Investment Advice.

gkerr4

guymo wrote: »

One thing to keep an eye on if you are making additional pension contributions is the annual allowance. At present you can only contribute £40k gross per year to a pension without having to pay tax. It gets complicated for final salary pensions: the amount of the annual allowance used up by the final salary scheme each year is calculated as 16 times the increase in annual pension benefits.

So if e.g. you are on a DB scheme that accrues 1/80 of final salary per year, then each year you use up (16 * 1/80 * your salary) of your annual allowance. So in your situation, you'd be using up about £20k of the AA via the final salary scheme, meaning you can only contribute another £20k to pensions without paying tax.

It's slightly more complex than that in fact --- the increase is reduced to account for inflation --- and if you get a pay rise then you'll use up even more. But to mitigate this, you can carry over unused allowance from the last three years. More details:

http://www.hmrc.gov.uk/pensionschemes/annual-allowance/pension-input.htm#3

good to see an example where HMRC are keeping things simple!! not!

can i ask - does employer contributions count towards that £40k cap - or just employee contributions?

guymo

gkerr4 wrote: »

can i ask - does employer contributions count towards that £40k cap - or just employee contributions?

For defined contribution pensions (i.e. pensions where you put money in, invest it, and draw it out later) it is the total contribution that counts. Your contributions, your employers', and the contributions of anyone else who happens to love you enough to put money in your pension all count. The amount that goes in to your pension in the year is the amount that counts against the annual allowance.

For defined benefit pensions (final salary schemes and the like) it's the growth in the benefits that count, calculated as per the link I posted above.