The perils of Pension Input Periods

Introduction

What is a PIP?

A “pension input period” (PIP)1 is used to assess annual increases in the value of members’ pension savings for the purpose of testing against the AA. Increases are measured against the AA for the tax year in which the PIP ends.

The PIP may be different for each scheme and, within a particular scheme, different arrangements may also have different PIPs. However:

there must be a PIP for each arrangement ending in each tax year;
a member may not have more than one complete PIP per arrangement in a tax year; and
it is not possible for a PIP to be longer than 12 months.

The significantly reduced AA of £50,000 (which will apply from the 2011/12 tax year) means that many more individuals will now need to give thought to testing against the AA.

When does a PIP start and end?

The start date of a PIP in respect of an arrangement under a pension scheme depends on the type of pension arrangement:

in a DB or cash balance (CB) arrangement, it starts when benefits first start to accrue;
in a DC arrangement, it starts when the first contribution (member or employer) is paid; and
in a hybrid arrangement, it starts whenever the earlier of the above applies.

Unless it is changed, the first PIP ends on the anniversary of its start date. Subsequent PIPs will then finish on the anniversary of the end of the first PIP.2

Default PIPs

If no PIP was nominated, a DB or CB scheme in existence at A-Day (6 April 2006) will generally have a default PIP ending on 6 April (as this is deemed to be the anniversary of the date on which benefits first started to accrue). However, new joiners since that date will need to have been notified that this PIP applied to them, otherwise their default PIP will end on the anniversary of the date on which their benefits started accruing (for example, the date they joined the scheme).

Similarly, DC scheme default PIPs will reflect the date on which the first contribution was made to an arrangement post A-Day.

Making a nomination

FA04 enables trustees (and individuals in a DC arrangement) to nominate a PIP, for example, to fit in with the scheme year.3

There is no set formula for nominating a PIP. The important thing to bear in mind is that members need to be notified of the PIP. Therefore, as well as notifying existing members, details of the PIP should be included in the scheme booklet or other joining materials, so that it also applies to new members.

In a DC scheme, the trustees should check whether any members have already nominated a PIP. If so, a general nomination cannot be imposed on such individuals in respect of the current PIP. (However, it may be possible for the trustees to make a nomination in respect of future tax years.)

Transitional provisions: Straddling PIPs

PIPs ending in the tax year 2011/12 which began on or after
14 October 2010 will be subject to the AA of £50,000. Where a PIP ending in 2011/12 started before 14 October 2010, transitional rules apply. This all means that many individuals will already be affected by the reduced AA.

Changing your PIP

Although the concept of a PIP has been with us since A-Day, in light of the above, the possibility of changing a PIP (for example, to align with the tax year) is currently a key question for many trustees.

HMRC guidance explains that a retrospective PIP nomination may be made where no previous nomination has been made. However, schemes which have already nominated a PIP in a particular tax year will not be able to change it.

The draft Finance Bill will remove the ability to nominate a PIP retrospectively. Therefore, trustees wishing to change their scheme’s PIP should do so ideally before 6 April 2011 (or before the Bill receives Royal Assent at the latest4).

Care needs to be taken when considering a change in PIP as this could affect an individual’s tax liability (as a result of contributions or benefit accrual falling within a different tax year).

Other considerations

When considering changing a PIP, the following (which are both assessed on a tax year basis) are worth bearing in mind:

the new carry forward provisions – which will allow individuals to set off excess contributions against unused allowance from up to three years previous in order to manage one-off spikes in accrual; and
the Special Annual Allowance Charge – imposed by “anti-forestalling” measures introduced by the former Labour Government, which will still apply to higher earners in the run-up to 6 April 2011.5

1 Introduced by s.238 FA04
2 For example, a PIP which started on 6 April 2006, will have ended on 6 April 2007 (where no nomination was made). The second PIP will have commenced on 7 April 2007 and finished on 6 April 2008
3 For more information, please see our Alert: “Pension Input Periods” dated 28 March 2007
4 Generally speaking, this may not be until June or July, but there have been two occasions in recent years when Royal Assent has been given as early as 7 and 8 April respectively
5 For more information, please see our Alert: “Finance Act 2009 – this time it’s personal” dated 24 July 2009