How to work out the value of a final salary pension.

peterg1965

A couple of questions, grateful if anyone could shed any light on the answers:

Firstly, how does one put a total 'pension pot' value on a non contributory final salary pension? This is from a Lifetime Allowance tax perspective, with a view to understanding how much of the £1.5m, said pension takes up. I assume there is a formula to work this out, put it is not clear from the HMRC website. The pension in question, is a final salary scheme with 3x lumpsum, with commutation option if taken before the retiring age - 55 in this case. How much would a hypothetical pension of £40,000 be worth, with a lump sum of £120K? I know that for assessment of annual value a multiplier of 16 is used.

Secondly, the Maximum Lifetime Allowance for pensions has been reduced to £1.5M, has the Treasury made any commitment to an annual increase in this amount over time? Or will it be subject to an announcement in the annual Budget, should and if the Chancellor decide to increase it.

Thanks.

hugheskevi

Firstly, how does one put a total 'pension pot' value on a non contributory final salary pension? This is from a Lifetime Allowance tax perspective

Multiply the amount of annual pension when payment is commenced by 20, and add to that any lump sum.

How much would a hypothetical pension of £40,000 be worth, with a lump sum of £120K?

£920,000

Secondly, the Maximum Lifetime Allowance for pensions has been reduced to £1.5M, has the Treasury made any commitment to an annual increase in this amount over time?

No, they simply said they will review it in 2016, it remains at £1.5m until then (unless they decide to change it again).

RichandJ

Only thing to add to kev's reply is that the decrease in the LTA to £1.5m doesn't happen until 6 April 2012 - it's still £1.8m until then.

dunstonh

If you think you are going to exceed the £1.5 million, then you can apply for fixed protection which allows you to keep the £1.8 million lifetime allowance. I have done one of these recently and its straightforward.

peterg1965

dunstonh wrote: »

If you think you are going to exceed the £1.5 million, then you can apply for fixed protection which allows you to keep the £1.8 million lifetime allowance. I have done one of these recently and its straightforward.

Thanks all, I have just under 9 years until I am 55 (2020), and may get close to the LTA if I advance one more step up in my career and continue to add to my SIPP at the rate I am doing so now - c£20K pa and if the SIPP performs as I would wish. I will hedge my bets a little and see if the LTA is increased in 2016. Would it be worth applying for fixed protection anyway? Are there any drawbacks of doing so, and can an individual do the necessary or has it got to be an IFA?

The nearest alligator for me is managing the £50,000 annual allowance, the calculations for a final salary pension are hugely complex (to me) and I stand in danger of having a tax bill I don't want if a career advancement occurs.

RichandJ

The AA calcs are pretty awful for us as well, at least the transitional year 2010/11 was. That said, the 2011/12 shouldn't be too difficult. First you need to work out the AA value of your benefits at your scheme's last Pension Input Period - this is your accrued pension probably at the last renewal date times 16. You then uprate that by CPI for Sept 11, 5.2% from memory.

Then do the same for your accrued pension at the next renewal date, except don't uprate by CPI. Take the 1st figure from the 2nd & that's your Pension Input Amount for the year. If less than £50k, fine, if not you will have a tax bill. How that's paid can be complex, ask your scheme admin if they're doing 'Scheme Pays'.

Don't forget the potential 3 year carry forward of the allowance.

peterg1965

RichandJ wrote: »

The AA calcs are pretty awful for us as well, at least the transitional year 2010/11 was. That said, the 2011/12 shouldn't be too difficult. First you need to work out the AA value of your benefits at your scheme's last Pension Input Period - this is your accrued pension probably at the last renewal date times 16. You then uprate that by CPI for Sept 11, 5.2% from memory.

Then do the same for your accrued pension at the next renewal date, except don't uprate by CPI. Take the 1st figure from the 2nd & that's your Pension Input Amount for the year. If less than £50k, fine, if not you will have a tax bill. How that's paid can be complex, ask your scheme admin if they're doing 'Scheme Pays'.

Don't forget the potential 3 year carry forward of the allowance.

Thanks for that, I was aware of the 3year carry forward, is that current and the three previous years? I have been battling with pension spot codes, and am still not sure how they work! I have to work the accrual figures out down to the day.

By the way for tax year 11/12, I thought you used the CPI figure for the previous year, ie sep 10, which was 3.1%?

Oh, and my scheme is doing 'scheme pays', however I can't access it as I have additional personal pension contributions. It just needs careful management I think. A two year pay freeze and high inflation means that my DB contribution for 12/13 will be nil.

RichandJ

Will chk inflation when in office tomorrow, unless someone else can remember & chip in.

hugheskevi

By the way for tax year 11/12, I thought you used the CPI figure for the previous year, ie sep 10, which was 3.1%?

Yep.

Well, that is what is in my personal spreadsheets, and I remember researching that specific point.

Just_Some_Guy

Yeah I used 3.1% for 2011/12.

peterg1965

Thank you for clarity on that point.

On the question of the 3 year 'carry over' , is it current and three tax years back, or current and two?