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How to Calculate Pension Input Periods (PIPs)

How to Calculate Pension Input Periods (PIPs)

In this article, we look at pension input periods – or PIPs.  This is the period of time where total pension contributions are calculated to see if the annual allowance or money purchase annual allowance has been exceeded. Read on to learn more as you prepare for any of the CII AF7, J05 or R04 exams.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2019/20.

Since 2016/17, PIPs have been aligned with the tax year (prior to this date, they could start and end at any point).

Total Pension Input for Money Purchase Scheme

This is pretty straightforward; the calculation is done at the end of the PIP and is the gross amount of pension contributions paid (either by the member or their employer or someone else) and includes any part that does not get tax relief.  This amount is entered on the self-assessment tax return to see if an annual allowance tax charge is due to be paid.

What’s not included is:

  • Contributions paid by an individual or someone other than the employer after age 75
  • Investment income or returns 

Total Pension Input for Defined Benefit Schemes

This is not quite as straightforward.  For active members of DB schemes, total pension input is calculated as the increase in capital value of pension rights over the PIP.  The annual pension is multiplied by 16 to give it a notional value and any lump sum is added.

This is the process:

Calculate the value of benefits at start of the PIP - the opening pension input value
Multiply this by 16.
Add any lump sum (but don’t multiply by 16).
Increase by 2.4% for 2019/20 (the CPI rate to September 2018)
Calculate value of benefits at end of the PIP - the closing pension input value
Multiply by 16.
Add any lump sum (but don’t multiply by 16).
No need to increase by CPI as this value is already in today’s terms.
The difference between the two figures is the total pension input for the period.

 

Taking a look at pension input periods - or PIPs and how to calculate them. Click To Tweet

 

Let’s look at an example:

At the beginning of the 2019/20 PIP, Nigel had been a member of his defined benefit scheme for 12 years, the scheme had an accrual rate of 1/60th and his pensionable salary was £62,000.

At the end of the 2019/20 PIP Nigel had been a member of the scheme for 13 years and his pensionable salary had increased to £67,000.

Nigel’s benefits at the beginning of the 2019/20 pension input period were:

  • 12/60 x £62,000 = £12,400

  • £12,400 x 16 = £198,400

  • £198,400 x 1.024 = £203,161.60

Nigel’s benefits at the end of the 2019/20 pension input period are:

  • 13/60 x £67,000 = £14,516.67

  • £14,516.67 x 16 = £232,266.72

Nigel’s total pension input is therefore:

£232,266.72 - £203,161.60 = £29,105.12

 

In this example, Nigel is within the annual allowance of £40,000.

For both DC and DB schemes, where a member takes benefits due to serious ill-health or death occurs, no amount will arise for the PIP that ends in that tax year.

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