Understanding SIPP carry forward

okydoky

Following last years budget announcements, my OH opened a SIPP and invested £5k which was grossed up to £6250 - her part time job with Local Government pays about £12K.
As she is 56, her plan is to pay all of her income into the SIPP for the next few years which she can then drawdown when she leaves at about age 60, to bridge the gap until state pension kicks in at 66. She has now paid in her entire salary for 14/15.
However the fund is likely to be lower than she would have liked due to the shortish timescales.
With "carry forward", can she pay in an amount equal to her salary for the years 11/12, 12/13 and 13/14(less the amount mentioned above of course), and still get full tax uplift/relief?
Thanks in anticipation.

zagfles

No. Carry forwards only applies the annual allowance, not the 100% of earnings limit.

amandajc

My understanding is that the amount she is allowed to pay in also has to take account of how much the value of her DB pension has increased by in the tax year and it is also gross - ie you should calculate it to include the amount by which HMRC will increase it.

if she earns £12,000 her allowance is £12,000 minus the increase in value of her LGPS for the relevant tax year (this figure should be available on her pension statement). The figure you arrive at is that which your wife's contribution would be made up to by HMRC - she can only pay in the amount that would produce this figure.

I have recently asked the same question myself and have been helped here.

I have done a similar calculation (I earn £26,000) and, taking into account the increase in value of my LGPS pension, the fact that I am paying some AVCs and the fact that the allowance has to include the amount that HMRC will add, I can only contribute about £12,500 pa.

It's worth doing the sums so that you don't end up overpaying and having to pay back the tax. Good luck.

jem16

amandajc wrote: »

if she earns £12,000 her allowance is £12,000 minus the increase in value of her LGPS for the relevant tax year (this figure should be available on her pension statement). The figure you arrive at is that which your wife's contribution would be made up to by HMRC - she can only pay in the amount that would produce this figure.

The value that her LGPS increases by has only relevance for the annual allowance.

As she is limited to £12k for tax relief purposes, she can forget the annual allowance calculation as she is nowhere near it.

Carry forward has no bearing on the OP's question, as like you, he thought you could carry forward tax relief which you can't.

The same applies to you as you only need to worry about actual contributions as your £26k limit is nowhere near the annual allowance of £40k.

amandajc

Ah. OK. That's good news.

I thought the term "annual allowance" referred to either to the £40,000 (currently), or your salary (if less than £40,000) and then the same calculations had to be applied to that figure to get to the amount that could be paid in. A misunderstanding on my part.

Sorry for misleading you okydoky and thanks yet again jem16

kidmugsy

In her position she can contribute her earnings from the job, less the amount she contributes to the LGPS.

If things are going to be tight before the State Pension begins, she could always consider drawing the Money Purchase pension and beginning the LGPS pension early. The tax efficiency that might result, plus the greater comfort, may compensate for the otherwise undesirable effect of starting a Defined benefit pension early.

Another possibility if she wished to avoid forgoing part of the LGPS pension is to live on cheap borrowing between the exhaustion of the private pension and the start of the LGPS and State pensions.

zagfles

It not surprising there's confusion about this - there's a lot of simplistic rubbish written like "the most you can put into a pension is 100% of your earnings subject to a min of £3,600 and max of £40,000", in an attempt to combine two completely separate limits with completely different rules.

dunroving

amandajc wrote: »

Ah. OK. That's good news.

I thought the term "annual allowance" referred to either to the £40,000 (currently), or your salary (if less than £40,000) and then the same calculations had to be applied to that figure to get to the amount that could be paid in. A misunderstanding on my part.

Sorry for misleading you okydoky and thanks yet again jem16

I also have been mistaken about this recently, as I am in the fortunate position to maximise pension contributions to 100% earnings this year and next year. I recently realised (thanks to the kind people on this forum) that personal contributions are what add up to the "100% earnings" limitation, and accrual is what counts towards annual allowance (I'm in a DB scheme, so this is a bit more complicated).


Just watch, now someone will tell me I still have it wrong!

zagfles wrote: »

It not surprising there's confusion about this - there's a lot of simplistic rubbish written like "the most you can put into a pension is 100% of your earnings subject to a min of £3,600 and max of £40,000", in an attempt to combine two completely separate limits with completely different rules.

Like many complicated things, most people just need a simple explanation. The danger is that sometimes the "simplistic" explanation ends up including "rubbish".

okydoky

dunroving wrote: »

I also have been mistaken about this recently, as I am in the fortunate position to maximise pension contributions to 100% earnings this year and next year. I recently realised (thanks to the kind people on this forum) that personal contributions are what add up to the "100% earnings" limitation, and accrual is what counts towards annual allowance (I'm in a DB scheme, so this is a bit more complicated).


Just watch, now someone will tell me I still have it wrong!


OK, so.......................................................
I certainly wont tell you you've got it wrong... but have I got it right?
Gross income £12000
Gross contributions to LGPS Scheme £600
So SIPP contribution limited to 80% of £11400 = £9120
which means HMRC then uplift by 25% of £9120 = £2280


Is this right, could not get my head round your comment about "accrual counting towards annual allowance"?


Thanks

jamesd

For a defined benefit pension it's not the amount paid in that matters for the annual allowance calculation, it's the increase in benefit value. So someone might pay in say £5,000 but get a raise of £3,000 and that raise could have a bigger effect on the final salary or average salary than just the amount paid in during the year.

zagfles

okydoky wrote: »

dunroving wrote: »

I also have been mistaken about this recently, as I am in the fortunate position to maximise pension contributions to 100% earnings this year and next year. I recently realised (thanks to the kind people on this forum) that personal contributions are what add up to the "100% earnings" limitation, and accrual is what counts towards annual allowance (I'm in a DB scheme, so this is a bit more complicated).

Just watch, now someone will tell me I still have it wrong!


OK, so.......................................................
I certainly wont tell you you've got it wrong... but have I got it right?
Gross income £12000
Gross contributions to LGPS Scheme £600
So SIPP contribution limited to 80% of £11400 = £9120
which means HMRC then uplift by 25% of £9120 = £2280


Is this right, could not get my head round your comment about "accrual counting towards annual allowance"?


Thanks

Yes that's right.