Calculating Annual Allowance for DB pensions

NedS

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?!

Exactly, with CPI inflation for Sept 2022 penciled in at around 7.5%, anyone with a large accrued DB pension and/or planning on making large contributions (either due to 2.32% of a large salary or through added pension) may easily find themselves exceeding the AA. I earn less than £30k per year and may possibly exceed the AA by as much as £10,000 if inflation comes in around 7.5% (and that's before I've factored in any pay rise for 2021/22). I never really had to pay too much attention to it before so has come as a bit of a shock for this (relatively) low earner trying to max out their pension before retirement. My spreadsheet predicts I'll likely exceed my AA including available carry forward if inflation exceeds 5% meaning I'll have to reduced my planned SIPP contributions accordingly.

A LOT of people could end up with unexpected tax bills as a consequence of a high inflation reading, especially if they have already used any available carry forward making it unavailable to smooth the effects of high inflation as @hugheskevi suggests above. At least I now understand the issue and can take avoiding action.

michaels

hugheskevi said:

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.

Thanks

So checking I have got this correct, it is the difference between the Sep 2020 CPI uplift that the revenue applies to the annual pension value at 5th April 21 and the Sep 21 CI uplift applied to this plus any accrual during 21/22FY that can cause the problem - and could mean that someone who doesn't accrue any additional pension but simply has a decent size DB already earned might see an AA charge that they could not avoid if the differential between the two inflation rates was large enough?!

For example, accrued DB pension of 40k with no further contributions, inflation in Sep 21 3.1%, inflation in Sep 22 8.2%, actual inflation increases is 2.6k more than the calculated increase based on the Sep 21 inflation figure, 2.6k times 16 > 40k so with no carry forward then AA is exceeded?!

NedS

Following on from that, do I need to factor in inflationary rises for my other two DB schemes that are long in deferment when calculating my Annual Allowance usage, or only the scheme(s) I've actually contributed to in that year?

hugheskevi

michaels said:

hugheskevi said:

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.

Thanks

So checking I have got this correct, it is the difference between the Sep 2020 CPI uplift that the revenue applies to the annual pension value at 5th April 21 and the Sep 21 CI uplift applied to this plus any accrual during 21/22FY that can cause the problem - and could mean that someone who doesn't accrue any additional pension but simply has a decent size DB already earned might see an AA charge that they could not avoid if the differential between the two inflation rates was large enough?!

For example, accrued DB pension of 40k with no further contributions, inflation in Sep 21 3.1%, inflation in Sep 22 8.2%, actual inflation increases is 2.6k more than the calculated increase based on the Sep 21 inflation figure, 2.6k times 16 > 40k so with no carry forward then AA is exceeded?!

Correct principle, but if someone didn't accrue anything at all it is likely they are a deferred member, and hence would get the deferred member carve-out and have a nil pension input.

On second para (and ignoring deferred member carve out), starting value would be £40,000 x 3.1% = £41,240. Closing value would be £40,000 x 1.082 = £43,280. An increase of £2,040, which multiplied by 16 is £32,640. I'm not sure exactly where the £2.6K comes from?

Following on from that, do I need to factor in inflationary rises for my other two DB schemes that are long in deferment when calculating my Annual Allowance usage, or only the scheme(s) I've actually contributed to in that year?

No, due to deferred member carve-out.

zagfles

hugheskevi said:

michaels said:

hugheskevi said:

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.

Thanks

So checking I have got this correct, it is the difference between the Sep 2020 CPI uplift that the revenue applies to the annual pension value at 5th April 21 and the Sep 21 CI uplift applied to this plus any accrual during 21/22FY that can cause the problem - and could mean that someone who doesn't accrue any additional pension but simply has a decent size DB already earned might see an AA charge that they could not avoid if the differential between the two inflation rates was large enough?!

For example, accrued DB pension of 40k with no further contributions, inflation in Sep 21 3.1%, inflation in Sep 22 8.2%, actual inflation increases is 2.6k more than the calculated increase based on the Sep 21 inflation figure, 2.6k times 16 > 40k so with no carry forward then AA is exceeded?!

Correct principle, but if someone didn't accrue anything at all it is likely they are a deferred member, and hence would get the deferred member carve-out and have a nil pension input.

On second para (and ignoring deferred member carve out), starting value would be £40,000 x 3.1% = £41,240. Closing value would be £40,000 x 1.082 = £43,280. An increase of £2,040, which multiplied by 16 is £32,640. I'm not sure exactly where the £2.6K comes from?

Following on from that, do I need to factor in inflationary rises for my other two DB schemes that are long in deferment when calculating my Annual Allowance usage, or only the scheme(s) I've actually contributed to in that year?

No, due to deferred member carve-out.

Just be aware of the exception to the deferred member carve-out which is quite common, where someone has a final salary pension and that's changed to a CARE or DC pension, if the final salary part is still linked to current salary then the FS part does not count as deferred.

cloud_dog

@NedS just as a comment, as I also undertake a PIA calculation each year. 

Mine is simplified somewhat, as it is a straightforward FS and any salary increase is limited to 1%, but in 2018/19 my PIA was actually £0 through a fluke of inflation I believe.

hugheskevi

cloud_dog said:

@NedS just as a comment, as I also undertake a PIA calculation each year. 

Mine is simplified somewhat, as it is a straightforward FS and any salary increase is limited to 1%, but in 2018/19 my PIA was actually £0 through a fluke of inflation I believe.

This is actually quite common in final salary schemes where salary increases are below inflation.

The benefit from an additional year of service linked to final salary can be outweighed by the inflation uplift. This can mean that for members not too far from retirement who do not expect pay increases and have long service in the pension scheme, they may well be better off leaving the scheme and benefiting from price revaluation as well as no member contributions. This is likely to particularly be the case for the forthcoming year, with revaluation probably at something like 8% but pay increases significantly lower in many cases.

michaels

hugheskevi said:

michaels said:

hugheskevi said:

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.

Thanks

So checking I have got this correct, it is the difference between the Sep 2020 CPI uplift that the revenue applies to the annual pension value at 5th April 21 and the Sep 21 CI uplift applied to this plus any accrual during 21/22FY that can cause the problem - and could mean that someone who doesn't accrue any additional pension but simply has a decent size DB already earned might see an AA charge that they could not avoid if the differential between the two inflation rates was large enough?!

For example, accrued DB pension of 40k with no further contributions, inflation in Sep 21 3.1%, inflation in Sep 22 8.2%, actual inflation increases is 2.6k more than the calculated increase based on the Sep 21 inflation figure, 2.6k times 16 > 40k so with no carry forward then AA is exceeded?!

Correct principle, but if someone didn't accrue anything at all it is likely they are a deferred member, and hence would get the deferred member carve-out and have a nil pension input.

On second para (and ignoring deferred member carve out), starting value would be £40,000 x 3.1% = £41,240. Closing value would be £40,000 x 1.082 = £43,280. An increase of £2,040, which multiplied by 16 is £32,640. I'm not sure exactly where the £2.6K comes from?

Following on from that, do I need to factor in inflationary rises for my other two DB schemes that are long in deferment when calculating my Annual Allowance usage, or only the scheme(s) I've actually contributed to in that year?

No, due to deferred member carve-out.

Thanks again for the info, it was supposed to be 50k so that 5% inflation differential gave more than 2.5k to make the calcs work.

Making things more complicated.  I am joining Alpha in 22/23.  I am planning to do two things:
1) Transfer in DC to purchase DB of 20k
Add to the 2.32% enough extra contributions to take the accrued new pension to 2.5k based on the 2) AA limit (I have no carry forward)

Will this inflation uplift impact on my ability to do so?  My entitlement as at the start of the tax year is zero as I don't join until mid April.

Thanks for any advice or suggestions of where I could get advice.

cloud_dog

hugheskevi said:

cloud_dog said:

@NedS just as a comment, as I also undertake a PIA calculation each year. 

Mine is simplified somewhat, as it is a straightforward FS and any salary increase is limited to 1%, but in 2018/19 my PIA was actually £0 through a fluke of inflation I believe.

This is actually quite common in final salary schemes where salary increases are below inflation.

The benefit from an additional year of service linked to final salary can be outweighed by the inflation uplift. This can mean that for members not too far from retirement who do not expect pay increases and have long service in the pension scheme, they may well be better off leaving the scheme and benefiting from price revaluation as well as no member contributions. This is likely to particularly be the case for the forthcoming year, with revaluation probably at something like 8% but pay increases significantly lower in many cases.

This aspect is something I am constantly trying to figure out if I would be better off doing?

hugheskevi

michaels said:

hugheskevi said:

michaels said:

hugheskevi said:

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.

Thanks

So checking I have got this correct, it is the difference between the Sep 2020 CPI uplift that the revenue applies to the annual pension value at 5th April 21 and the Sep 21 CI uplift applied to this plus any accrual during 21/22FY that can cause the problem - and could mean that someone who doesn't accrue any additional pension but simply has a decent size DB already earned might see an AA charge that they could not avoid if the differential between the two inflation rates was large enough?!

For example, accrued DB pension of 40k with no further contributions, inflation in Sep 21 3.1%, inflation in Sep 22 8.2%, actual inflation increases is 2.6k more than the calculated increase based on the Sep 21 inflation figure, 2.6k times 16 > 40k so with no carry forward then AA is exceeded?!

Correct principle, but if someone didn't accrue anything at all it is likely they are a deferred member, and hence would get the deferred member carve-out and have a nil pension input.

On second para (and ignoring deferred member carve out), starting value would be £40,000 x 3.1% = £41,240. Closing value would be £40,000 x 1.082 = £43,280. An increase of £2,040, which multiplied by 16 is £32,640. I'm not sure exactly where the £2.6K comes from?

Following on from that, do I need to factor in inflationary rises for my other two DB schemes that are long in deferment when calculating my Annual Allowance usage, or only the scheme(s) I've actually contributed to in that year?

No, due to deferred member carve-out.

Thanks again for the info, it was supposed to be 50k so that 5% inflation differential gave more than 2.5k to make the calcs work.

Making things more complicated.  I am joining Alpha in 22/23.  I am planning to do two things:
1) Transfer in DC to purchase DB of 20k
Add to the 2.32% enough extra contributions to take the accrued new pension to 2.5k based on the 2) AA limit (I have no carry forward)

Will this inflation uplift impact on my ability to do so?  My entitlement as at the start of the tax year is zero as I don't join until mid April.

Thanks for any advice or suggestions of where I could get advice.

The transfer doesn't produce any pension input in the first year (ref here).

The whole of pension built up by 31/3/2023 will be indexed by September CPI, and your starting value is zero. So assume inflation is 8%. If you had £2,314 of pension arising from normal accrual and Added Pension, that would be increased by 8% to £2,500 on 31/3/2022. There would then be accrual between 1-5 April 2023, which would reduce the amount you could have. Presumably you would also purchase maximum EPA, as that does not have any pension input.