Recently we have seen the Chancellor announce both the summer budget and the finance bill, and many people are wondering how the new changes will affect their day-to-day lives. Understandably, a lot of questions have emerged relating to the new rules; we’re here to give you answers that will help explain what the changes mean for you.
Pension Input Periods
In the future, the pension input period (PIP) is going to be measured across the tax year – from April to April – and although this will make for a simpler process in the long run, in order to implement the changes, the 2015/2016 tax year has been split into two chunks: pre-budget and post-budget. There the pre-budget annual allowance will be £80,000, while the post-budget annual allowance (AA) will be any remaining amount of that £80,000 up to a maximum of £40,000.
What does this mean if my PIP was aligned to the tax year?
- If you had already made a contribution prior to July 9th, you will now have an additional AA of £40,000 before April 5th
- If you did not make a contribution, your AA for this period will still be £40,000.
- This means that although the allowance across the two periods totals £80,000, you can only contribute a maximum of £40,000 between July 9th 2015 and April 5th
- If you have used carry forward to contribute more than £40,000 before July 9th you may still be able to contribute an additional £40,000, however this needs to be considered on a case-by-case basis. We can offer pension advice in Lancaster to help ensure that this is calculated correctly!
How will this affect carry forward from the 2015/2016 tax period?
- The amount to be carried forward from 2015/2016 will be the remainder of the pre-budget £80,000 allowance, with a maximum of £40,000 and minus any amount used during the post-budget period.
Annual Allowance Cuts
For those earning over £150,000, the annual allowance will now be cut by £1 for every £2 earned past the threshold.
What types of income will be taken into account?
- This is calculated using the adjusted income measure: all income before tax, and the value of employer’s contributions to pensions.
How will this affect carry forward?
- Although your AA may have been reduced if you’re a high earner, you can still carry forward any unused allowance as you would have previously.
Lifetime Allowance Cuts
As of April 2016, the lifetime allowance will be reduced from £1.25 million to £1 million.
What protection will be made available?
- Fixed protection 2016: this will allow people to keep an allowance of 1.25 million however defined contributions must stop and defined benefits cannot exceed the relevant percentage rates.
- Individual protection 2016: this applies to individuals with savings worth over 1 million on April 5th 2016; it gives a LTA equal to your benefit value, up to 1.25 million.
- The way you register for protection will also change as the HMRC no longer need to be notified in advance.
If you have any other unanswered questions or need more details on any of the information above, please don’t hesitate to get in touch at 01524 416872; we’ll be more than happy to deal with all your queries. You can also follow us on Facebook and Twitter for more great industry updates!