Part 4 - Annual allowances
131.Paragraph 63 amends section 227 of FA 2004 to provide that the annual allowance charge is payable where an individual has a chargeable amount, as defined in new section 227ZA, for a tax year. The charge is on the chargeable amount. This allows the annual allowance position for an individual who has not flexibly accessed their pension to be unaffected by the amendments made by Schedule 1.
132.Paragraph 64 inserts new section 227ZA into FA 2004 which defines the chargeable amount. The chargeable amount will be the alternative chargeable amount, as defined in new section 227B, if the individual has flexibly accessed their pension and the amount of their money purchase pension savings exceeds £10,000, commonly referred to as the ‘money purchase annual allowance’ and the alternative chargeable amount exceeds the default chargeable amount, as defined in new section 227ZA(3). Otherwise the chargeable amount will be the default chargeable amount.
133.New section 227ZA(1) and (2) provide that, starting with the tax year in which the individual first flexibly accesses their pension rights, the chargeable amount will be the alternative chargeable amount if their money-purchase input sub-total (MPIST), as defined in new section 227C, is greater than £10,000, and the alternative chargeable amount is greater than the default chargeable amount. New section 227B defines the alternative chargeable amount. New section 227G prescribes when an individual is treated as first flexibly accessing their pension rights.
134.New section 227ZA(3) provides that the default chargeable amount is the amount by which the individual’s total pension input amount exceeds their annual allowance, including any available carry forward. This preserves the current position for determining the amount of any annual allowance charge due both for those who haven’t flexibly accessed their pension and for those who have but whose money purchase pension savings are £10,000 or less.
135.Paragraph 65 inserts new sections 227B to 227G into FA 2004.
136.New section 227B provides that where the alternative chargeable amount applies it is based on the sum of the following amounts:
the excess of the MPIST over £10,000; and
the excess of the defined-benefit input sub-total (DBIST) over the amount found by deducting £10,000 from the individual’s annual allowance as set out in section 228(1) (£40,000 for tax year 2014-15) but including any available carry forward under section 228A. Pension input amounts for hybrid arrangements are included in the MPIST or the DBIST, as appropriate.
137.New section 227B(1) specifies how the alternative chargeable amount is calculated.
138.New section 227B(2) specifies the alternative annual allowance.
139.New section 227B(3) and (4) define the DBIST as the sum of:
all the pension input amounts for each defined benefits arrangement the individual is a member of;
the pension input amount for any hybrid arrangement that the individual is a member of where amount C is the pension input amount. That is, if amount C (the calculation done on the basis that the arrangement is to provide defined benefits) is higher than amount A (calculation on the basis that the arrangement is to provide cash balance benefits) and/or amount B (calculation on the basis that the arrangement is to provide other money purchase benefits), it is amount C that is included when calculating the member’s DBIST; and,
other pension input amounts in respect of money purchase and/or hybrid arrangements that relate to pension input periods ending in the tax year which ended before the member first flexibly accesses their pension rights or include the day on which the member first flexibly accessed their pension rights. For hybrid arrangements this includes any hybrid arrangements where the pension input amount is amount A or B. The amounts to be included in DBIST in these cases are calculated in accordance with new sections 227E and 227F.
The calculation is also subject to new section 227D.
140.New section 227B(5) provides that for a hybrid arrangement, where the defined benefit input (amount C) and the money purchase input (amount A or B) are equal, the money purchase input amount is included in MPIST. So where amount C is equal to the greater of amounts A and B, amount C is not included in the DBIST amount mentioned at subsection (3)(b). If there is only one of amounts A and B, and amount C is equal to it, again amount C is not included in the amount mentioned at subsection (3)(b). Instead amount A or B as appropriate is included in MPIST in new section 227C(1)(b).
141.New section 227C(1) defines the MPIST as the total of all the pension input amounts for each cash balance and other money purchase arrangement relating to the individual plus any pension input amount for a hybrid arrangement where the amount to be tested against the annual allowance under section 237 is amount A or B because that amount is higher than C.
142.New section 227C(2) provides for the MPIST to be reduced in the tax year in which rights are first flexibly accessed or a pension input period ending in the tax year contains the day on which rights are first flexibly accessed even if that day is not in the same tax year, under new sections 227E(2) and 227F(2), (3) and (5).
143.New section 227C(3) provides that certain input amounts for hybrid arrangements are subject to new sections 227B(5) and 227D.
144.New section 227D provides how to calculate the pension input amount, for a hybrid arrangement made on or after 14 October 2014 (the date the Taxation of Pensions Bill was introduced into Parliament) that contains a defined benefit option, for the purposes of new sections 227B(3)(b) (which relates to the element of DBIST that is derived from any hybrid arrangement where the pension input amount is amount C) and 227C(1)(b) (which relates to the element of MPIST that is derived from any hybrid arrangement where the pension input amount is amount A or B). The pension input amount will be the amount that provides the highest tax charge rather than automatically being the highest input amount, the intention being to prevent tax avoidance. This section applies where input amount C is the higher or highest amount for the purpose of calculating the pension input amount for the hybrid arrangement under section 237 (a relevant hybrid arrangement). If that is the case, a calculation must be done to find out whether using A or B instead of C for some or all of the individual’s relevant hybrid arrangements would result in a higher chargeable amount. Where it does then, for the relevant hybrid arrangements identified, C is replaced by A or B as appropriate in the calculation of the alternative chargeable amount.
Example
An individual has two hybrid arrangements set up on or after 14 October 2014. In the first, the benefits will be either cash balance or defined benefits, in the second they will be either other money purchase or defined benefits. They also have a separate money purchase arrangement with a pension input amount of £4,000.
Step 1
The first step is to work out the relevant input amounts as set out in section 237 of FA 2004 to see whether either of the hybrid arrangements are relevant hybrid arrangements. In this case, the relevant input amounts are as follows:
Arrangement 1 Amount A is £6,000 and amount C is £14,000 Arrangement 2 Amount B is £7,000 and amount C is £17,000 Arrangement 3 Money purchase input amount is £4,000 As amount C is higher for arrangements 1 and 2, both are relevant hybrid arrangements (section 227D(1)).
Step 2
The next step is to identify all the possible combinations of how sets of the relevant hybrid arrangements can be made up (or not made up as the case may be). In this example, there are four possible combinations:
Combination 1 - Use only arrangement 1
Combination 2 - Use both arrangement 1 and 2
Combination 3 - Use only arrangement 2
Combination 4 - Do not use either arrangement 1 or 2
Arrangement 3 is not included in the combinations as it is not a hybrid arrangement.
Step 3
Next, for each combination, calculate what MPIST would be if for each relevant hybrid arrangement amount A or B as appropriate was treated as the relevant input amount instead of amount C. In this example:
Combination 1 – £6,000 + £4,000 for arrangement 3 = £10,000 MPIST
Combination 2 – £13,000 + £4,000 for arrangement 3 = £17,000 MPIST
Combination 3 – £7,000 + £4,000 for arrangement 3 = £11,000 MPIST
Combination 4 – Nil + £4,000 for arrangement 3 = £4,000 MPIST
Step 4
If the maximum MPIST under step 3 has been no more than £10,000, then the £10,000 money purchase annual allowance does not apply for that tax year, and all pension savings are tested against the £40,000 annual allowance. If as in this case, the maximum MPIST is greater than £10,000, you move to step 5.
Step 5
Next, for any combination where the MPIST is over £10,000 calculate what the alternative chargeable amount under section 227B would be if, for each relevant hybrid arrangement, amount A/B was treated as the relevant input amount instead of amount C.
The alternative chargeable amount is the amount by which the DBIST exceeds the alternative annual allowance plus the amount by which the MPIST exceeds £10,000.
If a relevant hybrid arrangement is not included in a combination, input amount C for that arrangement will be included in the DBIST under s227B(3).
In this example, only the alternative chargeable amounts for Combination 2 and Combination 3 need to be calculated as only those two combinations have MPISTs over £10,000.
Combination 2 – Nil (DBIST) + £7,000 (MPIST) = £7,000 alternative chargeable amount
Combination 3 – Nil (DBIST) + £1,000 (MPIST) = £1,000 alternative chargeable amount
Step 6
The final step is to identify the highest or higher amount calculated at step 4 which in this example is the £7,000 for Combination 2. Accordingly, Combination 2 results in the highest tax charge, which is made up of the 2 relevant hybrid arrangements, 1 and 2, called the ‘maximising set’.
145.New section 227E applies where a pension input period ends in the same tax year as the individual flexibly accesses their pension rights, but before that flexible access occurs. New section 227E(2) provides that in such a case the pension input amount for an arrangement is nil for the purposes of calculating the MPIST. New section 227E(3) provides that the actual input amount is included in the DBIST.
146.New section 227F applies to a pension input period during which an individual first flexibly accesses their pension rights, but subject to sub-section (7).
147.New section 227F(2) and (3) set out what amount is included in respect of cash balance arrangements and other money purchase arrangements respectively for the purpose of the MPIST in new section 227C. For cash balance arrangements, the amounts are calculated by reference to the proportion of the pension input period that covers the period from the day after the date pension rights are flexibly accessed. For other money purchase arrangements it is the actual contributions paid to those arrangements in that part of the pension input period.
148.New section 227F(4) provides that for any money purchase arrangement, the amount of the excess of the actual pension input amount over the amount included in the MPIST, by virtue of subsection (2) or (3), is to be included in the DBIST calculated in accordance with new section 227B(3).
149.New section 227F(5) provides how much of relevant input amounts A or B in respect of hybrid arrangements are included in the MPIST. For cash balance arrangements, they are treated as being the amount that is represented by the proportion of the pension input period that covers the period from the day after the date the member first flexibly accesses pension rights. For other money purchase arrangements it is the actual contributions paid to those arrangements in that part of the pension input period.
150.New section 227F(6) provides that for a hybrid arrangement the input amount attributable to the period before the pension was flexibly accessed is to be included in the DBIST.
151.New section 227F(7) provides that new section 227F does not apply if the member had made a valid declaration that they met the flexible drawdown conditions accepted by a scheme administrator before 6 April 2015.
152.New section 227G specifies when pension rights are first flexibly accessed and therefore when the alternative chargeable amount may apply. The money purchase annual allowance will apply from the earlier or earliest of the dates that apply under subsections (2) to (9) in relation to an individual. See also the amendment made by paragraph 69 of Schedule 1, under which there can be a further date when pension rights may be first flexibly accessed.
153.New section 227G(2) provides if, on or after 6 April 2015, an individual has created a flexi-access drawdown fund by designating sums and assets into it or as a result of the operation of new paragraph 8D(2) of Schedule 28, and then takes a qualifying payment from that fund, they are treated as having flexibly accessed their pension rights immediately before that payment was made. This will potentially trigger the application of the money purchase annual allowance from the date of the payment. New section 227G(10) prescribes when a payment is a qualifying payment.
154.New section 227G(3) provides that where an individual was entitled to a flexible drawdown pension before 6 April 2015 under section 165(3A), this will automatically mean that the member has flexibly accessed their pension from the start of 6 April 2015 and therefore potentially triggers the application of the money purchase annual allowance from that date. No payment of drawdown pension is required for the money purchase annual allowance to apply.
155.New section 227G(4) provides that where the total withdrawn from a member’s drawdown pension fund for a year exceeds the maximum (‘the cap’) as set out in pension rule 5 in section 165, so that new section 8B of Schedule 28 (see paragraph 76 above) applies, the member has flexibly accessed their pension immediately before the first qualifying payment. The money purchase annual allowance potentially applies from the date the first qualifying payment is made, whether this is the payment that results in the cap being exceeded or a subsequent payment. New section 227G(10) defines what a qualifying payment is.
156.New section 227G(5) provides that where a scheme administrator accepts a notification to change a member’s drawdown pension fund to a flexi-access drawdown fund, so that new section 8C of Schedule 28 (see paragraph 78 above) applies, and a qualifying payment of drawdown pension is paid from this fund, the member has flexibly accessed their pension immediately before the first qualifying payment is made. They therefore potentially trigger the money purchase annual allowance from the date the payment is made. New section 227G(10) defines what a qualifying payment is.
157.New section 227G(6) provides that the first payment of a UFPLS to an individual will mean that they flexibly accessed their pension immediately before the payment is made and therefore they potentially trigger the money purchase annual allowance from the date of that payment.
158.New section 227G(7) and (8) provide that where a member receives a payment of a lifetime annuity under a flexible annuity contract then this will mean that they flexibly accessed their pension immediately before the payment is made and therefore they potentially trigger the money purchase annual allowance from the date of that payment. A flexible annuity contract is one set up on or after 6 April 2015 where the terms of the contract allow the payments to go down, or they can be varied to allow payments to go down, other than in prescribed circumstances set out in regulations.
159.New section 227G(9) provides that where a member receives a payment of a scheme pension from a money purchase arrangement where there are fewer than 12 individuals including the member receiving such scheme pensions, this will mean that they flexibly accessed their pension immediately before the payment is made and therefore they potentially trigger the money purchase annual allowance from the date of that payment.
160.New section 227G(10) and (11) provide that a qualifying payment is income withdrawal from the fund or payment of a short-term annuity purchased using sums or assets out of the fund, except where the whole of the fund was made up of disqualifying pension credits as defined in paragraph 2(3) and (4) of Schedule 29. A pension credit under a pension sharing order on divorce is disqualifying if the person subject to the corresponding debit had an actual entitlement to a pension under the arrangement to which the pension sharing order related.
161.Paragraph 66 omits, in relation to tax year 2015-16 onwards, section 227A of FA 2004, which provides that an individual who has taken a flexible drawdown pension has an effective annual allowance of nil. Individuals entitled to drawdown pension by virtue of section 165(3A) of FA 2004 will automatically be deemed to have flexibly accessed their pension savings at 6 April 2015 and therefore will potentially become subject to the money purchase annual allowance from 2015-16. Individuals entitled to dependants’ drawdown pension by virtue of section 167(2A) of FA 2004 will automatically revert to the default annual allowance from 2015-16 unless they are subject to the money purchase annual allowance for any other reason. As a consequence, this paragraph also omits paragraph 45 of Schedule 16 to FA 2011 which originally inserted section 227A into FA 2004.
162.Paragraph 67 inserts new subsections (8) and (9) into section 228A of FA 2004 which relates to the carry forward of unused annual allowance.
163.New section 228A(8) provides that where an individual has been subject to the £10,000 money purchase annual allowance for an earlier tax year, the amount available for any carry forward from that year is adjusted accordingly. Unused money purchase annual allowance cannot be carried forward to subsequent tax years.
164.New section 228A(9) provides that where an individual or dependant has taken a flexible drawdown pension before 6 April 2015 then for tax year 2015-16 onwards they will not have any carry forward of unused annual allowance for any tax year before 2015-16 during which they were entitled to flexible drawdown pension or flexible dependants’ drawdown pension.
165.Paragraph 68 inserts new subsection (2A) into section 237B of FA 2004. This provides that for the purpose of determining whether section 237B applies, the default chargeable amount applies to the individual, and not the alternative chargeable amount. Where section 237B applies, the member may request that the scheme administrator pays some or all of their annual allowance liability in return for an equivalent actuarial reduction in their promised benefits – commonly known as ‘scheme pays’. This means that the scope of when scheme pays can apply is not increased by these changes.
166.Paragraph 69 inserts new paragraph (4) into article 25C of the Taxation of Pension Schemes (Transitional Provisions) Order 2006 (SI 2006/572). This provides that where an individual who has primary protection (but not enhanced protection), and protected pre- 6 April 2006 lump sum rights of greater than £375,000, receives a stand-alone lump sum (that is a tax free lump sum that is paid not in connection with a pension) from a money purchase arrangement on or after 6 April 2015, then they are treated as first flexibly accessing their pension immediately before the payment of the stand-alone lump sum. This will potentially trigger the money purchase annual allowance on the day the lump sum is paid.
