What are pension input periods and why do they matter?

The 2004 Finance Act introduced two new concepts: the annual allowance – a fixed ceiling initially the same for everyone – and the pension input period. 

A PIP is the period over which the amount of pension saving (pension input amount) under an arrangement is measured. 

Crucially, the PIP does not have to be the same as a tax year – a key departure from pre A-day rules. 

The pension input amount is tested against the annual allowance for the tax year in which the PIP ends.

An individual may be a member of several arrangements that provide benefits on differing bases and may also have different PIPs.

For each arrangement, the pension input amounts for PIPs that end in the tax year must be aggregated to come to the total pension input amount.

In a money purchase scheme, the first PIP will start on the date of the first contribution. For other scheme types, it starts on the date benefits start to accrue. 

In a money purchase scheme, the first PIP will start on the date of the first contribution. For other scheme types, it starts on the date benefits start to accrue

A PIP normally runs for a year, although it can be less. The first PIP for an arrangement cannot be longer than 12 months, but a subsequent PIP for that arrangement can be.

Originally, for schemes in existence at A-day, the law set the PIP end date always as April 6, creating a permanent slight misalignment with tax years. 

From 2011 this was corrected, but it has always been possible for the scheme administrator to nominate a different end date.

Defined benefit schemes in particular have often aligned their PIP with the scheme year, for example January 1 to December 31. 

Indeed, it is thought that lobbying to enable this was the primary cause of the switch away from mandatory measurement of contributions against the tax year.  

Changes from 2016

From April 6 2016, the annual allowance for a tax year will be restricted if you have 'adjusted income' of more than £150,000 for that tax year. 

It will taper down from the standard £40,000 to just £10,000 where income exceeds £210,000.

Checking whether an individual has exceeded the annual allowance has often required complicated manual calculations, and it is about to get worse

To ensure this works as intended – the purpose being to fund an additional inheritance tax allowance – HM Treasury has decided it is necessary to align PIPs with the tax year.

For the time being PIPs will continue to exist and the government will consider at a later stage whether the concept can be scrapped altogether.

From April 6 2016, all existing arrangements will have a 12-month PIP from April 6 2016 to April 5 2017. All subsequent PIPs will be for the period April 6 to April 5. 

Inevitably, the transition is going to be complicated, especially for DB arrangements and deferred members. 

All PIPs open on July 8 2015 – the date of the announcement in the Summer Budget – will end on that same date. The next PIP will be July 9 2015 to April 5 2016 for these arrangements.

This means that all existing arrangements on July 8 2015 will have two or three PIPs ending in the tax year 2015-16, depending on the start date of the open PIP.  

Calculations for the 2015-16 tax year will be further complicated by a split into two 'mini tax years': the pre-alignment and post-alignment tax year.

The details take up 10 pages of the Finance Bill 2015-16, which was published on July 15. The bill is to have its second reading on July 21; further consideration will follow on September 8.

Checking whether an individual has exceeded the annual allowance has often required complicated manual calculations, and it is about to get worse.  

Ian Neale is a director at Aries Pension & Insurance Systems