Calculating the protected pension input amount (PPIA)
Protected pension input amounts (PPIAs) are regular payments that were paid at least quarterly prior to 22 April 2009 (or 9 December 2009 if the £130,000 relevant income amount applies). They provide protection against the special annual allowance charge for future regular payments up to the level that was previously being paid.
Money purchase - regular payments
For money purchase arrangements the PPIA is based on the pattern of payments made in the tax year 2008/9 (or as at 9 December for the new high income individuals).
Where the payments are regular and for an agreed amount the PPIA will be equal to the total amount paid in the tax year.
Contributions in 2008/09 = £2,000 per month
If a regular payment contract is based on a percentage of earnings the protection will include the agreed increase. Providing there is no change to the way in which the payments are calculated the PPIA will be based on the new amount each year.
GPP contributions = 10% of salary
Salary = £200,000
Discretionary increases, even where a pattern can be established, are not included for this purpose.
HMRC have also confirmed that if a payment is missed under a regular payment contract, this constitutes an "insignificant failure" and can be ignored.
Money purchase - non-regular payments
Protection is also given to individuals who don't have a regular payment contract but who have in practice made more than four payments in one year. In this scenario the amount of the payments actually made are taken into account.
If the payments are equal in value then the PPIA will be the total of the payments made, as in example 1.
If the payments have been of varying amounts, the PPIA is based on the median value over the tax year.
This is defined as the value of the middle payment if all the payments are put in order of size. Where an even number of payments are made the median is the average of the two middle payments – not the average of the total payments.
A client makes 4 payments in 2008/09 but of progressively smaller amounts as his finances were affected by the credit crunch:
1 May 2008 £ 7,000
Average payment = (£12,000 + £8,000 + £7,000 + £5,000)/4 = £8,000
Payments in order of size: £12,000; £8,000; £7,000; £5,000
Median payment = (£8,000 + £7,000)/2 = £7,500
PPIA: = £7,500 x 4 = £30,000 NOT £8,000 x 4 = £32,000
Money purchase - infrequent contributions
A pattern of single payments may also be protected against the special annual allowance tax charge. However these payments do not constitute a PPIA. Protection is achieved via an increase in the special annual allowance (see protecting existing payments).
Final salary schemes
For final salary schemes the PPIA is based on the increase in the value of the individual’s accrued benefits during the tax year. This in turn is defined, in the same way as for the annual allowance, as ten times the difference in pension that would have been payable at the start and end of each tax year:
FS accrual rate = 1/60 x salary
Value of benefits:
£220,000 - £166,667 = £53,333
Providing the rate of accrual remains constant, salary increases are taken into account in the formula and the increased pension input is protected.
If the accrual rate changes this is a "material change" and would not normally be protected.
If however the material change is applied at scheme level, defined as affecting 50 or more members, the change will be protected.
Existing regular AVC payments for added years will also be protected. Additional ad hoc payments are not.
Next page: Contributions refund lump sums (CRLS)
Note - The information provided is based on our current understanding of the 2009 Budget, the Pre-Budget Report 2009 and associated documents and may be subject to alteration as a result of changes in legislation or practice.
Published 12 January 2010
Updated 9 March 2010