Previously, each individual pension plan had its own PIP that could have started on any day in the year.
Therefore, while PIPs for all pension schemes have now been aligned, in the past, contributions could have been made in one tax year, but would be allocated to the annual allowance of the previous or following year.
It is imperative that this allocation is spot on before determining the amount that which can be carried forward. An error could be extremely costly.
One potentially positive aspect of the alignment, however, was the fact that many savers will have been entitled to – in effect – a bonus annual allowance of £40,000 in the 2015/16 tax year.
In order to ensure no saver was adversely affected by the realignment, the summer Budget retrospectively allowed a higher £80,000 annual allowance for the period 6th April 2015 – 8th July 2015.
The allocation for the second part of the tax year (9th July 2015 – 5th April 2016) equated to however much of the £80,000 that remained, up to a maximum of £40,000.
This could have proven to be extremely useful to someone who had made maximised what they thought was the annual allowance - £40,000 – in the period leading up to 8th July.
They could have then potentially contributed a total £80,000 in a single tax year without using any carry forward.
Reductions for some
But savers must be aware of a reduction to the annual allowance if they are high earners. Anyone with ‘adjusted income’ over £150,000 (essentially, income from all sources plus employer pension contributions) in a tax-year, could see their annual allowance reduce to £10,000 for the current tax-year, although previous years for carry forward could still potentially remain at £40,000 or £50,000.
This is especially important to note if significant regular contributions are currently being made; a saver could breach the allowance without even knowing.
While a reduction to the annual allowance is arguably understandable for those earning significant amounts, savers must be aware that by simply taking pension benefits your ability to contribute to a pension plan can be affected.
For example, anyone who has entered into Flexi-Access Drawdown (FAD) in the last two tax years may have triggered what is known as the money purchase annual allowance (MPAA) - and the new Chancellor Philip Hammond has already proposed cutting this down in his Autumn Statement 2016.
While the drawing of tax free cash alone through Flexi-Access Drawdown has no effect upon your Annual Allowance, by taking just a single penny of income after 6th April 2015 (in a new income arrangement) the saver may have inadvertently walked into a new MPAA of £10,000 per annum - soon potentially to be £4,000 unless the government listens to industry pressure to scrap this proposed cut.
