Valuing pension inputs made before 6 April 2011

[Para 30 Sch 17 FA 2011]

The amount of annual allowance for 2011–12 is lower than the annual allowance for previous tax years. Because of this there are special rules for working out how much annual allowance can be carried forward from the tax years 2008–09, 2009–10, and 2010–11.

The annual allowance for 2008–09, 2009–10 and 2010–11 is deemed to be £50,000. So if an individual's total pension input amount in each of those tax years was £20,000 then they will have £30,000 unused annual allowance to carry forward each year. If their total pension input amount was £50,000 or more in a year then they would not have any annual allowance left to carry forward from that tax year.

The way that pension savings are calculated is based on the new valuation methods. So, for a defined benefit arrangement you would use the new factor of 16 (rather than the existing factor of 10) and increase the opening value CPI to work out how much your pension saving is. (See RPSM06107030)

Normally, if one of the previous three years has an input amount of more than the annual allowance then that excess is treated as using up any amount of available annual allowance from the preceding year(s) first and this will reduce the available annual allowance to be carried forward to the current year (RPSM06108010 has more details). However, the position is different for 2008–09, 2009–10 and 2010–11.

If one of the previous three years that has an input amount of more than £50,000 is 2009–10 and/or 2010–11 then that excess is not treated as using up any amount of available annual allowance from the preceding year(s). This is because any amount of available annual allowance from the preceding tax year(s) would not have had the effect of reducing an amount of annual allowance charge for 2009–10 and/or 2010–11.

The method of working out if the individual has to pay an annual allowance charge, and how much, for the tax years 2008–09, 2009–10 and 2010–11 has not changed.

Example 1

Graeme has an other money purchase arrangement and a defined benefits arrangement. In 2011–12 Graeme has pension savings of £100,000 and both his pension input periods started on or after 14 October 2010. In the previous three tax years Graeme had the following pension input amounts:

2010–11-£32,000

2009–10-£30,000

2008–09-£25,000

These pension input amounts were calculated using the pre 6 April 2011 method of valuing pension saving.

However, to find out whether there is any available unused annual allowance to carry forward, the pension input amounts need to be re-calculated using the post 6 April 2011 methods of valuing pension inputs. On this basis, Graeme's pension input amounts will be:

2010–11-£38,000

2009–10-£36,000

2008–09-£30,000

So Graeme has £46,000 unused annual allowance that he can carry forward to 2011–12. This gives him a total available annual allowance of £96,000. This does not cover all of Graeme's pension saving and so the annual allowance tax charge is due on £4,000 pension saving over his available annual allowance.

Example 2

Bill's pension savings in 2011/12 are £76,000. This is £26,000 more than the annual allowance of £50,000. Bill will have an annual allowance charge on £26,000 if he doesn't have any available annual allowance to carry forward from earlier years.

To work out whether he has any available annual allowance, Bill will need to work out what his pension savings were in the previous three tax years. As all these years are from before 6 April 2011, Bill will need to re-calculate his pension savings for those years using the post 5 April 2011 valuation rules if from a defined benefit or cash balance arrangement.

His pension savings for the previous three years are:

2010–11-£48,000

2009–10-£55,000

2008–09-£25,000

Bill has £27,000 available annual allowance to carry forward to 2011–12 (£25,000 from 2008–09 plus £2,000 from 2010–11). Bill's pension saving for 2009–10 is more than £50,000 so he has no available annual allowance from that year. However, the excess of £5,000 for that year is not treated as using up any of his available annual allowance from 2008–09.

So, in 2011–12 Bill can have pension savings of £77,000 before he has to pay an annual allowance charge. Bill's actual pension savings of £76,000 are less than this so he has no annual allowance charge for 2011–12.

He also has annual allowance available to carry forward to 2012–13. The amount of available annual allowance that he can carry forward is £1,000. This is because the only unused annual allowance in the previous three years is £2,000 from 2010–11 but Bill can use only £1,000 worth as the other £1,000 worth was used up against the excess pension savings of £26,000 that Bill had in 2011–12.

Unlike for 2011–12 when none of his unused annual allowance of £25,000 for 2008–09 was used up against his pension savings of £55,000 for 2009–10, Bill cannot carry forward all of his unused annual allowance of £2,000 from 2010–11. This is because £1,000 worth of that amount had the effect of preventing an annual allowance charge from applying in 2011–12.

In 2012–13 Bill's pension savings are £55,000. This is £5,000 more than the annual allowance of £50,000. Bill has £1,000 available annual allowance to carry forward from the previous three years so he will have an annual allowance charge on £4,000.

Source: HMRC. www.hmrc.gov.uk. Copyright Acknowledged.