Annual contribution calculation for defined benefit schemes

Webber38

Hoping for some advice on whether I've done the right thing or whether I should be taking this further somehow.
I retired at the end of May 2018 and for the previous few years had paid in the maximum £40K annual tax free allowance to my defined benefit company pension (so no carry forward).  In May 2018 I paid in about £1K.  In October I received the annual statement from the company informing me that my annual contribution for that tax year was in excess of £60K.  After some to and fro, as they agreed it didn't seem right (!) it appears that because I had elected to take a pension with minimal spouses pension (she has her own) rather that the typical 50% spouses pension option, on which I guess the Actuaries normally calculate the nominal pension value, the company pensions team advised that the £60K figure was correct.  So, although I had actually only paid in £1K the actuarial calculation of increased value of the pension had arrived at the £60K figure and a significant tax bill. 

Having called the pensions advisory service they informed me that I should forget all about what I paid in for the calculation of annual contributions to a defined benefit scheme and that the £60K figure (for one months work in that tax year) was probably correct.  I've now paid the tax bill but am left wondering whether I should have taken this issue further.  Surely the objective of the annual limit is to avoid people putting excessive amounts of cash into their pension and thereby saving excessive tax and not to catch people out from an actuarial calculation?

My wife has advised me to write to the Chancellor and Pensions Minister and point out this anomaly which doesn't seem fair or as intended but I should think they have other matters on their minds at the moment (!) and I do appreciate that as one of the last to benefit from the final salary pension at my company I'm fortunate in that respect.  Any thoughts on the situation above would be gratefully received. Should I be trying to claim this tax penalty back and on what basis or should I follow the Pensions Advisory advice to "put it down to experience"?

Linton

AIUI the £40K limit for DB pensions applies to the gain in benefits in a particular year and is nothing to do with how much you or your employer pay in.  The gain in benefits for the purposes of the limit is based on the gain in lump sum + 16 X the gain in annual pension in that year with an ajustment for inflation.  It is not an actuarial calculation but a very crude one based simply on the basic benefits.  So by increasing your pension by reducing the spouse pension as a one-off change in a single tax year this calculation came up with the much higher number.
ISTM that those are the rules backed by legislation so there isnt anything you can do about it.

PS I dont see why this should result in a large tax bill if you only actually contributed £1K.
PPS I do now - the excess is regarded as extra taxable income 

Funkyfreddy

My understanding is that £40k Annual allowance applies to DC schemes only, both employer and employee contributions

Contributions don't, as far as I understand come into play at all for DB schemes - the annual allowance is measured against the increase in benefits and not how much has been put in.

Surely though your contributions into your DB scheme were a set percentage of salary/pay - did this equate to £40k ? Sounds unrealistically high or were these additional contributions going maybe going into an AVC (DC) scheme that was also available ?

Tommyjw

One of Schemes I work on has several options (bridging pension, PIE) which impact on retirement just like your situation. In our case though Trustee asked us to calculate the projected annual allowance used in each case so people are more aware of it and gives people less issues, which is a good thing and would likely have stopped you have this issue as you may have adjusted your option accordingly, but ultimately this isn't a requirement and annual allowance will always be a personal tax issue that is for you to understand and seek financial advice if not.

Paul_Herring

So, although I had actually only paid in £1K the actuarial calculation of increased value of the pension had arrived at the £60K figure and a significant tax bill. 

This is exactly the problem that was raised with doctors not working extra - because their working an extra hour incurred an increase in contributions, which subsequently ended up with an increase of the value of their pension above the limit.

My wife has advised me to write to the Chancellor and Pensions Minister and point out this anomaly which doesn't seem fair or as intended

You put in £1K into your pension, and got your pension increased by £60K from it.

And are complaining that some of it may seem excessive in the eyes of HMRC (i.e. us normal taxpayers)

I agree, that's not exactly fair. I'd love to do that.

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I'm rather less sold on it the idea of it not being intended.

hyubh

In May 2018 I paid in about £1K.  In October I received the annual statement from the company informing me that my annual contribution for that tax year was in excess of £60K.  After some to and fro, as they agreed it didn't seem right (!)

The AA (pace a previous reply) does apply for DB, but has no relation to contibutions made. Instead it pertains to the increase in pension entitlement above inflation. This makes sense - with DB, it's ultimately the sponsoring employer still being around that guarantees the pension promised being paid out, not contributions made while the member was still an active employee, which need not be anything.

However, the AA doesn't take into account spousal and other secondary benefits. Rather, it's just, your own pension at normal pension age for the scheme x16 (= an ultimately arbitrary multiplier) + any standard lump sum: the AA input is then the total so determined at the end of the tax year less the total at the end of the previous tax year uprated for inflation. So in your case, by opting for a lower spouse's pension to increase your own, you caused your AA input to be higher than otherwise.

Having called the pensions advisory service they informed me that I should forget all about what I paid in for the calculation of annual contributions to a defined benefit scheme

This is correct, and when you think about it, treating DB contributions like DC ones would be absurdly unfair (and the x16 multiplier is already arguably unfair).

My wife has advised me to write to the Chancellor and Pensions Minister and point out this anomaly which doesn't seem fair

Do you realise what pension arrangements are like for the majority of the private sector...?

Linton

I think the key point has been missed by some responders. The actuarial value of the OPs pension has not increased by £60K. The spouses pension has been removed in return for more in the main pension at much the same actuarial cost. However the £40K formula only takes account of the main pension. The effect is that the OP has been taxed £4K, £8K or £9K for £20K of benefit In 1 year  which was not actually received in any shape or form.

Whatever your view on DB pensions, being taxed on a benefit you did not actually receive is surely totally unreasonable. ISTM that the £40K calculation should factor in the spouses benefit in the first place which would have removed the illusory gain.

However I would guess that most DB schemes would not have the flexibility of the OPs so it may be an issue very few, if any, people have met before.