LGPS benefits sanity check

nash0819

Dazed_and_confused wrote: »

That depends on whether you have sufficient earnings in the current tax year.

And don't forget you cannot get higher rate tax relief on all your contributions just because you are currently paying some higher rate tax.

Depending on the type of contribution (net pay or relief at source) and how much you pay on comparison to your taxable income for the tax year you may not get any tax relief at all on some contributions.

I expect to earn more than the 40K annual pension allowance this year (and much less than the next tax band 150K) and henceforth until retirement. So my APA will be 40K.

I'm confused by your comment (in bold in the quote above). I thought that all my pension contributions would get tax relief at the higher rate. As per Pensionwise,

When paying into your pension, you receive tax relief on any contributions that you make. This is at the highest rate of income tax that you pay, provided that the total gross pension contributions paid into your pension scheme, by you, your employer and anyone else don't exceed the lower of:

• your annual earnings; and
• the annual allowance.

I expect to meet those provisos.

Dazed_and_confused

That quote from Pensionwise is a little too simplistic.

Let's say you had taxable income, all pay from an employment, of £60k in the current tax year and are rest of UK (i.e. not Scottish) resident for tax purposes. You will normally pay higher rate tax on £10k of this income.

And you choose to pay £30k (the gross amount after basic rate tax relief is added by the pension company) into a relief at source pension scheme. This increases the amount of basic rate tax you can pay by £30k, moving the higher rate threshold from £50k to £80k.

But you have only paid higher rate tax on £10k so the £30k pension contribution which has increased your basic rate band means you will pay basic rate tax of 20% on an extra £10k instead of 40%. This saves you £2k (£10k x 20% = £2,000 instead of £10k x 40%).

nash0819

Thanks D&C. I admit to following you up to the end of your second paragraph but I don't quite follow the next two paragraphs. Is there an authoritative online reference you could point me to, to help me understand, at my leisure, this finer point?

In general, I am quite frustrated by my journey to try and understand pensions. I suppose my circumstances are relatively unusual so I shouldn't expect an easy ride but every time I turn a corner and think I have the position surrounded, it seems something else pops up to cloud my judgement.

I genuinely appreciate the help of everyone on this board. My gripe against the general world is that it shouldn't have to be this complex. When I talk to friends to try and explain my journey, they sigh and say they cannot be bothered to put in the same effort. They know they will be the poorer for it but the barrier of understanding is too much for them.

atush

Basically, if you earn 60K, only 10K will get HRT relief.

Anything above that is BRT, Still worth it though.

nash0819

OK, this site has helped me understand better, especially the examples given under "how is higher tax rate relief limited"?

What I'm struggling to understand is, for our putative £60K salary person, who in the current and last 3 tax years has contributed the following to pensions and no more:

• 5K employee contributions to LGPS
• 11K employer contributions to LGPS

They're paying 16K into pensions pa and 10K (salary minus 50K) of that qualifies for higher rate tax relief. Whatever extra they choose to pay in will only get 20% tax relief.

They could choose to pay in an extra 96K to chew up all the four year's unused annual allowance. But the maximum pension contribution for a year (including carry forward) that qualifies for any tax relief at any rate is their salary 60K.

Yes?

Dazed_and_confused

They could choose to pay in an extra 92K to chew up all the four year's unused annual allowance. But the maximum pension contribution for a year (including carry forward) that qualifies for any tax relief at any rate is their salary 60K.

Yes but the amount of tax relief all depends on what type of pension contribution is being made.

It couldn't all be salary sacrifice in your example due to NMW issues but a "net pay" contribution, if this is even possible, would effectively attract no tax relief on £12,500 as this slice wouldn't have any tax due in the first place as a result of the Personal Allowance.

Whereas with "relief at source" you would pay £48k, the pension company would add £12k basic rate tax relief to give £60k in the pension fund. You could then get a £2k personal tax reduction as you would be eligible to have all £47.5k above the Personal Allowance taxed at 20% instead of £10k being taxed at 40%.

nash0819

According to this (not my exact scheme but true for all LGPS I believe), my LGPS pension is net pay arrangement.

I'm weighing up the options of APC, AVC or SIPP to boost my pension.

Would an APC qualify as additional "net pay arrangement"?

Whereas an AVC or SIPP contribution would be a "relief at source"?

nash0819

Took the time to do a bit more research, For my own sanity, and for reference, I'll define the two terms here, as per link to gov.uk site:

• "net pay (arrangement)" = Your employer takes your contribution from your pay before it’s taxed. You only pay tax on what’s left. This means you get full tax relief, no matter if you pay tax at the basic, higher or additional rate. I]provisos noted as discussed above[/I
• "relief at source" = Your employer takes your pension contribution after taking tax and National Insurance from your pay. However much you earn, your pension provider then adds tax relief to your pension pot at the basic rate. You may be able to claim money back if [...] you pay higher or additional rate Income Tax
• Another useful reference link (PDF)

Which type of pension is which:

• My main LGPS contributions are "net pay" (struggling to find concrete answer for my scheme but as per note 2 over p1 and p2 of this PDF link for Herts scheme)
• Any APC via regular contributon (a.k.a salary sacrifice) would also be "net pay" (as per link to LGPS site)
• Any APC via lump sum would however be "relief at source" and require me to apply for tax relief from HMRC (ditto)
• Any in-house AVC via regular contribution (again, salary sacrifice) would also be "net pay" (ditto) - the only option to qualify for the 100% TFLS option
• Any SIPP would be "relief at source" and require me to apply for tax relief from HMRC, albeit no employer is involved (as per link to gov.uk site)

This would seem to indicate I cannot make a lump sum contribution via AVC. I have to contibute regularly via my salary (net pay method).

I'll leave that to settle in my mind before working out the options I have and running a few calcs.

Dazed_and_confused

It may just be the way you've worded things but some of this wrong,

Any APC via regular contributon (a.k.a salary sacrifice) would also be "net pay" (as per link to LGPS site)

There is no pension tax relief on salary sacrifice contributions. These are paid by your employer not you hence no tax relief is available. You benefit by not having the salary to pay tax on (and NIC) in the first place

Any APC via lump sum would however be "relief at source" and require me to apply for tax relief from HMRC (ditto)

Are you absolutely certain about this. Lump sum contributions to an employer scheme often have no tax relief at all to start with, you have to claim all tax relief from HMRC. But this is not "relief at source". The contribution works a bit like the Personal Allowance, it is effectively a tax free allowance. Some posters on here have come unstuck with this in the past not realising that some of these contributions can give an effective tax relief rate of 0% i.e. the Personal Allowance is made redundant and cannot be used elsewhere (say salary £20k with tax paid of £1,500 and gross lump sum pension contribution of £15k paid not under net pay or relief at source rules. Maximum tax relief would be £1,500)

Any in-house AVC via regular contribution (again, salary sacrifice) would also be "net pay" (ditto) - the only option to qualify for the 100% TFLS option

As above, no pension tax relief on salary sacrifice but you do reduce income tax (and NI) payable

Any SIPP would be "relief at source" and require me to apply for tax relief from HMRC, albeit no employer is involved (as per link to gov.uk site)

The basic rate tax relief is added automatically by the pension company (courtesy of HMRC) and there is no fixed additional pension tax relief due but the total contribution extends your basic rate tax band so can result in some higher rate tax relief but that all depends on how much higher rate tax you have paid. There is no set extra 20%.

nash0819

Ah OK, I think I managed to confuse both of us by chucking in the term "salary sacrifice" without checking the correct, formal pension term. On which... my employer's "Discretions" document rules out any contribution to shared cost AVCs. So that sinks the "salary sacrifice" boat, I think?

I get your point now (finally) on the AVC/APC contributions tax position.

Resetting the conversation as I think I'm tying myself in knots.

On the up side, I now much better understand my current pension position and what benefits I can expect and the ways they can be withdrawn and any penalties for early withdrawal. I have created a s/sheet that automatically models my expected annual pension income, overall TFLS and LTA percentage consumption, based on a few variable inputs, in particular:

• Retirement year
• Percentage of elective TFLS (from 0 to 25)
• Multiplier for adjusted API [currently 20 but may rise in wake of McCloud] as part of LTA calc

I'll now concentrate research into AVC's, as offered in-house to my LGPS scheme by The Pru (link). The double tax benefit (at pay-in and pay-out as 100% TFLS) is very appealling, noting there will be conditions against the TFLS. I think it has to be The Pru with my scheme but I intend to contact the administrators to confirm.

Later on I can compare against SIPPs.