Final Salary Pension and Annual Allowances

gadgetmind

hyubh wrote: »

Your general point is a reasonable one, however the AA for 2014/15 was 40K not 50K.

Ah, sorry, I was reading down my spreadsheet incorrectly (after just going back and checking it in a panic!)

zagfles

seaniow wrote: »

I'm lucky enough to be in a final salary pension scheme and have recently been advised by the company pension administrator that I have gone over the £40,000 annual allowance. Basically my salary was increased by £10k following a promotion and my pension calculation will have gone up on the previous year by £4723 a year, multiplying this number by a government factor of 16 gives a figure of £75,561, £35,561 more than the £40k cap.
I am not a super high earner although I do creep into the 40% tax bracket. It would appear that my £10k pay award is not only being taxed through PAYE this year losing over £4k of my salary but I will also have to pay another £14k in tax (40% tax on £35k this year). In essence a £10k pay award has cost me £18k this year. Please can someone tell me I am reviewing this correctly as it doesn't appear to be fair or right. I have no carry forward pension from previous years either as I have been saving in a SIPP.


Many thanks for reading.

I presume you're talking about exceeding last year's AA? If this year's, which mini-tax year are they talking about?

See https://www.gov.uk/government/publications/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods

Did you not know you'd be exceeding the AA and how have you worked out how much you could put into a SIPP? What are your PIP's?

gadgetmind

Given the potential tax bill, paying an accountant a few bob could be worth it. An IFA is another option.

However, I had to spend a lot of time educating my accountant regards the finer details, and did a lot of other leg work myself. As for an IFA, just make sure you can find one who knows *all* the PIP issues as there is a lot of complexity.

BTW, I just got a letter from Friends Life regards my Pension Inputs, and they give my inputs for various years. They have completely ignored the Pension Input Period for one of my schemes and assumed it's tax year aligned (it isn't) and for another I *think* they used the right PIP but ignored the fact I formally changed it at one point (which they formally acknowledged.)

TBH, you can't beat working out your exact PIPs, printing out all of your statements that show contributions, and drawing rings around things.

You, of course, also need to worry about your DB inputs, so good luck!

kidmugsy

MrStanners wrote: »

Kidmugsy - Why is a SIPP a bad idea for a basic rate taxpayer already in an FS scheme?

Because all he gets out of it is the eventual tax avoidance on the tax-free lump sum (if it survives), and the tax deferral on the income - which might (for all we know) defer tax from the current 20% to a future 25%, say.

In return for these very modest benefits he ties up his capital inflexibly until he is 55, 56, 57, ...60.... or whatever, leaving it vulnerable to the government throughout that period.


If his ISA is full, he can just buy shares exposed to tax. If he remains a 20% tax-payer he has no extra income tax to pay (and from next tax year the first £5k p.a. dividends will be tax-free even if it would otherwise push him into the 40% bracket), and he can use his annual CGT allowance to avoid CGT. At the very least I'd recommend the 20% taxpayer (other than someone near to, or over, 55) to await The Great Pension Liberator's next set of reforms, in hopes that he makes the deal more attractive for the 20% payer.

hyubh

zagfles wrote: »

Yes, and even when the AA was £50k it's possible for OP to use it up if he was just in the 40% tax band before the promotion, eg on £45k the value of the PIP in a 1/60th FS scheme would be about £12k or so (when payrsie is about level with inflation), leaving £38k payable into a SIPP and using up the £50k AA.

I'm probably missing something obvious, but I don't quite understand what you are saying here - if pay only increases by inflation, then the DB part of his AA assessment is just for the increase in pension attributable to the one extra year's reckonable membership. This is because the AA for DB benefits is about the total notional increase in pension value, as distinct from the total notional value per se (which is what the LTA assesses).

MrStanners

Kidmugsy - Thank you for your thoughts.

zagfles

hyubh wrote: »

I'm probably missing something obvious, but I don't quite understand what you are saying here - if pay only increases by inflation, then the DB part of his AA assessment is just for the increase in pension attributable to the one extra year's reckonable membership. This is because the AA for DB benefits is about the total notional increase in pension value, as distinct from the total notional value per se (which is what the LTA assesses).

I'm saying the same as you (I think).

The PIP for a DB scheme is the increase in value of the pension, which is worked out by increasing the starting value by inflation and taking it off the end value.

If both inflation and payrise are the same, then the increase would be just the extra year accrual, which would 16/60 time salary, ie £12k on a £45k salary. Assuming a 1/60th scheme of course.

Of course it's unlikely the inflation measure used (which IIRC is the previous Sept inflation) will be identical to the rise in pensionable pay over the year, and this could make a considerable difference.

hyubh

zagfles wrote: »

I'm saying the same as you (I think).

Reading it again, yes you are.