Annual Allowance and Pension Input Periods
Updated 20 June 2007 / Members
Following changes to tax legislation on 6 April 2006, each member has a limit on “input” that can be made to pension schemes before an additional tax becomes payable. This covers:
- Growth in benefits for defined benefit schemes such as the Teachers’ Pension Scheme, and/or;
- Contributions in respect of “money purchase” schemes, such as Additional Voluntary Contributions (AVCs) and personal pensions.
This limit is known as the “Annual Allowance” (£215,000 for the 2006/2007 tax year and £225,000 for 2007/2008) and is assessed over a “Pension Input Period” or “PIP”.
If the Annual Allowance is exceeded in any tax year, any excess will be subject to a 40% tax charge.
The impact of this will be very limited as relatively few people will have paid contributions or have pension accrual which is anything near to the Annual Allowance.
If a member's total contributions and/or their accrual in benefits exceed the Annual Allowance in any tax year, the member must notify HM Revenue and Customs (HMRC) on their self assessment tax return (SATR). The reference for the section of the SATR is SA125 and SA125 (Notes).
The Teachers’ Pension Scheme has nominated a PIP end date of 31 March, as this corresponds with the annual return of service supplied by employers and the date of your Estimate of Retirement Benefits. This means that the first PIP is 6 April 2006 to 31 March 2007 and those with large pension benefits will need to obtain details of the growth in their Teachers’ Pension benefits up to 31 March 2007 (and any other pension benefits in the same tax year) for the completion of the 2006 / 07 SATR.
Examples of how pension growth is assessed
If you believe that your benefit accrual in a final salary scheme and your contributions to a money purchase scheme will exceed the Annual Allowance, we recommend that you consult an independent financial advisor.
As far as the Teachers’ Pension Scheme is concerned, future PIP periods will run from 1 April to 31 March each year.
Back to AnnouncementsHow is pension growth assessed in a defined benefit scheme such as the Teachers’ Pension Scheme?
The Teachers’ Pension Scheme (TPS) is a defined benefit scheme providing pension benefits based on a formula of 80ths with an automatic lump sum for pre 2007 existing members or 60ths with an option to convert for new entrants from 1 January 2007.
The question to be asked is how is the growth in benefits in TPS assessed against the Annual Allowance?
The increase in benefits is assessed between the start and the end of the PIP. So for the 2006/2007 tax year, a comparison is undertaken between 6 April 2006 (when the Annual Allowance was introduced) and 31 March 2007 (the nominated PIP end date of the scheme). For the 2007/2008 tax year, the relevant PIP comparison dates will be 1 April 2007 and 31 March 2008.
The difference in the value of benefits at the beginning of the PIP is compared with the value of benefits at the end of the PIP. This can be calculated by using the following formula:
(Current Annual Pension less Previous Annual Pension) X 10 + (Current Lump Sum less Previous Lump Sum) = Growth in benefits
Example
A member has a pension of £1,000 per annum and an automatic lump sum of £3,000 as at 1 April 2007. By the 31 March 2008, the member’s pension has increased to £1,200 per annum and a lump sum of £3,600. The growth in benefits is as follows:
(£1,200 p.a. less £1,000 p.a.) X 10 + (£3,600 less £3,000) = A growth in benefits of £2,600
This growth is well within the Annual Allowance of £225,000 for the 2007/2008 tax year, but this value needs to be aggregated with other inputs which may have been made to other pension schemes during the tax year.
When assessing the growth in benefits for out of service teachers, the current annual pension comprises the teacher’s pension including any PI. The previous annual pension comprises of the annual pension including any PI as shown on the previous year’s annual estimate of retirement benefits statement. The above does not include state pension or dependants.