Annual Allowance - DB & SIPP

GavB79 · 5 March 2018 at 8:20PM

I am trying to work out what to contribute to my SIPP in the new tax year and I think I'm comfortably under the AA but would like some reassurance please. I'd also like to make sure my SIPP calculation is correct!

From April, depending on the cost of living award, my salary may be up to £64,500pa. I am in the LGPS CARE scheme. I have 5 years' service pre-2008, i.e. guaranteed lump sum based on final salary. The current scheme is 1/49th salary. My contribution is 9.9%.

So, for 18-19 I will accrue £1,316 of benefit. I multiply that by 16? For £21,061.

I also contribute to a SIPP to try and minimise my 40% tax. I only started this last year and haven't gone through the process of claiming back the additional tax relief yet, so I'm not sure if I understand this bit right. For 18-19, I plan to make contribution of £782 per month, £9,384 pa. With the 20% tax relief this is another £2,346? And I can reclaim a further £2,346 for the 40% total? Which of the figures counts towards the AA? I presume it's £9,384 plus £2,346 as these are the amounts going into the SIPP. The other 20% is just refunded to me.

For AA, it's therefore the CARE plus the SIPP = £32,800? So unless my small lump sum increase is £8k, which it won't be, I have nothing to worry about?

I'd also be grateful to know if I've worked out my SIPP contribution correctly to maximise my tax relief. I'm on standard tax code. If I'm overpaying, I'll pay into a LISA/ISA instead.

Many thanks

Brynsam · 5 March 2018 at 9:01PM

Have a read of this - it won't answer all your questions, but it should answer some and possibly give rise to a few more (sorry!): https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance

Dazed_and_confused · 5 March 2018 at 9:04PM

And I can reclaim a further £2,346 for the 40% total? Which of the figures counts towards the AA? I presume it's £9,384 plus £2,346 as these are the amounts going into the SIPP. The other 20% is just refunded to me.

The higher rate tax relief doesn't work quite like that. You cannot claim a straight 20% extra. The gross amount of the SIPP contribution increases the amount of your basic rate tax band so you end up paying more 20% tax and this in turn reduces the amount of 40% tax you pay.

So it can work out as roughly 20% refund but it often isn't as straightforward as that as your higher rate tax relief is limited by the amount of 40% tax you would otherwise pay. It is tricky to pay exactly the correct amount to get 40% on the whole contribution and leave yourself paying no 40% tax at all, particularly if you don't know your total taxable income for the year until you get your March payslip.

You are correct that any additional tax relief comes back to you and doesn't get added to your pension fund.

Linton · 5 March 2018 at 9:34PM

When calculating pension contribution and tax it is much easier if you work in gross terms and then calculate the tax effects at the end.

For AA you need the pension input amount for your DB pension and the gross contribution to your SIPP. The pension input amount is calculated:

When working out how much the benefits have increased by, calculate the annual pension amount at the beginning of the pension input period (this is the pension that the member would get if they retired now at normal pension age). The total should then be increased by the increase in CPI over the 12 month period to the September before the start of the tax year in which the annual allowance is being calculated. Then multiply this amount by 16. If the scheme also gives the member a lump sum in addition to the pension (i.e. not by commutation of pension), add this on.

Then calculate the value at the end of the pension input period; the end value shouldn't be increased by CPI. Multiply this amount by 16. Again if the scheme also gives the member a lump sum in addition to the pension (i.e. not by commutation of pension), add this on.

Deduct the start value you from the end you have calculated above, this is the pension input amount.

See here

So, bcause of the CPI factor your pension input amount will presumably be less than you said. Lets call it £20K. Now you make a £9K gross SIPP contribution which makes the AA usage £29000. This corresponds to a net 0.8X£9K=£7200 which is what you actually pay into your SIPP. HMRC add the missing £1800 to your SIPP and also refund £1800 higher rate tax to you.

Looking at your income and tax. Your salary is £64500. You contributed 9.9% +£9K=£15425 and so overall you pay tax based on taxable pay of £49075.

Apologies for any errors!

GavB79 · 5 March 2018 at 9:43PM

Thanks. The £9k will be the net contribution, not gross, but I should still be fine.

I forgot to add, I also need to be below the £50k child benefit threshold, which I also accomplish here.

Linton · 5 March 2018 at 9:47PM

GavB79 wrote: »

Thanks. The £9k will be the net contribution, not gross, but I should still be fine.

I forgot to add, I also need to be below the £50k child benefit threshold, which I also accomplish here.

OK. To ensure no confusion - £9K net=1.25*£9K=£11.25K gross.

zagfles · 5 March 2018 at 10:04PM

Linton wrote: »

When calculating pension contribution and tax it is much easier if you work in gross terms and then calculate the tax effects at the end.

For AA you need the pension input amount for your DB pension and the gross contribution to your SIPP. The pension input amount is calculated:

See here

So, bcause of the CPI factor your pension input amount will presumably be less than you said. Lets call it £20K. Now you make a £9K gross SIPP contribution which makes the AA usage £29000. This corresponds to a net 0.8X£9K=£7200 which is what you actually pay into your SIPP. HMRC add the missing £1800 to your SIPP and also refund £1800 higher rate tax to you.

Looking at your income and tax. Your salary is £64500. You contributed 9.9% +£9K=£15425 and so overall you pay tax based on taxable pay of £49075.

Apologies for any errors!

But you've not accounted for the inflation increase in the accrued pension (ie the RE part of CARE). If they used the same inflation figure as the HMRC calculation they'd pretty much cancel out, but I doubt they do. With inflation quite volatile this could make a significant difference.

Also it appears the OP has final salary benefits, in LGPS the final salary link is maintained by default AIUI so there could be pension input from this if OP has had an above inflation payrise.

OP - get a statement of pension input amounts for previous tax years from the scheme, it won't help with this year but at least you'll know how much carry-forwards you have and so what margin or error you have to play with.

AlanP_2 · 6 March 2018 at 1:46PM

Second the point about getting statements from LGPS admins re Annual Allowance used per year. We get ours in the Annual Statement but not all LAs do that by the sounds of it.

You say you have the SIPP to use up 40% allowance and to get below the £50k Child Benefit threshold.

As an alternative (or alongside) have you investigated the LGPS AVC option?

Meets both of your objectives but can be taken entirely tax free up to a limit of 25% of (DB/CARE annual pension *20) + (AVC Pot)) unlike your SIPP where you are likely to pay tax on 75% of it as you withdraw it.

Disadvantage of AVC is it must be taken at same time as main scheme benefits to be eligible for tax free payment so if you want to retire early then you need the SIPP but if not....

We are contributing to both SIPP and AVCs to try and get best of both worlds.

GavB79 · 6 March 2018 at 5:24PM

I wanted the SIPP as I intend on retiring early, but thanks. A mixture of SIPP and ISA will hopefully see me through from 55 (with LISA from 60) whilst staying below the tax threshold, then the LGPS will see me through from NRA onwards. That's the plan anyway!

cautious_investor · 6 March 2018 at 5:28PM

" The current scheme is 1/49th salary. My contribution is 9.9%." WOW ! do you know how fortunate you are ? Thats a fertile pension...

GavB79 · 6 March 2018 at 7:11PM

cautious_investor wrote: »

" The current scheme is 1/49th salary. My contribution is 9.9%." WOW ! do you know how fortunate you are ? Thats a fertile pension...

Yes, it has worked out rather well... when they shifted to CARE in 2015 I was already earning a good salary so will actually be better off in this new scheme compared to the old 1/60th FS scheme. I could conceivably have a pension of 80%+ of current salary, not that I want to put another 30 years in though. Not so good for new entrants earning £15k p.a. working their way up, but still not to be sniffed at.

Annual Allowance - DB & SIPP

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