Looking at Pension Input Periods and Defined Benefit Schemes

Here, we take a look at pension input periods (PIPs) in relation to active members of defined benefit (DB) schemes. This is useful reading if you’re preparing for either of the CII’s R04 or J05 exams

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2020/21.

What is a PIP?

The PIP is the timeframe used to measure the contributions paid or, as is the case with DB schemes, the benefits accrued, for testing against the annual allowance, money purchase annual allowance, or tapered annual allowance.

Since 8 July 2015, PIPs are aligned with the tax year, i.e. 6 April to 5 April. So, for 2020/21, the PIP is 6 April 2020 to 5 April 2021.

Determining Whether an Allowance Charge Applies

To determine whether an annual allowance charge applies to a DB scheme member, we need to follow a three-step process:

1. Calculate the opening pension input value.
   • This is the member’s entitlement at the start of the PIP based on the number of years’ service to date, pensionable salary, and the scheme’s accrual rate.
   • Multiply this figure by 16.
   • If the scheme provides a lump sum in addition to the pension, add this on.
   • Revalue the total by the Consumer Price Index (CPI) figure for the previous September (for 2020/21 PIP, this figure is 1.7%).

 

2. Calculate the closing pension input value.
   • This is the member’s entitlement at the end of the PIP based on the number of years’ service to date, pensionable salary, and the scheme’s accrual rate.
   • Multiply this figure by 16.
   • If the scheme provides a lump sum in addition to the pension, add this on.

 

3. Deduct the opening pension input value from the closing input value.
   • If the input is less than the annual allowance (or money purchase annual allowance or tapered annual allowance where appropriate), there will be no charge to tax.
   • If it is greater, then a tax charge will be levied.

Example

To make the process clearer, let’s take a look at an example.

At the beginning of the 2020/21 PIP, Phil had been a member of his defined benefit scheme for 15 years, the scheme had an accrual rate of 1/60^th and his pensionable salary was £50,000.

At the end of the 2020/21 PIP, Phil had been a member of the scheme for 16 years and his pensionable salary had increased to £52,500.

CPI increased by 1.7% for the year to September 2019.

1. Calculate Phil’s opening pension input value.
   • Phil’s benefits at the beginning of the 2020/21 pension input period were:
   • 15/60 x £50,000 = £12,500
   • Multiply by 16: £12,500 x 16 = £200,000
   • No mention of a lump sum in addition to the pension, so no need to add on
   • Revalue by 1.7% increase in the CPI = £200,000 x 1.017 = £203,400

 

2. Calculate Phil’s closing pension input value.
   • Phil’s benefits at the end of the 2020/21 pension input period were:
   • 16/60 x £52,500 = £14,000
   • Multiply by 16: £14,000 x 16 = £224,000

 

3. Deduct the opening pension input value from the closing input value.
   • Phil’s total pension input is, therefore:
   • £224,000 – £203,400 = £20,600

This is well below the annual allowance, so there’ll be no tax charge on this occasion.

For revision purposes, you should also be mindful that DB accrual in the tax year of a member’s death or in a tax year in which benefits are taken due to their severe ill-health are excluded from the total pension input.

Grab the resources you need!

If you’re studying for your CII R04 exam, grab our free taster to try out one of Brand Financial Training’s mock exam papers for yourself.  Click the link to download the R04 mock exam taster now!

Alternatively, you can download the taster for J05 if you are planning to sit that exam.