HMRC £40K p.a. level & LGPS beneficiaries

Random47

Couple Questions / Background first:

I'm in C.A.R.E. LPGS at 1/49th with some 8yrs Final Salary at 1/60th. I also have SIPP with Vanguard selection of LS and 2035 pension policies. I reckon I can retire around 60-62 dependant on SIPP growth and if employer throws in the annual staff cull with pension enhancements I might get out a year or so earlier or at the same age just with better employer pension.

1.
I understand the HMRC  £40K limit, my question relates to my employer contribution as to whether that counts towards £40K total.
Currently I pay around 8% on a £60K salary (£4800) and also have APC of £13800 p.a., with my SIPP £7200 p.a.
The rule of thumb seems to be that the LPGS (council) pay about x2.5 what employee pays in so:  £1 me + £2.50 employer

2.
My other question is regards beneficiaries if I pop my clogs after I retire, wife on 50% and x2 kids on 25% each as nominees. LPGS state they get 1/160th.
My understanding is this would be 1/160th of final salary pension (x8 years I have accumulated) plus whatever assumed pensionable pay xCARE years I accumulate. Is this correct.

Apologies if I seem a bit rambling I just need to understand HMRC tax implications when I do a second tranche of APC (this one ends in 2024) and also what wife's widow pension might look like as it will have a minor sway in when I choose to retire.

Thanks

zagfles

You don't understand the £40k limit - in a DB scheme the amount you and your employer pay is not relevant, it's the increase in pension value than matters. In a 1/49th CARE scheme that would be approx 16/49 * salary, if you have a final salary link that could add more to it. The calculation in complicated by inflation increases/allowances. From the above you're probably blowing the limit, but you might have carry forwards available.

First of all, get the "pension input amounts" from the LGPS scheme from the last 3 years, these should be on the statements. You then need to add APCs (if not included) and gross SIPP contributions. These will allow you to work out any carry forwards you might have available. Then you'll have to guess this year's PIA - note that if you get a payrise and have a final salary link this can cause a massive spike in the PIA - to work out how much you can contribute this year.

But until you've got your head round the calculations, stop making SIPP contributions at least until you're sure you're not just creating a tax liability.

This tool may be useful https://www.lgpsmember.org/nilgosc/aa-quick-check-tool.php

Or google "pension input amount lgps" for a factsheet, can't seem to get proper links to pdfs.

NedS

Random47 said:

Couple Questions / Background first:

I'm in C.A.R.E. LPGS at 1/49th with some 8yrs Final Salary at 1/60th. I also have SIPP with Vanguard selection of LS and 2035 pension policies. I reckon I can retire around 60-62 dependant on SIPP growth and if employer throws in the annual staff cull with pension enhancements I might get out a year or so earlier or at the same age just with better employer pension.

1.
I understand the HMRC  £40K limit, my question relates to my employer contribution as to whether that counts towards £40K total.
Currently I pay around 8% on a £60K salary (£4800) and also have APC of £13800 p.a., with my SIPP £7200 p.a.
The rule of thumb seems to be that the LPGS (council) pay about x2.5 what employee pays in so:  £1 me + £2.50 employer

Where DB pensions are involved, the £40k annual allowance is not based on contributions but rather 16 times the amount your DB pension has increased in that year (so take final figure minus the starting figure and multiply by 16). As a somewhat crude estimate, it's 16x DB pension accrued in that year plus any inflationary increase. So if last year your accrued DB pension stood at a pension of £5000 per year, and at the end of this year your contributions had earned you an additional £1000, taking it to £6000, and inflation of 2% raises that to £6120, then your annual DB increase is £1120 multiplied by 16 = £17920 towards your annual allowance of £40k. Any DC contributions are simply counted gross on top of that.

That may not be exactly right, but it's probably close enough to give you a ball park estimate. I'm sure others will correct me where necessary.

Random47

You learn something new every day...

Will do some googling on the x16 rate with DB increase and also impacts with SIPP as I really don't want the HMRC chasing me for return of tax contributions to SIPP

Random47

I think this may get a bit complex, but I'll give it a go and hopefully the better LPGS mathematicians can keep me right.

As some further background context:
I'm in early 50s and did not take pensions seriously until early 40s - what can I say, young men think they can live forever, ergo, why I am now APC and SIPP to play a little bit of a belated catch up game.

My final salary DB was built up and then deferred benefits since late 2015 when I left Local Authority Council to work elsewhere (predominately self employed) until re-joining another Local Authority Council in mid 2020. Fortunately the time period was a few months short of 5 years so I have been able to transfer the deferred Final Salary DB to tie in with my current positions salary / pension. My last salary in 2015 was £30K so the ability to tie into this my current at £60K was somewhat off a win fall. That said the reason I left in 2015 was being stuck in position with little opportunity to grow and learn new skills. Working self employed in my field which has around 5 main work streams has helped develop my experience, skills. etc., and ultimately led to my current appointment. However, I did not pay into any private pensions during 18/19 or 19/20 with a small contribution in 17/18 and have only started CARE in July 2020 and SIPP April 2020. So carry forward allowance should be significant. That said carry forward only applies if you are in a tax registered pension scheme - I am assuming that being a deferred member of an LGPS applies (one hopes)

Workings: (correct me if I am wrong)
CARE 1/49 of £60K = £1225 p.a. pension
APC benefit p.a. in my case (age dependant) = £1150 p.a. (note this is additional DB pension bought not AVC which is DC)

For a moment if we consider the previous year (2019/20) as zero benefits then ((1225+1150) x 1.02) x16 = £38760 

(The quick quote modeler shared by zagfles is roughly the same.)

However, if we add the Final Salary DB which previously in 19/20 was estimated at £4300 p.a and quote on transfer was £8400 p.a. there is an increase for 2020/21 of £4100, so x16 = £65,600 which once added to the £38760 = £104360, then if I add my £9,000 SIPP the total is alarmingly £113,360, a whopping £73360 over annual allowance.
However, my carry forward should soak this up (hopefully). With future years in 2022/3 and 23/24 just coming in on 40K annual allowance (SIPP not included)

A few questions, are:
1. Have I got the above close enough correct
2. How do I go about ensuring the annual allowance is utilised - Is this my LPGS pension funds responsibility or HMRC
3. Ideally I do not want to suspend paying into my SIPP but if no tax benefit then I will reconsider.
4. Does being a deferred member of LPGS pension fund meet the requirements for use of annual allowance carry over. Given HMRC consider the increase of deferred benefit during PIP as towards my annual allowance I would assume yes, but confirmation would be good to have. 
5. Is there anything I am missing

Cheers

NedS

Random47 said:

So carry forward allowance should be significant. That said carry forward only applies if you are in a tax registered pension scheme - I am assuming that being a deferred member of an LGPS applies (one hopes)

Correct - you were a member of a UK registered pension scheme (albeit deferred) so you will qualify for any carry forward you may have available from the last 3 years.

NedS

Random47 said:

Workings: (correct me if I am wrong)
CARE 1/49 of £60K = £1225 p.a. pension
APC benefit p.a. in my case (age dependant) = £1150 p.a. (note this is additional DB pension bought not AVC which is DC)

For a moment if we consider the previous year (2019/20) as zero benefits then ((1225+1150) x 1.02) x16 = £38760 

(The quick quote modeler shared by zagfles is roughly the same.)

Inflation figures for September 2021, which will be used to uprate your pension in April 2022, were conveniently published today, and are 3.1% so that is the figure that will be used (assuming your scheme applies CPI uplift).

I will let someone else deal with how a large change in your annual salary impacts your Annual Allowance calculations for the DB. I'm not sure what happens when someone has a large salary increase in a single year which would then cause the annual allowance to be breached.

zagfles

Random47 said:

I think this may get a bit complex, but I'll give it a go and hopefully the better LPGS mathematicians can keep me right.

As some further background context:
I'm in early 50s and did not take pensions seriously until early 40s - what can I say, young men think they can live forever, ergo, why I am now APC and SIPP to play a little bit of a belated catch up game.

My final salary DB was built up and then deferred benefits since late 2015 when I left Local Authority Council to work elsewhere (predominately self employed) until re-joining another Local Authority Council in mid 2020. Fortunately the time period was a few months short of 5 years so I have been able to transfer the deferred Final Salary DB to tie in with my current positions salary / pension. My last salary in 2015 was £30K so the ability to tie into this my current at £60K was somewhat off a win fall. That said the reason I left in 2015 was being stuck in position with little opportunity to grow and learn new skills. Working self employed in my field which has around 5 main work streams has helped develop my experience, skills. etc., and ultimately led to my current appointment. However, I did not pay into any private pensions during 18/19 or 19/20 with a small contribution in 17/18 and have only started CARE in July 2020 and SIPP April 2020. So carry forward allowance should be significant. That said carry forward only applies if you are in a tax registered pension scheme - I am assuming that being a deferred member of an LGPS applies (one hopes)

Workings: (correct me if I am wrong)
CARE 1/49 of £60K = £1225 p.a. pension
APC benefit p.a. in my case (age dependant) = £1150 p.a. (note this is additional DB pension bought not AVC which is DC)

For a moment if we consider the previous year (2019/20) as zero benefits then ((1225+1150) x 1.02) x16 = £38760 

(The quick quote modeler shared by zagfles is roughly the same.)

However, if we add the Final Salary DB which previously in 19/20 was estimated at £4300 p.a and quote on transfer was £8400 p.a. there is an increase for 2020/21 of £4100, so x16 = £65,600 which once added to the £38760 = £104360, then if I add my £9,000 SIPP the total is alarmingly £113,360, a whopping £73360 over annual allowance.
However, my carry forward should soak this up (hopefully). With future years in 2022/3 and 23/24 just coming in on 40K annual allowance (SIPP not included)

A few questions, are:
1. Have I got the above close enough correct
2. How do I go about ensuring the annual allowance is utilised - Is this my LPGS pension funds responsibility or HMRC
3. Ideally I do not want to suspend paying into my SIPP but if no tax benefit then I will reconsider.
4. Does being a deferred member of LPGS pension fund meet the requirements for use of annual allowance carry over. Given HMRC consider the increase of deferred benefit during PIP as towards my annual allowance I would assume yes, but confirmation would be good to have. 
5. Is there anything I am missing

Cheers

As you exceeded the AA (ignoring carryforwards) in the LGPS scheme last tax year they should have written to you telling you how much you used (the pension input amount, PIA), have they not done? They are supposed to do it by 6 Oct following the tax year you exceeded it (see the LGPS AA factsheet). Maybe contact them and see what they say?

With a DB scheme it's hard to be accurate about the PIA, so it's best to allow a margin and if you don't use it you can carry forwards and use it the following year.

Note that if you exceed the AA inc any carryforwards, you need to declare it on a tax return.  If you exceed it one year but have enough carryforwards keep records of you PIAs in case HMRC query it, but you don't need to declare it. The SIPP will still claim tax relief whether you exceed it or not, but effectively you'll pay the tax relief back as an extra tax charge if you do exceed it. So unlikely to be a good idea to contribute to the SIPP if you exceed the AA.

zagfles

NedS said:

Random47 said:

Workings: (correct me if I am wrong)
CARE 1/49 of £60K = £1225 p.a. pension
APC benefit p.a. in my case (age dependant) = £1150 p.a. (note this is additional DB pension bought not AVC which is DC)

For a moment if we consider the previous year (2019/20) as zero benefits then ((1225+1150) x 1.02) x16 = £38760 

(The quick quote modeler shared by zagfles is roughly the same.)

Inflation figures for September 2021, which will be used to uprate your pension in April 2022, were conveniently published today, and are 3.1% so that is the figure that will be used (assuming your scheme applies CPI uplift).

I will let someone else deal with how a large change in your annual salary impacts your Annual Allowance calculations for the DB. I'm not sure what happens when someone has a large salary increase in a single year which would then cause the annual allowance to be breached.

That's one of the main reasons for allowing carry fowards, a payrise when in a final salary scheme can cause a massive PIA as per the OP's calculations. So you just need to have sufficient carry forwards, otherwise you pay the AA charge. 

Random47

Good to be reassured that being deferred member counts to applicable AA carryover.

(zagfles) The actual DB transfer did not complete until this tax year 2021-22 (LPGS funds notoriously deliberate in processing, COVID homeworking aside). Funnily enough HMRC have just adjusted my tax code this month and stated pension payments as reason. I'll give current LGPS fund a call to chat through transfer progress and AA. I'll also drop VG SIPP admin a message that payments will exceed AA this year so carryover between them and LGPS will need managed.

The table below outlines carryover years unused AA. I have also checked on HMRC calculator and no tax due.
SIPP value for 2021-22 is YTD, and 23K AA still available, so I should be OK to continue SIPP pay in rate for this year (9K year end total).
Whilst I could probably continue SIPP for 2022-24 at current pay in level with remaining AA carryover used in the following years I will reduce to £100 p.m (£1500 p.a.) for 2022 to 2024 just to get in the clear.

		Pension AA
	Tax Year	B/PAL	Bee	LPGS	SIPP	Yr Total	Unused AA
carry over 1	2018-19	5777				5777	34223
carry over 2	2019-20		816		800	1616	38384
carry over 3	2020-21			16777	7450	24227	15773
							88380
current	2021-22			38490	5250	43740
DB transfer	2021-22			61502		61502
						105242	-65242
						Spare AA	23138

The current APC is for 3 years completing in 2024. Thereafter I aim to utilise the remaining balance of allowable APC I can buy. This is planned to be over a longer 7 year period so PIA will smaller and be around £535 annual pension increase (x16). So with CARE pension contributions the rough calculations I've done outline I will be around £32K p.a. and can thereafter increase SIPP again so I come in just under £40K AA. 

One of the points I have picked up on is the ability to use AA carry over also depends on your actual income for the year AA is used. 
On checking HMRC they state total income for:
2018-19 = £46K
2019-20 = £43K
2020-21 = not available on HMRC yet but will be around £46K

Is the amount used calculated on gross or net. Also confirmation income levels will allow full AA carryover would be good to have reassurance on. Thanks

zagfles

A few points:

What is the HMRC tax code change - doesn't sound right as your taxable pay (ie salary minus your LGPS and APC conts) sounds like it'll be under £50k, unless you have other income which takes you into higher rate? If you paid higher rate after LGPS/APC conts you'd be due extra tax relief on the SIPP conts, but doesn't look like you will. Unless you're in Scotland?

You don't need to tell the SIPP provider about using carry forwards, it's something between you and the taxman. LGPS will tell HMRC, and you, if you exceed £40k in LGPS, but for information only. If you have sufficient carry forwards, you can ignore the LGPS letter, and as above just keep records so if HMRC investigate you can give figures

The last point about income is incorrect, it causes massive confusion here. The ability to use carry forwards does NOT depend on your income (unless you're subject to the AA taper, which only applies to seriously high incomes approx £110k+ ex pension and £150k+ inc pension, so doesn't apply to you).

For info - this confusion is caused by people who confuse the AA rules with another limit, the limit on tax relief on personal contributions, which (simplified) is 100% of taxable earnings. So for low earners, the tax relief limit is usually the limiting factor, not the AA, and there is no carry forwards for the tax relief limit. But the tax relief limit is not an issue for you - unless you put 100%+ of your earnings after LGPS conts into your SIPP, which you're nowhere near doing. (employer conts/PIAs are not counted for the tax relief limit, it's just your actual contributions). Your issue is the AA only. So you can use carry forwards regardless of your income in previous years.