Additional payments into civil service Alpha scheme

Wobble101

I joined this scheme just under two years ago. I'm 54 and a HRT. I'd like to increase my payments to the maximum possible (via the additional pension option) and had naively assumed that the amount I could pay in would be the difference between my payments (and those of my employer) for the current FY and the £40k annual allowance. But on looking at the guidance on the pension website it is clearly much more complex than that for this scheme (I assume because it is DB?) and from my sums it seems that I can only pay in another c £6k. These are the calculations I've made:

• Step1
  • We determine the benefits you had built up at the end of the previous Pension Input Period and multiply this by a factor defined by HMRC - currently 16.
  • £498 x 16 = £7,968
• Step 2
  • Plus automatic lump sum = £0.
• Step 3
  • We adjust the total amount in line with inflation; 2.4% for 2019/20. This is the value at the start of the Pension Input Period. £8,159.
• Step 4
  • Accrued benefits at 5 April 2020 2626 x 16 = £42,016
• Step 5 Plus automatic lump sum = £42,016 (closing amount)
• Step 6 We deduct the value in Step 3 from the value in Step 5 which gives us your Pension Input Amount. £33,857. 
• So I can only pay in another £6,143.

Let's call the above Pension 1 because, to complicate matters, I am an active member of another pension scheme (USS, Pension 2) but with only a tiny amount being paid in (because I am very part time). When I did the same calculation as above for this pension I ended up with a negative number (-£500) because the adjustment step set out in step 3 meant my benefits at the start of the input period were actually higher than those achieved at the end.  

I'd be grateful for views about a couple of issues.
Have I understood the £40k annual allowance correctly above in both cases and if so, can I add the £500 from pension 2 to the amount I can pay in as calculated on the basis of pension 1 - ie I can pay in up to £6,143 + £500?
How do I make use of unused annual allowances from previous years - do I just calculate as above for that FY and pay in the extra? I assume I would only be able to backdate to the point at which I joined the alpha scheme. 
Many thanks in advance - I've found this board so helpful but as you can probably gather am still rather stumbling about!

hugheskevi

I joined this scheme just under two years ago. I'm 54 and a HRT. I'd like to increase my payments to the maximum possible (via the additional pension option)

If Annual Allowance is an issue and you could contribute enough to take you out of higher rate tax, you are likely to be better-off if you only contributed an amount to take full advantage of higher-rate relief, leaving headroom for future years. You wouldn't want to make contributions from basic rate income in 2020/21 and then pay higher rate tax in future years where pension contributions are limited by the Annual Allowance.

But on looking at the guidance on the pension website it is clearly much more complex than that for this scheme (I assume because it is DB?)

Yes.

and from my sums it seems that I can only pay in another c £6k.

Your contribution amount does not matter, it is the deemed value of the pension benefits purchased which matters. A pension input of £6,000 would equate to an Added Pension purchase of £6,000 / 16 = £375.

It does not matter what is costs you to purchase that £375 of Added Pension, it results in a pension input of £6,000.

Have I understood the £40k annual allowance correctly above in both cases

Yes, although note that calculation of salary between 1-5 April varies across different payrolls so is likely to be different to what you have calculated, but only by a trivial amount.

can I add the £500 from pension 2 to the amount I can pay in as calculated on the basis of pension 1 - ie I can pay in up to £6,143 + £500?

No - if a pension input for an arrangement is negative it simply becomes zero, you cannot offset it against other inputs.

How do I make use of unused annual allowances from previous years - do I just calculate as above for that FY and pay in the extra? I assume I would only be able to backdate to the point at which I joined the alpha scheme. 

You can carry-forward any unused Annual Allowance from the last 3 years, assuming you were a member of a registered pension scheme in that period (eg the USS), so a lot longer than when you joined the alpha scheme. Do not assume anything with regard to pension tax, it is complicated, not intuitive and so you cannot make assumptions.

Request Pension Saving Statements from all pension schemes you have been an active member of since 2017/18, including the USS and Civil Service. Add the pension input figures together to get your total pension input for each year, and then use the HMRC Annual Allowance calculator. This will show you how much Annual Allowance plus carry-forward you have available for 2020/21. Note that if your Threshold Income exceeds £110,000 in any of the previous years, things get more complicated (Threshold Income is usually your taxable income).

Note that after working out your available Annual Allowance and carry-forward, you will need to estimate your pension input for 2020/21 from your standard alpha and USS pension accrual (using the methodology you set out in your original post) to see how much headroom you have available for further pension accrual in 2020/21.

To use carry-forward you do not need to inform anyone, just use it. You only have to declare tax due if you exceed the Annual Allowance plus carry-forward and have a tax charge to pay.

it seems that I can only pay in another c £6k

Presumably you are considering buying Added Pension. EPA gives effectively the same outcome mathematically as Added Pension, but does not result in a pension input so may well be more attractive.

Wobble101

Thanks so much - this is really helpful. A couple of follow up questions if that's ok. 
With regard to the HRT bracket, I don't think I'd be able to contribute enough to take me out of this (but this is dependent on being clear about what I can pay in this FY). It's come up because I've been left some money and this seems a very effective way of using some of it.  

Your contribution amount does not matter, it is the deemed value of the pension benefits purchased which matters. A pension input of £6,000 would equate to an Added Pension purchase of £6,000 / 16 = £375.It does not matter what is costs you to purchase that £375 of Added Pension, it results in a pension input of £6,000.

So does it follow from that that in fact I can pay in more than £6000, and if so how do I calculate what I can pay?

Presumably you are considering buying Added Pension. EPA same outcome mathematically as Added Pension, but does not result in a pension input so may well be more attractive.

Yes precisely. Can you say a bit more about EPA not resulting in a pension input - I'd found it hard to make a call between the two of them (added pension vs EPA) so had decided on the latter as I felt understood it more clearly and I'd read that in effect there is not that much difference in terms of the money paid out between the two.

Thanks again. I've been struggling with this for a while and do need to make a decision fairly soon (well, this FY anyway!).

Dazed_and_C0nfused

Just to clarify one thing, probably just terminology but it is a common source of confusion.

I assume I would only be able to backdate to the point at which I joined the alpha scheme. 

You can never backdate pension contributions.  Any contributions you make in the current tax year will entitle you to tax relief in the current tax year and not in any other tax year.

Carry forward may allow you to contribute more in the current tax year but it is still a contribution in the current tax year and any tax relief due will be based on your tax position in the current tax year.

If you make regular payments through your wages then the maximum possible tax relief due is given automatically by reducing your taxable pay (net pay method).

If you plan on making a lump sum contribution then these normally attract no tax relief whatsoever at the point of payment and you have to claim any tax relief due from HMRC.  This method seems to confuse HMRC as there are regular posts from people who have had problems obtaining the correct tax relief and it seems to take multiple contacts with HMRC before they allow the correct tax relief (if any is due).

hugheskevi

Your contribution amount does not matter, it is the deemed value of the pension benefits purchased which matters. A pension input of £6,000 would equate to an Added Pension purchase of £6,000 / 16 = £375.It does not matter what is costs you to purchase that £375 of Added Pension, it results in a pension input of £6,000.

So does it follow from that that in fact I can pay in more than £6000, and if so how do I calculate what I can pay?

Probably less actually, as the cost of £375 of alpha Added Pension is likely to be less than £6,000. You need to first work out what your Annual Allowance plus carry-forward from last 3 years is for 2020/21, then work out how much pension input your Civil Service and USS pensions will use up in 2020/21. That will tell you your maximum pension input for 2020/21 available for voluntary contributions. Divide that figure by 16 to work out how much Added Pension you can purchase, and finally look up the cost of purchasing that amount of Added Pension using the Added Pension calculator.

You should leave some margin, as however carefully you do the calculation you won't get the same figures that your employer and pension scheme will use when calculating the various pension inputs. 

Note that a common criticism of the operation of the Annual Allowance is that it causes people to have to guess what their income and pension inputs will be in the financial year when planning their pension affairs, which is particularly difficult for Defined Benefit pensions.

Can you say a bit more about EPA not resulting in a pension input - I'd found it hard to make a call between the two of them (added pension vs EPA) so had decided on the latter as I felt understood it more clearly and I'd read that in effect there is not that much difference in terms of the money paid out between the two.

EPA reduces the age from which alpha pension is payable without reduction, for example, from your State Pension age (67) to 65 in return for an annual contribution, the amount of which is based on your age and changes each year. HMRC ignore Normal Pension age when calculating pension inputs, only looking at the annual amount of pension due at the scheme Normal Pension age. Hence even if the Normal Pension age reduces, the pension input remains unchanged.

Whether you purchase Added Pension or EPA, the same actuarial assumptions are used to set the price. As you can take your alpha pension early or late with actuarial reduction, it all adds up to the same - simply put, you get the same value of pension for a given level of voluntary contributions (as the same pricing assumptions are used). With Added Pension you get more pension from the same pension age, with EPA you get the same pension from a lower pension age. But as you choose when you take the pension and it is actuarially adjusted to that commencement date, you end up with the same amount at whatever age you choose to commence the pension regardless of whether you purchased Added Pension or EPA (setting a few small actuarial adjustments aside, eg, Added Pension generates survivor benefits whereas EPA does not). But Added Pension generates a pension input, whereas EPA does not, due to the simplistic valuation methodology used by HMRC.

Wobble101

Huge thanks - this thread has more than doubled my understanding, especially of EPA and carry forward!
EPA does sound the best approach, so I will look into sorting that out for the next financial year as you can't put in a lump sum. But I'll look at using up my annual allowance and any carry forward for 2020/21. 

IAMIAM

This is interesting, how would if work if you have made an EPA election in addition to added pension contributions.
Do you get the pension with no reduction at EPA age but the Added Pension part DOES have actuarial reduction as it can only be paid for using State Pension Age?

Wobble101

I'm having problems adding posts to the forum today, so am going to try two separate posts. Apologies. 
1/2

This thread returns! Am using the Christmas break to fill out the various forms and just wanted to check a couple of additional points. 

 For 2020/21 I'm intending to purchase EPA and added pension, paid out of payroll. The added pension will take me to just below the limit allowed by the alpha scheme and taking into account the headroom left after EPA. This is c £2k below my annual allowance based on the calculations further up this thread (for 2019/20). I note @hugheskevi's point that it is difficult to calculate pension inputs for the current financial year - on the basis that my pensionable salary has changed little and there is a £2k buffer between my calculation of my annual allowance and the civil service maximum payment per year of £7,200 (minus EPA headroom calculations). Does that sound reasonable?

Wobble101

2/2

I am also going to pay in an additional lump sum added pension payment for this current financial year (so 20/21) using my annual allowance for 2018/19 and 2019/20. My calculations are that my outstanding annual allowance for 2019/20 is £6k and for 2018/19 is c£15k. The 2018/19 allowance was incurred while in a previous role & pension (non civil service). Two questions here; a) I assume the civil service £7,200 added pension limit applies here, even if my annual allowance would permit me to pay in more - so I can only pay in £7,200 for 2019/20; b) in making this calculation it does not matter that I am carrying forward allowance from before I joined the civil service? I note the previous point about needing to be on the ball about ensuring this is treated correctly by HMRC. 

Thanks all.

Dazed_and_C0nfused

Wobble101 said:

2/2

I am also going to pay in an additional lump sum added pension payment for this current financial year (so 2019/20) using my annual allowance for 2018/19 and 2019/20. My calculations are that my outstanding annual allowance for 2019/20 is £6k and for 2019/20 is c£15k. The 2019/20 allowance was incurred while in a previous role & pension (non civil service). Two questions here; a) I assume the civil service £7,200 added pension limit applies here, even if my annual allowance would permit me to pay in more - so I can only pay in £7,200 for 2019/20; b) in making this calculation it does not matter that I am carrying forward allowance from before I joined the civil service? I note the previous point about needing to be on the ball about ensuring this is treated correctly by HMRC. 

Thanks all.

Your tax years seem all over the place.

The current tax year is 2020:21.

Do you really mean £6k for 2019:20 and £15k for 2019:20.  

Wobble101

Sorry, my mistakes - yes by this financial year I meant 2020/21. The two sums mentioned are for 2019/20 (£6k) and 2018/19 (£15k).  Have edited original post to correct.