Two questions re: SIPP/pension allowance and tax

dunroving

Have been working on maximising my pension contributions this year to make maximum use of previous unused annual allowance. My goal this year is to make pension contributions up to my total earnings (which are higher than the annual allowance this year). I contribute to:


a) Defined benefit scheme (regular payments).
b) Defined benefit scheme (AVC contract to buy added years).
c) AVCs to employer-sponsored money purchase scheme
d) SIPP with Fidelity


My first question is regarding calculation of calculated use of annual allowance. My pensions Department has calculated my annual allowance used in each of the relevant Paying In Periods (the on-going year and the past 3 PIPs).


From the worksheets they have given me, this appears to be based on two amounts: (1) the increase in the Total pensionable Service over the year (which is essentially 1 year of service), plugged into a formula, and (2) my payments of AVCs into the money purchase scheme.


There is no mention of the monthly AVCs I have been paying in order to purchase added years. Is this an error, or is the contract for additional years counted towards the year in which I took out the contract?


Second question(s) is/are with regard to the tax relief on the SIPP contributions. So far, the net contributions have shown up as purchased units in the various investments. The "tax relief" part is still showing, after a couple of weeks, as "cash". Three associated questions:


1) How long does it typically take SIPP providers to credit the tax relief amount in the relevant funds? I presume Fidelity are just waiting to receive this from HMRC (I have seen from previous threads that some providers find this up-front and others wait until they have cash in hand from HMRC)
2) If this occurs after the end of the current tax year, I presume this won't have any knock-on effect as the net payment was during 2014-2015 (i.e., the tax relief won't be debited against next year's pension contribution allowance) - is this correct?
3) What unit prices will apply to units purchased with the tax relief? I know when I buy units in ISAs and SIPPs, even though the transaction may show with a date several days later, the unit price is on the date of the initial transaction (i.e., payment). Will the unit rice be the same as on the day of the "net" purchase, or on the date that the tax relief is received from HMRC?


Thanks for any advice!

zagfles

The PIA (pension input amount) calculation for DB schemes is far more complicated than just being based on an increased year of service. It's basically the increase in value of the pension, so stuff like salary changes and inflation are accounted for. Try the HMRC calculator, see what you get: http://www.hmrc.gov.uk/tools/annual-allowance/index.htm

For the SIPP tax relief counts in the tax year of your contributions eg if you make a contribution in March 2015 and tax relief is not paid till May the total counts as a gross contribution for the 2014/15 tax year.

The other questions will be specific to Fidelity. I would imagine they'll use the unit price when they purchase the units. I think the "settlement date" is usually a few days after the purchase date which is why you see payments go out a few days after purchase.

dunroving

zagfles wrote: »

The PIA (pension input amount) calculation for DB schemes is far more complicated than just being based on an increased year of service. It's basically the increase in value of the pension, so stuff like salary changes and inflation are accounted for. Try the HMRC calculator, see what you get: http://www.hmrc.gov.uk/tools/annual-allowance/index.htm

For the SIPP tax relief counts in the tax year of your contributions eg if you make a contribution in March 2015 and tax relief is not paid till May the total counts as a gross contribution for the 2014/15 tax year.

The other questions will be specific to Fidelity. I would imagine they'll use the unit price when they purchase the units. I think the "settlement date" is usually a few days after the purchase date which is why you see payments go out a few days after purchase.

Thanks - my "plugged into a formula" covers the "complicated" process you're describing for the DB accrual calculations, I'm pretty sure. I actually had a stab at calculating it myself based on the information provided on HMRC and surprised myself by getting something close to the figure our Pensions Department (I think the main source of my innacuracy was trying to guess at how inflation would be modelled).

My biggest concern is that the additioanl years (actually, days) of pensionable service I bought over the year via my monthly AVC added years contract didn't seem to be there. I had expected, instead of "1 year" additional pensionable service being in the formula, there'd be something like 1 year, 39 days" , or something like that.

jem16

dunroving wrote: »

My biggest concern is that the additioanl years (actually, days) of pensionable service I bought over the year via my monthly AVC added years contract didn't seem to be there. I had expected, instead of "1 year" additional pensionable service being in the formula, there'd be something like 1 year, 39 days" , or something like that.

My buying back of years was certainly included in each statement and showed in the increase in value. As the PIP amount is calculated from the value as opposed to the years, I would expect your added years to be included that way.

zagfles

dunroving wrote: »

Thanks - my "plugged into a formula" covers the "complicated" process you're describing for the DB accrual calculations, I'm pretty sure. I actually had a stab at calculating it myself based on the information provided on HMRC and surprised myself by getting something close to the figure our Pensions Department (I think the main source of my innacuracy was trying to guess at how inflation would be modelled).

The way inflation is modelled can make a massive difference if you've been in the scheme a long time, often over £10k diffreence. So don't guess - use the correct figures - revalue the initial amount by the previous Sept's CPI figure. The HMRC calculator will use the correct amount, or see here for a list (& a good guide to calculating it) http://www.aviva-for-advisers.co.uk/site/public/tech-centre/tech-article-detail/annual-allowance---pension-contribution-planning

My biggest concern is that the additioanl years (actually, days) of pensionable service I bought over the year via my monthly AVC added years contract didn't seem to be there. I had expected, instead of "1 year" additional pensionable service being in the formula, there'd be something like 1 year, 39 days" , or something like that.

That's just more DB pension, so surely you just include that in the values you calculate for your DB pension at the start and the end of the PIP?

dunroving

zagfles wrote: »

The way inflation is modelled can make a massive difference if you've been in the scheme a long time, often over £10k diffreence. So don't guess - use the correct figures - revalue the initial amount by the previous Sept's CPI figure. The HMRC calculator will use the correct amount, or see here for a list (& a good guide to calculating it) http://www.aviva-for-advisers.co.uk/site/public/tech-centre/tech-article-detail/annual-allowance---pension-contribution-planning
That's just more DB pension, so surely you just include that in the values you calculate for your DB pension at the start and the end of the PIP?

Yes, the estimate provided by our Pensions Department included the correct inflation figures - I was just guesstimating for my own edification. I will also try out the HMRC calculator when I have a spare 10 minutes.


- I could add the extra days to the DB formula, if I knew how many days to add. That's the problem with the estimate I was sent, it doesn't say anything about added days of pensionable service. The Pension Department is using a modeller provided by USS (the DB scheme).


I think the monthly AVC added years contract runs from when it started (February 2011) to my official retirement age (which was 65, at the time the contract was taken out), so an interim step would be for me to divide the total added years by the number and fraction of years over which the contract runs, I suppose.


I emailed the Pensions Department with a rather urgent request for clarification. I'm fine as far as annual allowance goes because I have so much carry-over; it's the "salary" limit I may have exceeded.

zagfles

dunroving wrote: »

Yes, the estimate provided by our Pensions Department included the correct inflation figures - I was just guesstimating for my own edification. I will also try out the HMRC calculator when I have a spare 10 minutes.


- I could add the extra days to the DB formula, if I knew how many days to add. That's the problem with the estimate I was sent, it doesn't say anything about added days of pensionable service. The Pension Department is using a modeller provided by USS (the DB scheme).


I think the monthly AVC added years contract runs from when it started (February 2011) to my official retirement age (which was 65, at the time the contract was taken out), so an interim step would be for me to divide the total added years by the number and fraction of years over which the contract runs, I suppose.


I emailed the Pensions Department with a rather urgent request for clarification. I'm fine as far as annual allowance goes because I have so much carry-over; it's the "salary" limit I may have exceeded.

That doesn't make sense. The increase in pension value is irrelavent for the "100% of earnings" limit (which I assuming you're talking about). For that, you just need to consider your contributions. Employer contributions or increase in DB pension aren't relevant.

For instance, if you earn £50k, and contribute £10k to your occupational scheme (inc AVCs etc), so you have a £40k taxable income, you can then contribute £40k gross (£32k net) to a SIPP without breaching the "100% of earnings" limit. Obviously you'd need AA to carry forwards but you say you have this.

dunroving

zagfles wrote: »

That doesn't make sense. The increase in pension value is irrelavent for the "100% of earnings" limit (which I assuming you're talking about). For that, you just need to consider your contributions. Employer contributions or increase in DB pension aren't relevant.

For instance, if you earn £50k, and contribute £10k to your occupational scheme (inc AVCs etc), so you have a £40k taxable income, you can then contribute £40k gross (£32k net) to a SIPP without breaching the "100% of earnings" limit. Obviously you'd need AA to carry forwards but you say you have this.

OK, that's a new one on me. I am relatively new to the "tax efficient investments" game, but have been learning fast.


So, to use the "If I'm understanding correctly" scenario:


The salary limit ("100% of earnings") applies only to how much I pay in, irrespective of whether it's into SIPP, DB or DC, added years AVCs, etc.?


The annual allowance is counted against (or vice versa) the sum of (increase in value of DB pensions) plus (personal contributions to SIPPs, money purchase AVCs)? (and presumably if there were employer contributions to a DC scheme, these also would count against the annual allowance?)


It does seem to make more sense this way. I should be home free re: annual allowance because I have about £40 carryover from 2011-2012, never mind 2012-2013.


Sorry if it looks like I am just repeating what you said, but sometimes it helps to put it in your own words to see if the OP says "Yes, that's what I said"


If you have any links to specific HMRC pages that state this, that would be helpful ... I have read so many HMRC, gov.uk, etc., pages they all seem to mix into one.

zagfles

See https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Though this explains it better: http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/pension-contributions-the-basics/

The thing to remember is that the "100% of earnings" limit is a limit on tax relief for personal contributions, you can put in more but you don't get tax relief (though this will cause problems and some SIPP's T&Cs state that you shouldn't, I think you'd have to tell the scheme and they'd pay back the tax relief).

You don't technically get tax relief on employer contributions, the employer does. So employer contributions aren't relevant.

ETA: the other important thing to remenber is that the "100% of earnings limit" applies to the tax year, not the pension input period (the PIP is only relevant for the AA).

dunroving

zagfles wrote: »

See https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Though this explains it better: http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/pension-contributions-the-basics/

The thing to remember is that the "100% of earnings" limit is a limit on tax relief for personal contributions, you can put in more but you don't get tax relief (though this will cause problems and some SIPP's T&Cs state that you shouldn't, I think you'd have to tell the scheme and they'd pay back the tax relief).

You don't technically get tax relief on employer contributions, the employer does. So employer contributions aren't relevant.

ETA: the other important thing to remenber is that the "100% of earnings limit" applies to the tax year, not the pension input period (the PIP is only relevant for the AA).

Thank you, I will take a look through these in more detail (just scan-read them).


Yes, I was interested to find out that in terms of salary within the relevant tax year, the tax year that income was allocated to is determined by day of receipt (i.e., pay-day). So, for example, salary earned before April 5th is allocated to the following tax year if it's paid in an end of April pay check. I suppose that makes things simpler.

dunroving

dunroving wrote: »

<<snip>>
Second question(s) is/are with regard to the tax relief on the SIPP contributions. So far, the net contributions have shown up as purchased units in the various investments. The "tax relief" part is still showing, after a couple of weeks, as "cash". Three associated questions:


1) How long does it typically take SIPP providers to credit the tax relief amount in the relevant funds? I presume Fidelity are just waiting to receive this from HMRC (I have seen from previous threads that some providers find this up-front and others wait until they have cash in hand from HMRC)



<<snip>>

3) What unit prices will apply to units purchased with the tax relief? I know when I buy units in ISAs and SIPPs, even though the transaction may show with a date several days later, the unit price is on the date of the initial transaction (i.e., payment). Will the unit rice be the same as on the day of the "net" purchase, or on the date that the tax relief is received from HMRC?

Just an update to say I managed to find time to call Fidelity and the answer is (for Fidelity, anyway):


1) It takes HMRC 6-8 weeks to send the "tax refund", at which time Fidelity buys the units in the relevant fund


3) As you'd guess from the have, the unit price is on the day the deal is made (i.e., the deal on the tax refund money).


Thus if I invest £2,000 net in Fund X on January 10th, and the unit price is £1, I get 2,000 shares


If HMRC send Fidelity the tax relief (£500) on March 10th, and the unit price is £1.25, I get 400 additional shares.


Thus, there's a bit of a crapshoot depending on whether the fund price goes up or down in between the initial net investment and the subsequent investment of the tax relief.