working out size of deemed contribution to LGPS DB scheme

koru

The total amount of pension contributions on which tax relief is allowed is 100% of earnings (max £40k). If an individual is a member of the Local Gov Pension Scheme (LGPS), they will already have made some contributions and the employer will have made some, too. I want to work out the total LGPS contributions made, so that I can work out how much more can be contributed to a SIPP.

If I understand right, the LGPS is a defined benefit scheme, so I don't just add the employer and employee year-to-date "contributions" shown on the year end payslip. Instead, the deemed contribution for tax relief purposes is the increase in scheme benefits over the tax year. But this seems far too small, so am I doing something wrong?

As I understand it, the LGPS increases the "pension account" by 1/49th of the pensionable pay for the year, plus an inflation uplift on any opening balance. So, in year 1, if pensionable pay for the year is £6463 then the pension account increases by £132. Ignoring any other years of contribution to the LGPS, this means that on retirement the employee gets an index-linked annuity of £132 per year.

How do I determine the deemed contribution from that figure? To buy an indexed-linked annuity of £132, it would cost £3-4k. The actual amounts put into the scheme by the employer and employee amount to £2000 in year 1.

zagfles

koru wrote: »

The total amount of pension contributions on which tax relief is allowed is 100% of earnings (max £40k).

Arrrrggghhh!!!! Not again!!!

Sorry not your fault - this confuses loads of people because of oversimplified bulls**t you see everywhere. See this thread: https://forums.moneysavingexpert.com/discussion/5623582

If an individual is a member of the Local Gov Pension Scheme (LGPS), they will already have made some contributions and the employer will have made some, too. I want to work out the total LGPS contributions made, so that I can work out how much more can be contributed to a SIPP.

If I understand right, the LGPS is a defined benefit scheme, so I don't just add the employer and employee year-to-date "contributions" shown on the year end payslip. Instead, the deemed contribution for tax relief purposes is the increase in scheme benefits over the tax year. But this seems far too small, so am I doing something wrong?

As I understand it, the LGPS increases the "pension account" by 1/49th of the pensionable pay for the year, plus an inflation uplift on any opening balance. So, in year 1, if pensionable pay for the year is £6463 then the pension account increases by £132. Ignoring any other years of contribution to the LGPS, this means that on retirement the employee gets an index-linked annuity of £132 per year.

How do I determine the deemed contribution from that figure? To buy an indexed-linked annuity of £132, it would cost £3-4k. The actual amounts put into the scheme by the employer and employee amount to £2000 in year 1.

For the purposes of the annual allowance, ask them for the "pension input amount". This is basically the increase in pension multiplied by 16, allowing for inflation.

For the purposes of the "100% of earnings" tax relief limit, only your contributions are relevant.

koru

Thanks. When you say "ask them", you mean ask the county council that administrates the scheme?

But from what you say, the "pension input amount", based on my example, will be 16x132=£2112. Which is almost exactly the actual contributions shown on the payslip, so that seems right. Thanks.

(I won't respond on the £40k point, because it isn't relevant to my query. I only mentioned it for completeness, though I agree there are circumstances in which one can get relief on more than £40k.)

zagfles

koru wrote: »

Thanks. When you say "ask them", you mean ask the county council that administrates the scheme?

But from what you say, the "pension input amount", based on my example, will be 16x132=£2112. Which is almost exactly the actual contributions shown on the payslip, so that seems right. Thanks.

(I won't respond on the £40k point, because it isn't relevant to my query. I only mentioned it for completeness, though I agree there are circumstances in which one can get relief on more than £40k.)

If your earnings are only £6463, the annual allowance is totally irrelevant, you are way below it, so you can forget about it.

The only limit that matters is the tax relief limit, this is 100% of earnings or £3600 if greater. For this limit, as I said above, only your contributions matter, not employer contributions, and not the pension input amount.

So to work out how much you can put into a SIPP, just take your contributions off your earnings (this should be your taxable income as your pension conts should be deducted before tax). That's your gross contribution limit. Multiply by 0.8 and that's how much net you can put into a SIPP.

Eg if salary is £6000 and you make a 5% LGPS contribution. Taxable earnings are £5700. You can put £5700 gross into a SIPP, which means you can put £4560 net in and the SIPP will claim tax relief of £1140.

koru

zagfles wrote: »

The only limit that matters is the tax relief limit, this is 100% of earnings or £3600 if greater. For this limit, as I said above, only your contributions matter, not employer contributions, and not the pension input amount.

Sorry, I missed the significance at first. Wow, so I can ignore the employer contributions in working out the 100% of earnings limit (but for the £40k annual allowance, I need to include the pension input amount).

I was sceptical, but now I know to look for it, I see you are right. Sec 190(1) FA 2004 says "The maximum amount of relief to which an individual is entitled under section 188 (relief for contributions) for a tax year is ... the amount of the individual’s relevant UK earnings ..." And Sec 188(3)(b) FA 2004 says contributions paid by an employer are not "relievable pension contributions" for the purpose of relief given under sec 188 (they are relieved separately under sec 196).

Thank you so much for taking the time to point this out.

zagfles

koru wrote: »

Sorry, I missed the significance at first. Wow, so I can ignore the employer contributions in working out the 100% of earnings limit (but for the £40k annual allowance, I need to include the pension input amount).

I was sceptical, but now I know to look for it, I see you are right. Sec 190(1) FA 2004 says "The maximum amount of relief to which an individual is entitled under section 188 (relief for contributions) for a tax year is ... the amount of the individual’s relevant UK earnings ..." And Sec 188(3)(b) FA 2004 says contributions paid by an employer are not "relievable pension contributions" for the purpose of relief given under sec 188 (they are relieved separately under sec 196).

Thank you so much for taking the time to point this out.

Yup - when you think about it is logical for instance if the pension input is £2k and the salary is £6k, you should be in the same position as if the employer paid you the same total remuneration but all as pay instead of pension - if they paid you £8k and no pension you'd be able to put £8k gross into a pension.

The thing that causes all the confusion, as I keep on ranting about here, is you get oversimplified rubbish published even in usually reliable sources that try to combine the annual allowance with the tax relief limit into one thing, when they are two totally separate limits with completely different rules.

chiefie

zagfles wrote: »

Arrrrggghhh!!!! Not again!!!

Sorry not your fault - this confuses loads of people because of oversimplified bulls**t you see everywhere. See this thread: https://forums.moneysavingexpert.com/discussion/5623582

For the purposes of the annual allowance, ask them for the "pension input amount". This is basically the increase in pension multiplied by 16, allowing for inflation.

For the purposes of the "100% of earnings" tax relief limit, only your contributions are relevant.

Do you add your own contributions to this pension input amount ? Thanks

Linton

chiefie wrote: »

Do you add your own contributions to this pension input amount ? Thanks

No - the £40K limit controls what goes into your pension as opposed to what you pay. For DB schemes this is all covered by the calculated pension input amount.