DB scheme and AA

MoneySavingUser

Hi,

Checking for a friend - I think my understanding is correct but wanted to double-check. He is a member of a DB scheme - contributions for the year ended 31 March 2016 were:

Employer - £4,490
Employee - £3,925

Annual allowance used for 2015/16: £20,998

Assuming the figures are similar for 2016/17 and he wants to pay into a DC pension alongside this - is it correct that:

For relevant earnings purposes he has contributed £3,925
But for annual allowance purposes he has contributed £20,998

1. So if his salary was £40,000 then the maximum gross amount he can contribute is:

Relevant earnings limit = £40,000 - £3,925 = £36,075
Annual allowance limit = £40,000 + (£40,000 - £20,998) - £20,998 = £38,004
(Lets assume no c/f from previous years).

2. Assuming he also has some self-employment income say £5,000 profit he can add this to his relevant earnings making them £41,075 meaning he can mop up all of his unused annual allowance?

3. As he doesn't yet know what his self employment profits will be what if he goes over the relevant earnings limit - am I correct that if someone pays in more than their relevant earnings they can get a refund for the excess (but no refund is possible if they exceed the annual allowance but are still below relevant earnings).

https://www.aegon.co.uk/support/faq/pension-technical/Refunding-excess-personal-contributions.html

It seems there is no tax on an excess contributions lump sum refund but what about the fact that those contributions have been invested and may have had some growth - is this taxed?

edit: another thought - instead of having a refund can you ask the provider to treat them as contributions of the following year?

neilvw

Ignoring carry-forward as you say
Point 1 should be £40,000 - £20,998 = £19,002 annual allowance left in 2015/16. Not sure quite what your sum is trying to do there.

MoneySavingUser

neilvw wrote: »

Ignoring carry-forward as you say
Point 1 should be £40,000 - £20,998 = £19,002 annual allowance left in 2015/16. Not sure quite what your sum is trying to do there.

Sorry to make it more clear I'm talking about 2016/17

So as above £19,002 left in 2015/16 then assume same amount £20,998 used by DB in 2016/17

Leaves £40,000 - £20,998 + £19,002 = £38,004 available in 2016/17 for DC conts

I meant ignore any carry forward from years before 15/16

neilvw

Right, got you now.

If you exceed £40,000 pension input in 2016/17 you need then to go back to 2013/14 and use up any unused allowance there (the AA was £50k then, the last year before it fell to £40k). Only after 2013/14 and 2014/15 have been fully used up would you then carry forward from 2015/16. You need to have been a member of a registered pension scheme in the years from which you carry forward.

If we assume that there is no allowance left to carry forward from 2013/14 or 2014/15 (or he wasn't a pension scheme member in those years), then yes, your figure is correct:

2016/17 - £20,998 pension input, £19,002 AA left
2015/16 - £20,998 pension input, £19,002 AA left
Total: £38,004 available

Regarding your other questions:

- yes, S/E profits count as relevant income.
- yes if the limit of £3,600/100% is exceeded a refund of excess contributions is allowed by HMRC but the scheme does not have to permit it.
- it is an interesting question regarding investment growth. I would have thought that a traditional insurance company with pension funds would simply cancel the units bought with the excess contributions, and refund the original premiums with no addition. Whether that would happen with a SIPP invested in unit trusts or whatever I'm not sure. Not come across this situation in real life; others may have.
- if the scheme does not permit a refund then I imagine HMRC would simply reclaim the excess relief.
- to my knowledge, you can never re-allocate excess personal contributions to a later year.

MoneySavingUser

Thanks Neil - yes AA is available from earlier years, just ignored it to keep the example simple and was a member of a pension scheme in those years.

Bootsox

MoneySavingUser wrote: »

Hi,

Checking for a friend - I think my understanding is correct but wanted to double-check. He is a member of a DB scheme - contributions for the year ended 31 March 2016 were:

Employer - £4,490
Employee - £3,925

...snip

I thought, for a DB scheme, there are no tangible "employer contributions" as, ultimately, the liability for paying the pension lies with the employer?

PensionTech

I thought, for a DB scheme, there are no tangible "employer contributions" as, ultimately, the liability for paying the pension lies with the employer?

Quite right - the Pension Input Amount isn't based on contributions at all for DB schemes. You need to get a figure from the administrators.

zagfles

Bootsox wrote: »

I thought, for a DB scheme, there are no tangible "employer contributions" as, ultimately, the liability for paying the pension lies with the employer?

The employer will be contributing a tangible amount but yes it's irrelevant for AA or relevant earnings purposes - the OP is aware of that as reflected in his calculations.

MoneySavingUser

MoneySavingUser wrote: »

3. As he doesn't yet know what his self employment profits will be what if he goes over the relevant earnings limit - am I correct that if someone pays in more than their relevant earnings they can get a refund for the excess (but no refund is possible if they exceed the annual allowance but are still below relevant earnings).

https://www.aegon.co.uk/support/faq/pension-technical/Refunding-excess-personal-contributions.html

It seems there is no tax on an excess contributions lump sum refund but what about the fact that those contributions have been invested and may have had some growth - is this taxed?

edit: another thought - instead of having a refund can you ask the provider to treat them as contributions of the following year?

Some info from the providers I queried this with in case anyone else has a similar situation:

Cavendish

[FONT=&quot]I have checked with Fidelity FundsNetwork who power our SIPP and they have confirmed that if someone is self-employed and they have over contributed in error once they know their relevant earnings then they will refund this to you. If this happens they would need to confirm the amount of the over contribution and they would sort this with HMRC and return the over contribution to him.[/FONT]

Fidelity:

Thank you for contacting Fidelity.

I confirm that Fidelity will return the funds if the client exceeds the relevant holdings; however, if the client exceeds their annual allowance, we will be unable to do so.

HL:

If you contribute more than your Relevant UK Earnings (RUKEs) within a tax year you will have three options of how to proceed. Please note that you cannot normally declare an over-contribution until after the end of the tax year in which it was made. If you have claimed higher and/or additional rate tax relief, you will need to settle this directly with HMRC. You would then have three options for what to do with the excess contribution amount:

1. Leave the net excess contribution in the pension as a gross contribution for the tax year in which it was made.
2. Have the excess contribution refunded to you.
3. Have the excess amount removed from the scheme and then immediately re-contributed as a net tax-relievable contribution for the current tax year, subject to your eligibility.

Any money to be removed from the pension (whether it be returned to HMRC, refunded to you, or re-contributed in this tax year) will need to be made available as cash. It will be your responsibility to place any necessary sales to make this cash available.