The Annual Allowance (the maximum amount of pension
savings an individual can make in any one tax year without incurring a
tax charge) is reducing from its current level of £255,000 to £50,000 on
6 April 2011.
As well as individuals taking action to see how they are
individually affected trustees of occupational pension schemes may also
want to take action and communicate the changes to their scheme members.
It will be more than likely that some individuals are unaware of this
change let alone understand how the changes will affect them. This will
be particularly true of members of Defined Benefit ("DB") schemes
because of the way in which pension savings are valued for the purpose
of assessing against the AA. The position is most important to active
members and the member may not be aware there is a problem until after a
tax charge has crystallised.
Trustees of schemes with active
members (generally speaking deferred benefits are not taken into account
when assessing against the AA) may therefore wish to consider issuing
an announcement to their active members to draw attention to the changes
or consider a suitable paragraph included as part of an existing member
communication.
Following the changes due to the inappropriately
named pension simplification regime from 6 April 2006 scheme booklets
may refer to the level of the AA that applied on 6 April 2006. If the
booklet has recently been updated, it may refer to the current level of
the AA. In any event if reference is made in a booklet to the AA, it is
likely that after 6 April 2011 this wording will no longer be correct.
Trustees
should review all scheme documentation and update as necessary to
reflect the regime changes. These include benefit statements, leaver
statements and other documents that refer to the AA (and possibly
consider any statement referring to the Lifetime Allowance change from
April 2012)
Another headache for trustees to watch for is Pension
Input Periods (PIPS). Generally lasting for twelve months this is a
period pension savings are measured for the purpose of the AA test.
A
PIP can start on a date nominated by the trustees of the scheme (or in
the case of a Defined Contribution ("DC") scheme the member). Although
technically a scheme can have a number of PIPs depending on the scheme
profile the default position is determined as follows:
- For
DB arrangements, the PIP ends on the anniversary of the date the member
joined the scheme, if they joined after 6 April 2006, or 6 April if
they joined before.
- For
DC arrangements, the PIP ends on the anniversary of the first
contribution made, if the member joined after 6 April 2006, or the first
contribution made after 6 April 2006 if they joined before this date.
PIPs
can be aligned to renewal years or tax years for administrative ease
however many schemes still operate under a default position.
If no
nomination has been made trustees may want to make a nomination so that
the current PIP finishes before 6 April 2011. By doing this, the
pension savings made during the current PIP will be covered by the
current AA rather than the new lower AA applying from 6 April. (There
are transitional arrangements depending on PIPs starting before or after
14 October 2010 but these are not covered here)
Arrangements
where a nomination is yet to be made have until the date the Finance Act
2011 receives Royal Assent to nominate the preferred PIP. Trustees that
haven't already done so should consider whether they wish to nominate
the PIP for their scheme, rather than relying on the default. If no
nomination is made, the default position will continue to apply. This
could mean different members having different PIP end dates, depending
on when they started to make pension savings. It will also mean that for
a large number of members, their current PIP will end after 6 April
2011 and pension savings made over part (in the case of those who fall
under the transitional arrangements) or all of that PIP will therefore
be subject to the new AA.