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 ‘mini’ tax years. The pension input amount for the combined period is apportioned between the pre and post-alignment tax years (see PTM058070 for more details).
There is a modification to the usual ‘deferred member carve-out’ 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.
The ‘increase in the CPI over the twelve month period ending with a month that falls within the pension input period’ limb of the ‘relevant percentage’ 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
There 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
There 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).
The 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
The 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).
The 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.
The 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.
The 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).
The 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
The 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. The 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.
The deferred member carve-out applies for the part of the combined period comprising 1 April 2015 to 8 July 2015 (‘period A’) 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.
There 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.