Annual Allowance on pension growth

GingerJim

Although the final salary scheme is now closed, many of us still contribute to added years for that scheme, so each year we get more 80ths (though I only accrue 0.324 80ths a year for my added years) for that scheme. The calculation for growth is complicated, but also factors in CPI so even if there was no salary rise, or added years, there would still be growth. Anyone who contributed to the NHS pension before 2008 was on the 1995 scheme, so there will be many people with 7 or more years of membership to the 1995 scheme, and then since 2015 they will have three years in that scheme too.

With the 2015 scheme there is growth every year by 1/54th of the pensionable salary, and the CPI factor.

Collectively the growth of the two schemes needs to be under £40,000 else it breaches the annual growth allowance (a variable which is not calculated by either employer or employee contributions), and any excess can be shifted to previously unused pots up to three years ago.

I'm grateful for the comments. I'll call the NHS Pensions Service and ask them.

Jim

HappyHarry

GingerJim wrote: »

The current allowance on pension growth is £40,000. If the growth on the pension exceeds the allowance, the excess can be "moved" to the three previous years if those pots are not yet full.

Two questions:

1. If a pot from two years ago has the capacity for say £20,000, can I move the £5,000 excess from last year AND the £5,000 excess form this year to that pot, or can a pot only accept one move?

2. If this current years growth is say £10,000, but I am predicting a large growth in the next few years, can I move the £10,000 to an older pot which has £10,000 capacity in order to keep this year's pot completely empty ready to accommodate future growth?

These numbers are made up, I'm just trying to understand the principles of my NHS pension. By growth, I do mean growth of the pension, not contributions. [edited to avoid confusion]

Thanks

Jim

To answer your questions (whilst ignoring all above comments);


1. Yes, any unused allowances from a previous year can be carried forward to one or more years. e.g. a £20,000 unused allowance from 2016/17 could be used to support an excess of £10,000 in 2017/18 and an excess of £10,000 in 2018/19.


2. No. This year's allowance must be used first. e.g. if you use £15,000 of your allowance this year, it comes off this year's allowance. You can not ask for it to be carried forward from excess allowance in, say, 2015/16. It is only once you exceed this years' annual allowance that you can then use carry-forward from previous years.

Pension_Geek

GingerJim wrote: »

Although the final salary scheme is now closed, many of us still contribute to added years for that scheme, so each year we get more 80ths (though I only accrue 0.324 80ths a year for my added years) for that scheme. The calculation for growth is complicated, but also factors in CPI so even if there was no salary rise, or added years, there would still be growth. Anyone who contributed to the NHS pension before 2008 was on the 1995 scheme, so there will be many people with 7 or more years of membership to the 1995 scheme, and then since 2015 they will have three years in that scheme too.

With the 2015 scheme there is growth every year by 1/54th of the pensionable salary, and the CPI factor.

Collectively the growth of the two schemes needs to be under £40,000 else it breaches the annual growth allowance (a variable which is not calculated by either employer or employee contributions), and any excess can be shifted to previously unused pots up to three years ago.

I'm grateful for the comments. I'll call the NHS Pensions Service and ask them.

Jim

If you are still buying additional years, and are concerned about exceeding the AA, then stopping the additional years may be prudent.

GingerJim

Pension_Geek wrote: »

If you are still buying additional years, and are concerned about exceeding the AA, then stopping the additional years may be prudent.

It looks like the excess growth can be adequately accomodated in unfilled years without stopped the added years luckily. But thanks for the suggestion.

GingerJim

HappyHarry wrote: »

To answer your questions (whilst ignoring all above comments);


1. Yes, any unused allowances from a previous year can be carried forward to one or more years. e.g. a £20,000 unused allowance from 2016/17 could be used to support an excess of £10,000 in 2017/18 and an excess of £10,000 in 2018/19.


2. No. This year's allowance must be used first. e.g. if you use £15,000 of your allowance this year, it comes off this year's allowance. You can not ask for it to be carried forward from excess allowance in, say, 2015/16. It is only once you exceed this years' annual allowance that you can then use carry-forward from previous years.

Thank you. Very helpful.

TcpnT

Jim

Whilst I understand what you are getting at here your use of terminology (specifically growth) shows that you have not fully grasped the principles and calculations involved.

The £40,000 is a limit on annual contributions , not growth, and is applicable to all types of pension schemes. For a defined contribution scheme things are relatively simple. Broadly speaking this is the limit to actual contributions that can be made during a tax year.

For final salary or Care schemes the actual amount of contribution is irrelevant. The way it works is that there is a "deemed" contribution value which is calculated by multiplying the increase in value of the accrued annual pension benefit by 20. So if on 5th April 2018 you have accrued a pension so far of £18000 per year and on 5th April 2019 that has increased to £20000 (either due to salary increases or due to added years or both) then your pension benefits have increases by £2000 over the year. Multiplying this by 20 gives £40,000 and so you have used your full annual allowance for that year.

If you have more that one type of pension then all then the results of this calculation need to be added together to come to the final figure. If you have exceeded the allowance you can use the carry forward facility which you mention, thereby taking advantage of unused allowance for the previous three years. However your description in your first post about moving money from pot to pot to take advantage of this is completely misguided - there is no shifting involved. The use of carry forward is a paper exercise only. You need to do the calculations and retain them to prove your case if requested by HMRC but no other action is required.

You haven't mentioned your earnings from all sources but the annual allowance taper mentioned in post #11 is a very nasty sting in the tail when your earnings reach the £100k+ level. It's a fairly complex calculation but well documented online. Can result in a large and unexpected tax liability.

Then there's the lifetime allowance to worry about as well... The driver behind many medics taking early retirement.

GingerJim

TcpnT wrote: »

Jim

Whilst I understand what you are getting at here your use of terminology (specifically growth) shows that you have not fully grasped the principles and calculations involved.

The £40,000 is a limit on annual contributions , not growth, and is applicable to all types of pension schemes. For a defined contribution scheme things are relatively simple. Broadly speaking this is the limit to actual contributions that can be made during a tax year.

For final salary or Care schemes the actual amount of contribution is irrelevant. The way it works is that there is a "deemed" contribution value which is calculated by multiplying the increase in value of the accrued annual pension benefit by 20. So if on 5th April 2018 you have accrued a pension so far of £18000 per year and on 5th April 2019 that has increased to £20000 (either due to salary increases or due to added years or both) then your pension benefits have increases by £2000 over the year. Multiplying this by 20 gives £40,000 and so you have used your full annual allowance for that year.

If you have more that one type of pension then all then the results of this calculation need to be added together to come to the final figure. If you have exceeded the allowance you can use the carry forward facility which you mention, thereby taking advantage of unused allowance for the previous three years. However your description in your first post about moving money from pot to pot to take advantage of this is completely misguided - there is no shifting involved. The use of carry forward is a paper exercise only. You need to do the calculations and retain them to prove your case if requested by HMRC but no other action is required.

You haven't mentioned your earnings from all sources but the annual allowance taper mentioned in post #11 is a very nasty sting in the tail when your earnings reach the £100k+ level. It's a fairly complex calculation but well documented online. Can result in a large and unexpected tax liability.

Then there's the lifetime allowance to worry about as well... The driver behind many medics taking early retirement.

Thank you. What you outline is exactly my understanding, even if my terminology is incorrect. I'm grateful for your clarification on the terminology.

crv1963

Hi GingerJim

You could ask your Trust pension officer for a forecast, you can also ask for an appointment to go through your personal figures. If your Trust runs Retirement Courses these are helpful to some, I found mine really useful and thought provoking. We each had time alone with a Pension Officer going through our personal forecasts, they don't advise but can tell you your options to increase pension/ what you'd lose going early and so it was useful.

zagfles

TcpnT wrote: »

For final salary or Care schemes the actual amount of contribution is irrelevant. The way it works is that there is a "deemed" contribution value which is calculated by multiplying the increase in value of the accrued annual pension benefit by 20.

No it's by 16 (20 is for the lifetime allowance, 16 for the annual allowance)

So if on 5th April 2018 you have accrued a pension so far of £18000 per year and on 5th April 2019 that has increased to £20000 (either due to salary increases or due to added years or both) then your pension benefits have increases by £2000 over the year. Multiplying this by 20 gives £40,000 and so you have used your full annual allowance for that year.

As well as correcting to x16 you need to account for inflation - be careful because the inflation figure to calculate the pension input amount probably won't match the inflation figure used to revalue the CARE part.

This explains it quite well https://www.moneymarketing.co.uk/pension-annual-allowance/

GingerJim

zagfles wrote: »

No it's by 16 (20 is for the lifetime allowance, 16 for the annual allowance) As well as correcting to x16 you need to account for inflation - be careful because the inflation figure to calculate the pension input amount probably won't match the inflation figure used to revalue the CARE part.

Yes, I've been using x16 in my spreadsheet for the growth calculations, but my growth calculations are a long way off the NHS Pensions ones as I think my dates are out of kilter with theirs and issues with my incremental date falling half way through the tax year confuses the calculations (and me)!