Maximum Contribution Advise

andybirch

A friend of mine is due to retire in August and has just been informed that she will have a £6000 tax bill because she has paid too much into her pension fund over the years. She was informed that paying into AVC's was a good idea.

The pension fund in question is a company final salary scheme.

My question is:

Is the company responsible for monitoring the contributions made into their pension scheme to ensure that they fall within the allowed limits? I understand that from next year these limits will be increased to 100% of your salary.

Debt_Free_Chick

Yes & no ... the Trustees of the scheme, via the administrators, should ensure that no-one pays more than 15% of remuneration, in total - including AVCs.

However, it sounds like her AVCs have grown, to the point whereby the fund is over the limit. So whilst she may have not exceeded the contributions limit, she has exceeded the fund limit. A bit of explanation ... there is no fund limit, as such - but the AVC fund must not be such that it causes the total pension to exceed the pension limit.

I would suggest she ask the pension administrators to set out how they have calculated her Final Remuneration. They will know what she means - then post the explanation here and we may be able to advise further.

If it turns out that her AVCs are over the limit, then the administrator will be required to deduct the tax from her AVC fund, so she won't have to pay a separate tax bill.

HTH

Pal

Debt_Free_Chick wrote:

Yes & no ... the Trustees of the scheme, via the administrators, should ensure that no-one pays more than 15% of remuneration, in total - including AVCs.

While this is technically true, it is not the Trustees responsibility in practice because they have no way of knowing whether or not someone is exceeding 15% of their total remuneration. What if someone has a second job? If anyone should take responsibility it should be the payroll at the company, but in practice it is down to the individual to check that they are not exceeding the limits.

However, it sounds like her AVCs have grown, to the point whereby the fund is over the limit. So whilst she may have not exceeded the contributions limit, she has exceeded the fund limit. A bit of explanation ... there is no fund limit, as such - but the AVC fund must not be such that it causes the total pension to exceed the pension limit.

I would suggest she ask the pension administrators to set out how they have calculated her Final Remuneration. They will know what she means - then post the explanation here and we may be able to advise further.

If it turns out that her AVCs are over the limit, then the administrator will be required to deduct the tax from her AVC fund, so she won't have to pay a separate tax bill.

HTH

Agreed. If she is over the pension limit then her excess AVCs will be refunded and the tax paid at the time. However I would ask for a detailed calculation of the Final Remuneration calculation, as most scheme administrators do not calculate them properly, often using basic salaries instead of full p60 and p11d earnings figures.