Calculating Annual Allowance for DB pensions

NedS

Hi all,

I would just like to check my understanding of Pension Input Amounts and calculating the Annual Allowance for DB pensions (for 2021/22), specifically for Alpha Civil Service pension in my case.

It's a career average scheme, with no lump sum, that is revalued by CPI each year. Following the steps here:

https://www.civilservicepensionscheme.org.uk/your-pension/yearly-pension-update/pension-saving-statement/annual-allowance/

Step 1: 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.

Step 2: Any automatic lump sum that you may be eligible for is added to the amount calculated in Step 1. (not relevant to me as no lump sum in Alpha)

Step 3: Adjust the total amount in line with inflation; 0.5% for 2021/22. This is the value at the start of the Pension Input Period.

So this starting value is simply the value of my pension (the closing balance) on my Statement as of 31/3/2021.

Step 4: Determine the benefits you had built up at the end of the current Pension Input Period and multiply it by the same factor as used in Step 1.

Question - is this just the value of Step 3 plus the new accrued benefits (2.32% of pensionable salary), or do I need to adjust for 3.1% CPI inflation here too?

Step 5: Add any automatic lump sum that you may be eligible for to the amount calculated in Step 4. (not relevant to me as no lump sum in Alpha)

Step 6: Deduct the value in Step 3 from the value in Step 5 which gives us your Pension Input Amount.

So my question is around the value at Step 4 - do I need to adjust for the 3.1% CPI inflation for 2021/22 at this step or not?

hugheskevi

So this starting value is simply the value of my pension (the closing balance) on my Statement as of 31/3/2021.

No, it is the closing value on the Statement (which includes the annual uplift of 0.5%) plus the accrual between 1/4/21 and 5/4/21 (inclusive), and to all of that an uplift of 0.5% is applied to generate the starting value.

Question - is this just the value of Step 3 plus the new accrued benefits (2.32% of pensionable salary), or do I need to adjust for 3.1% CPI inflation here too?

It is the value as at 5/4/2022 that is used, which will include the 3.1% inflation increase as well as service between 1/4/22 and 5/4/22 (inclusive), so yes, you include the 3.1% uplift.

Also, if you are affected by 2015 Remedy, all this becomes academic as your pension input will in due course become based on your legacy scheme.

NedS

hugheskevi said:

So this starting value is simply the value of my pension (the closing balance) on my Statement as of 31/3/2021.

No, it is the closing value on the Statement (which includes the annual uplift of 0.5%) plus the accrual between 1/4/21 and 5/4/21 (inclusive), and to all of that an uplift of 0.5% is applied to generate the starting value.

Question - is this just the value of Step 3 plus the new accrued benefits (2.32% of pensionable salary), or do I need to adjust for 3.1% CPI inflation here too?

It is the value as at 5/4/2022 that is used, which will include the 3.1% inflation increase as well as service between 1/4/22 and 5/4/22 (inclusive), so yes, you include the 3.1% uplift.

Also, if you are affected by 2015 Remedy, all this becomes academic as your pension input will in due course become based on your legacy scheme.

Thank you. So how do I calculate the accrual between 1st - 5th April - just pro-rata my salary for those 5 days (5/365 x Annual Salary) x 2.32% ?

hugheskevi

Thank you. So how do I calculate the accrual between 1st - 5th April - just pro-rata my salary for those 5 days (5/365 x Annual Salary) x 2.32% ?

There is no central guidance so each payroll will probably be doing something slightly different. Although as long as you do something sensible, such as you outline above, it shouldn't make much difference.

NedS

Thank you.

Next question - if my pension conts for the last 4 years have been:

2021/22: £43,044

2020/21: £39,764

2019/20: £33,287

2018/19: £28,756

How do I calculate how much Annual Allowance (including any carry forward) I have available to use in 2022/23? Depending what the Sept 2022 CPI inflation reading is (I'm estimating 7.5%), I may be very close to exceeding my limit, although I can adjust SIPP contributions after Sept once I know what the CPI figure is.

QrizB

NedS said:

How do I calculate how much Annual Allowance (including any carry forward) I have available to use in 2022/23?

There's a calculator here:
https://www.tax.service.gov.uk/pension-annual-allowance-calculator

NedS

QrizB said:

NedS said:

How do I calculate how much Annual Allowance (including any carry forward) I have available to use in 2022/23?

There's a calculator here:
https://www.tax.service.gov.uk/pension-annual-allowance-calculator

Yes, thank you, I've used that calculator, but it doesn't calculate for next tax year which was my question. I'd like to understand how the calculation is performed.

QrizB

NedS said:

Yes, thank you, I've used that calculator, but it doesn't calculate for next tax year which was my question. I'd like to understand how the calculation is performed.

OK, here goes.

This year (assuming nothing special about your situation) you had available £40k plus whatever you had left over from 2020 (£236), 2019 (£6713) and 2018 (£11244). That totals £58193.

The first £40k you contribute to your pension comes from the current year, and everything above that is taken from your carry-forward, starting with 2018. If your total contributions for 2021 remain £43044, the £3044 will come from 2018 and it won't start to use up your carry-forward from later years.

In 2022 you do the same calculation over again. Start with £40k and add on whatever you didn't use in 2021 (£0), 2020 (£236) and 2019 (£6713). That makes £46,949.

Do check all those numbers; I'm just some random person with on the internet and it's not my pension, I might have mis-typed or mis-read any one of those figures (and I make plenty of typos ...)

NedS

QrizB said:

NedS said:

Yes, thank you, I've used that calculator, but it doesn't calculate for next tax year which was my question. I'd like to understand how the calculation is performed.

OK, here goes.

This year (assuming nothing special about your situation) you had available £40k plus whatever you had left over from 2020 (£236), 2019 (£6713) and 2018 (£11244). That totals £58193.

The first £40k you contribute to your pension comes from the current year, and everything above that is taken from your carry-forward, starting with 2018. If your total contributions for 2021 remain £43044, the £3044 will come from 2018 and it won't start to use up your carry-forward from later years.

In 2022 you do the same calculation over again. Start with £40k and add on whatever you didn't use in 2021 (£0), 2020 (£236) and 2019 (£6713). That makes £46,949.

Do check all those numbers; I'm just some random person with on the internet and it's not my pension, I might have mis-typed or mis-read any one of those figures (and I make plenty of typos ...)

Thank you, and that tallies with what the HMRC calculator said - £6949 of unused annual allowance
I didn't realise that was the figure that is carried forward as available for next tax year, but makes sense now.

michaels

hugheskevi said:

So this starting value is simply the value of my pension (the closing balance) on my Statement as of 31/3/2021.

No, it is the closing value on the Statement (which includes the annual uplift of 0.5%) plus the accrual between 1/4/21 and 5/4/21 (inclusive), and to all of that an uplift of 0.5% is applied to generate the starting value.

Question - is this just the value of Step 3 plus the new accrued benefits (2.32% of pensionable salary), or do I need to adjust for 3.1% CPI inflation here too?

It is the value as at 5/4/2022 that is used, which will include the 3.1% inflation increase as well as service between 1/4/22 and 5/4/22 (inclusive), so yes, you include the 3.1% uplift.

Also, if you are affected by 2015 Remedy, all this becomes academic as your pension input will in due course become based on your legacy scheme.

I'm confused now - does the CPI uplift on your existing entitlement count against the AA - Suppose you have 25k entitlement and a 10% CPI uplift to 27.5k then 2.5k uplift x 16 means any contributions take you over the AA?!

hugheskevi

michaels said:

hugheskevi said:

So this starting value is simply the value of my pension (the closing balance) on my Statement as of 31/3/2021.

No, it is the closing value on the Statement (which includes the annual uplift of 0.5%) plus the accrual between 1/4/21 and 5/4/21 (inclusive), and to all of that an uplift of 0.5% is applied to generate the starting value.

Question - is this just the value of Step 3 plus the new accrued benefits (2.32% of pensionable salary), or do I need to adjust for 3.1% CPI inflation here too?

It is the value as at 5/4/2022 that is used, which will include the 3.1% inflation increase as well as service between 1/4/22 and 5/4/22 (inclusive), so yes, you include the 3.1% uplift.

Also, if you are affected by 2015 Remedy, all this becomes academic as your pension input will in due course become based on your legacy scheme.

I'm confused now - does the CPI uplift on your existing entitlement count against the AA - Suppose you have 25k entitlement and a 10% CPI uplift to 27.5k then 2.5k uplift x 16 means any contributions take you over the AA?!

The CPI uplift counts, simply as it forms your benefit entitlement. HMRC don't care how the level of benefit as at 5th April is calculated, they only care what the entitlement is on that date.

HMRC ensure you are not taxed on inflation by uplifting the starting value by inflation, although differences in date of CPI measurement may create differences. For example, for 2021/22, the pension is increased by September 2021 CPI shortly before the end of the year, whereas the Pension Input starting value is increased by September 2020 CPI. But with carry-forward it should be neutral over time in many circumstances.