PTM058080 - Annual allowance: transitional rules for tax year 2015-16: pension input amounts: defined benefits and cash balance arrangements: deferred members
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Deferred member carve-out for entire combined period
Becoming a deferred member � in a pension input period ordinarily ending on or after 6 April 2015 but before 8 July 2015
Becoming a deferred member � in relation to a pension input period ending on 8 July 2015
Deferred member carve-out applies for pre-alignment tax year portion of a combined period only or post-alignment tax year portion only � other cases
Sections 230(5B), 234(5B) & 237ZA(4), (7), (10) & (16) Finance Act 2004
Transitional annual allowance rules apply for tax year 2015-16.
For annual allowance purposes only (including the money purchase annual allowance), the 2015-16 tax year is split into two ‘mini� tax years - the ‘pre-alignment tax year� and the ‘post-alignment tax year� (see PTM058010 for more details).
For cash balance and defined benefits arrangements there is a combined period covering both ‘miniâ€� tax years. »Ê¹ÚÌåÓýapp pension input amount for the combined period is apportioned between the pre and post-alignment tax years (see PTM058070 for more details).
»Ê¹ÚÌåÓýappre is a modification to the usual ‘deferred member carve-outâ€� conditions for the purpose of establishing whether the carve-out applies for the whole of a combined period.
Also, there are modifications to the apportionment of a pension input amount for a combined period where:
- an individual becomes, or is, a deferred member during the combined period, and
- the ‘deferred member carve-out� would have applied for certain periods of time for part of the combined period.
Deferred member carve-out for entire combined period
Essentially, there is no change to the way the deferred member carve-out provisions apply (as set out in PTM053900 onwards) for the purpose of the combined period except for the following.
»Ê¹ÚÌåÓýapp ‘increase in the CPI over the twelve month period ending with a month that falls within the pension input periodâ€� limb of the ‘relevant percentageâ€� definition (see PTM053920) is replaced with 2.5%.
However, this modification to the CPI limb of the ‘relevant percentage� definition does not extend to the ‘CPI percentage� definition for the purpose of applying the deferred member carve-out to deferred annuity contracts � i.e. the ‘CPI percentage� definition in PTM053940 continues to apply for the purpose of the combined period.
In effect, for an individual in relation to a cash balance or defined benefits arrangement, there is a nil pension input amount for the combined period if throughout the combined period the individual:
- is a deferred member (or a deferred member/pensioner member or deferred member/transfer-out member in certain circumstances), and
- the deferred member carve-out provisions as set out in PTM053900 onwards (but with 2.5% replacing the CPI limb of the ‘relevant percentage� definition) apply.
Becoming a deferred member � in a pension input period ordinarily ending on or after 6 April 2015 but before 8 July 2015
»Ê¹ÚÌåÓýappre is a pension input amount for the pre-alignment tax year only (i.e. 100% apportionment to the pre-alignment and nil to the post-alignment tax years) in relation to a cash balance or defined benefits arrangement where:
- the individual becomes a deferred member in relation to the arrangement during a pension input period that, leaving aside the transitional rules, would have ended any time on or after 6 April 2015 but before 8 July 2015 (‘pension input period A�), and
- the deferred member carve-out as set out in PTM053900 onwards applies for each of the following pension input periods
- the pension input period starting immediately after ‘pension input period A� and ending on 8 July 2015 (‘pension input period B�), and
- the pension input period starting immediately after ‘pension input period B� and ending on 5 April 2016.
Where these circumstances apply to an arrangement, there is no combined period and pension input amount that requires apportionment between the pre and post-alignment tax years.
Instead, the pension input amount for the arrangement is that for ‘pension input period A� (i.e. that for the pension input period ending on or after 6 April 2015 but before 8 July 2015) which is tested against the annual allowance for the pre-alignment tax year (the pension input amount for the arrangement for the post-alignment tax year is nil).
Note - for the purpose of the 2nd bullet point immediately above, ‘the deferred member carve-out as set out in PTM053900 onwards� means all of the relevant conditions set out in that part of the guidance including the CPI limb of the ‘relevant percentage� definition set out in PTM053920 (i.e. the 2.5% replacement figure mentioned above in Deferred member carve-out for entire combined period does not apply).
Becoming a deferred member � in relation to a pension input period ending on 8 July 2015
Where an individual becomes a deferred member of a cash balance or defined benefits arrangement in relation to a pension input period ending on 8 July 2015 (�8 July ending pension input period�), then
- how the pension input amount is calculated for a combined period and how the apportionment between the pre and post-alignment tax years applies
depends on
- when the 8 July ending pension input period would have ended but for the transitional rules.
Pension input period ends on 8 July 2015 regardless of transitional rules
»Ê¹ÚÌåÓýappre is a pension input amount for the pre-alignment tax year only (i.e. 100% apportionment to the pre-alignment and nil to the post-alignment tax years) where:
- the individual becomes a deferred member in relation to the arrangement during a pension input period that, leaving aside the transitional rules, ended on 8 July 2015, and
- the deferred member carve-out as set out in PTM053900 onwards applies for the whole of the next pension input period (i.e. the pension input period starting on 9 July 2015 and ending on 5 April 2016).
»Ê¹ÚÌåÓýapp pension input amount for the arrangement is that for the pension input period ending 8 July 2015 ordinarily and is tested against the annual allowance for the pre-alignment tax year (the pension input amount for the arrangement for the post-alignment tax year is nil).
Note - for the purpose of the 2nd bullet point immediately above, ‘the deferred member carve-out as set out in PTM053900 onwards� means all of the relevant conditions set out in that part of the guidance including the CPI limb of the ‘relevant percentage� definition set out in PTM053920 (i.e. the 2.5% replacement figure mentioned above in Deferred member carve-out for entire combined period does not apply).
Pension input period ends on 8 July 2015 but would have ended during 9 July 2015 to 4 April 2016
»Ê¹ÚÌåÓýapp apportionment of pension input amount between the pre and post-alignment tax years for a combined period for a cash balance or defined benefits arrangement is modified where:
- due to the transitional rules, a pension input period for the arrangement ended on 8 July 2015 (�8 July ending pension input period�)
- but for the transitional rules, the 8 July ending pension input period would have ended after 8 July 2015 but before 5 April 2016 (‘intended end date�)
- the individual becomes a deferred member in relation to the arrangement either during the 8 July ending pension input period or at any time during 9 July 2015 to the intended end date, and
- the deferred member carve-out as set out in PTM053900 onwards applies for the whole of the period of time starting the day after the intended end date and ending on 5 April 2016 as if that period of time was a pension input period (i.e. the remaining part of the post-alignment tax year from the intended end date).
Note - for the purpose of the 4th bullet point immediately above, ‘the deferred member carve-out as set out in PTM053900 onwards� means all of the relevant conditions set out in that part of the guidance including the CPI limb of the ‘relevant percentage� definition set out in PTM053920 (i.e. the 2.5% replacement figure mentioned above in Deferred member carve-out for entire combined period does not apply).
Where these circumstances apply the length of the combined period and the pre and post-alignment tax year apportionment basis (as ordinarily described in PTM058070) are modified for the arrangement as follows:
- the combined period is shortened so that it ends on the intended end date (instead of 5 April 2016), and
- the number of days for the apportionment test is adjusted to the number of days in the period starting on 9 July 2015 and ending on the intended end date (instead of 272 days).
Example
Christine is a member of a defined benefits arrangement with a pension input period of 1 January to 31 December (but for the transitional rules the intended end date for the latest pension input period is 31 December 2015).
»Ê¹ÚÌåÓýapp transitional rules mean that Christine now has the following two pension input periods for this arrangement:
- 1 January 2015 to 8 July 2015, and
- 9 July 2015 to 5 April 2016.
Christine becomes a deferred member of the arrangement on 1 October 2015.
»Ê¹ÚÌåÓýapp deferred member carve-out would have applied ordinarily for the period of time starting on 1 January 2016 and ending on 5 April 2016 if that period of time was a pension input period.
»Ê¹ÚÌåÓýapp combined period for Christine’s defined benefits arrangement is therefore based on the period 1 January 2015 to 31 December 2015 (instead of 1 January 2015 to 5 April 2016).
Christine’s pension input amount for the combined period is £60,000 (based on the intended end date of 31 December 2015).
As she became a deferred member in a pension input period that would have ordinarily ended on or after 9 July 2015 but before 5 April 2016 (31 December 2015 in this example), her pension input amount for the combined period is apportioned between the pre and post-alignment tax years.
For the pre-alignment tax year the apportionment is based on the formula
(D - X /D) x 100
Where
D is the number of days in the combined period for Christine’s defined benefits arrangement (365 days in this example), and
X is the number days in the period 9 July 2015 to the intended end date of Christine’s defined benefits arrangement (176 days in this example).
»Ê¹ÚÌåÓýapp pension input amount for the purpose of the pre-alignment tax year is
£60,000 x ([365 � 176/365] x 100) = £31,068.
For the post-alignment tax year the apportionment is based on the formula
X/D x 100
»Ê¹ÚÌåÓýapp pension input amount for the post-alignment tax year is
£60,000 x ([176/365] x 100) = £28,932.
Note 1 -
the same apportionment formula would have applied to Christine’s £60,000 pension input amount if:
- Christine had become a deferred member of the arrangement during the 1 January 2015 to 8 July 2015 pension input period, and
- the deferred member carve-out would have applied ordinarily for 1 January 2016 to 5 April 2016 if that period of time was a pension input period,
i.e. the apportionment formula is �([365 � 176/365] x 100)� for the pre-alignment tax year and �([176/365] x 100)� for the post-alignment tax year.
Note 2 -
all of Christine’s £60,000 pension input amount would be for the pre-alignment tax year (and nil to the post-alignment tax year) if:
- the arrangement pension input period had been 1 June 2014 to 31 May 2015
- Christine had become a deferred member on 31 March 2015 i.e. during a pension input period ordinarily ending on or after 6 April 2015 but before 8 July 2015, and
- the deferred member carve-out would have applied ordinarily for the 1 June 2015 to 8 July 2015 and 9 July 2015 to 5 April 2016 pension input periods.
Deferred member carve-out applies for pre-alignment tax year portion of a combined period only or post-alignment tax year portion only � other cases
For cases not otherwise already covered on this page of guidance, the pension input amount for a combined period for a cash balance or defined benefits arrangement is apportioned entirely against the pre-alignment tax year, or entirely against the post-alignment tax year, in the following circumstances:
- the combined period for the arrangement takes in some, or all, of the pre-alignment tax year and all of the post-alignment tax year
- the deferred member carve-out as set out in PTM053900 onwards applies for the part of the combined period
- that consists of the start of the combined period to 8 July 2015 (as if that period of time was a single pension input period if not otherwise the case), or
- that consists of the post-alignment tax year, but
- not both.
Note - for the purpose of the 2nd bullet point immediately above, ‘the deferred member carve-out as set out in PTM053900 onwards� means all of the relevant conditions set out in that part of the guidance including the CPI limb of the ‘relevant percentage� definition set out in PTM053920 (i.e. the 2.5% replacement figure mentioned above in Deferred member carve-out for entire combined period does not apply).
Example
Hilary is a member of a defined benefits arrangement with a pension input period of 1 April to 31 March (but for the transitional rules the intended end date for the latest pension input period is 31 March 2016).
For all of the period 1 April 2015 to 31 March 2016 Hilary was a deferred member of the arrangement and the deferred member carve-out would have applied ordinarily for all of that period. »Ê¹ÚÌåÓýapp deferred member carve-out ceased to apply with effect from 1 April 2016 as further benefits started to accrue for Hilary under the arrangement.
Hilary’s combined period for the arrangement runs from 1 April 2015 to 6 April 2016.
»Ê¹ÚÌåÓýapp deferred member carve-out applies for the part of the combined period comprising 1 April 2015 to 8 July 2015 (‘period Aâ€�) if period A is treated as a pension input period.
Treating the remaining part of the combined period comprising the post-alignment tax year, 9 July 2015 to 6 April 2016, as a pension input period (‘period B�) means that the deferred member carve-out does not apply for period B.
»Ê¹ÚÌåÓýappre is no pension input amount for the arrangement for testing in relation to the pre-alignment tax year.
For the post-alignment tax year the amount tested is the pension input amount for the arrangement that is calculated for period B.