LGPS and breaching Annual Allowance

Notoldjustexperienced

Hi Forum members

Has anyone come across this before please? I received notification from LGPS stating 3 years ago I breached Government Annual Allowance limit by a huge amount (150k) even though my pension contribution for the year according to my end of year payslip was only 10k...they havent really explained other than to provide lots of data on paper plus the method they use to calculate this but has left me facing a tax bill to HMRC.

Its incredibly stressful and I want to to sort it out...

any ideas please?

thanks in advance

peter3hg

Did you have a big promotion that year? The annual allowance calculation for defined benefit schemes is the increase in your annual pension entitlement x 16, plus your lump sum.
If you are on a final salary pension and get a big promotion you may breach the allowance, even if you haven't contributed much in year.
You can carry forward unused allowance from the previous three tax years which should help to reduce the level of breach.

Notoldjustexperienced

Thanks so much for this Peter3hg..whilst yes, that is what happened, and this was explained as the reason and the calculation also explained...I still dont really understand whilst I do accept the words if that makes sense???

How does the salary increase cause me to breach please? If I could understand it I'd feel a lot better...

Is the salary bit connected to the annual pension entitlement??

thanks for your patience...

peter3hg

Basically yes.
To give a crude example lets say you had accrued a final salary pension of 20/60ths. If your salary in a year was £30k your annual pension entitlement would be £10k.
Now, if a year later you had been promoted to £60k, you would suddenly be entitled to 21/60ths of this which is £21k.
To calculate the amount "added" to your pension against the annual allowance they take the difference in value between the two years.
So the first year your pension was worth £160k (16x £10k) but in the second year it would have increased to £336k (16x £21k), giving a contribution for that year of £176k.

I think the LGPS allows scheme pays against AA breaches, which means they'll take it from your pension rather than you having to foot the bill. I don't know if this can be backdated however with it being a few years ago.

hyubh

peter3hg wrote: »

Basically yes.
To give a crude example lets says you had accrued a final salary pension of 20/60ths. If your salary in a year was £30k your annual pension entitlement would be £10k.
Now, if a year later you had been promoted to £60k, you would suddenly be entitled to 21/60ths of this which is £21k.
To calculate the amount "added" to your pension against the annual allowance they take the difference in value between the two years.
So the first year your pension was worth £160k (16x £10k) but in the second year it would have increased to £336k (16x £21k), giving a contribution for that year of £176k.

Good explanation, though one slight correction - assuming '3 years ago' isn't a typo, the 20/60ths will still be 20/60ths not 21/60ths because while the OP has a final salary link for their pre-April 2014 service, they have been accruing CARE pension on service from April 2014. What the CARE part of their pension contributes to the AA calculation is pretty simple though - ignoring a few technicalities, it will basically be pensionable pay for the year x 1/49 x 16.

Also, the pay figure for the previous year will be adjusted for inflation. So, pay has got to go up in real terms for the final salary benefits to eat into the AA allowance, and they will actually produce a negative figure if pay was static but inflation positive (not an unusual situation given public sector pay restraint).

hyubh

Notoldjustexperienced wrote: »

I received notification from LGPS stating 3 years ago I breached Government Annual Allowance limit by a huge amount (150k)

I'm curious what that's based on. If you breach the AA limit one year, you get automatic rollover relief for the previous three, though you have to use previous years in order (most recent first, then two years ago, then three). Were you paying a lot of AVCs perhaps? (AVC contributions would be added to the notional increase in value of the main pension) Or did you just become a top earner? To be honest, breaching the AA limit is pretty rare in the LGPS, and crudely put, the few that do (or might) are very senior people.

Notoldjustexperienced

Thank you so much I totally understand now! If only they had explained it like that I wouldn’t have troubled the forum...

Thanks again...

Notoldjustexperienced

Yes you are right... it had been a promotion into a better role but with help from forum members like you and peter I now totally understand ... still got to sort things out but easier once you know the whys and wherefores!

Much appreciated...:T

Takaty

As far as I know, if you wanted to use mandatory scheme pays you would need to have let the scheme know by the following 31 July. They might offer you scheme pays on a voluntary basis however otherwise you will need to settle direct with HMRC