Pension rules

Tony_Geo

My neighbour was discussing pensions with me today. I wonder if one of the experts can clarify something for me.


My neighbour is a long term member of a defined benefit scheme. He was also planning to open a SIPP this year. His administrator explained that his pension input amount this year was large enough that he did not have much scope within his annual allowance because he has just had a promotion.


I read something recently about carrying forward the annual allowance if it was not used in the previous two tax years.


My question is, if he opened a SIPP in the next couple of days could he add money using this unused allowance from previous years? That is would his DB pension count as having had a pension in the previous years for the carry forward to work? Or would he have had to have a SIPP in the previous two years?

kidmugsy

I believe that the period is three years; on your material point I can't help. Darn good question, though.

zagfles

Looks like it, see http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm06108010.htm

See also http://www.hmrc.gov.uk/pensionschemes/understanding-aa.htm

lvader

Annual allowance yea, but isn't the tax relief limited to the current years earnings?

Mattygroves2

lvader wrote: »

Annual allowance yea, but isn't the tax relief limited to the current years earnings?

Yes you can only contribute up to current year earned income and with a DB scheme it isn't easy to work out what the actual contributions are for each year - the scheme administrator would need to provide them.

Tony_Geo

lvader wrote: »

Annual allowance yea, but isn't the tax relief limited to the current years earnings?

Yes he knows that, but that is not the issue for him as he is well into the 40% bracket.

zagfles

Mattygroves2 wrote: »

Yes you can only contribute up to current year earned income and with a DB scheme it isn't easy to work out what the actual contributions are for each year - the scheme administrator would need to provide them.

The 100% of annual earnings limit is personal/employee contributions only, not employer contributions, so it's simple to work out. It's basically taxable earned income.

The annual allowance limit includes employer contributions, and is hard to work out for a DB scheme, but perfectly possible, I worked out mine from the info on the HMRC site linked above and got it right. But best to ask the scheme administrator, or have a look at the annual statements which may include this.

BobQ

zagfles wrote: »

The 100% of annual earnings limit is personal/employee contributions only, not employer contributions, so it's simple to work out. It's basically taxable earned income.

The annual allowance limit includes employer contributions, and is hard to work out for a DB scheme, but perfectly possible, I worked out mine from the info on the HMRC site linked above and got it right. But best to ask the scheme administrator, or have a look at the annual statements which may include this.

There is a formula to calculate the value of a DB Pension at the start and end of the Pension Input Period (not necessarily aligned to the tax year). The starting sum is revalued for inflation and then subtracted from the end sum to give the increase in value of the notional DB pension. Its explained on the HMRC site I recall and can have significant change if the pension holder gets a promotion in a final salary scheme in a particular year