Going over annual allowance

Simes122

Exotoxin1 said:

EdSwippet said:

Scheme pays is not free money. When you use it, your pension is reduced by an amount equal to the tax paid on your behalf by the scheme.

In my NHS England/Wales schme, Scheme Pays is charged for at CPI+2.4% each year. So incurring a Scheme Pays debt for 20 years say is a lot of real interest charge, so it's not simply "your pension is reduced by an amount equal to the tax paid on your behalf by the scheme".

Scheme pays in my USS scheme is taken from my dc pot first if they exist - in my case they do, so it wouldn’t be accruing a debt as such, but I agree, paying from DB could be costly.

EdSwippet

Exotoxin1 said:

EdSwippet said:

Scheme pays is not free money. When you use it, your pension is reduced by an amount equal to the tax paid on your behalf by the scheme.

In my NHS England/Wales schme, Scheme Pays is charged for at CPI+2.4% each year. So incurring a Scheme Pays debt for 20 years say is a lot of real interest charge, so it's not simply "your pension is reduced by an amount equal to the tax paid on your behalf by the scheme".

Right. Straightforward value swap for DC schemes, but worse, and hellishly complicated, for DB schemes.

Grumpy_chap

Simes122 said:

Grumpy_chap said:

Simes122 said:

As additional info, I’m in Scotland as well.  My forces pension is about £36.5k gross, and the HR threshold up here is £43662.  For obvious reasons, I can only Sal sac down to min wage, but that plus my forces pension means anything I don’t Sal sac to min wage is taxed at 41%.   So I Sal sac to the max (min wage) to avoid that problem.   

so if scheme pays is not the answer, is ‘me pays’ a better option (to ensure I’ve used the full £40k AA?)

AIUI, the annual allowance is usually reduced for anyone already drawing pension benefits.  However, please note the inclusion of "usually" as there are some factors that may be different in the case stated:

• Scotland not England
• Forces pensions might be treated differently to any general DC (or DB) pension

Sorry, this is a bit of a vague comment, but I wanted to draw attention so that this is something you can investigate and confirm.

Thanks - If you mean the MPAA, this is not triggered by withdrawals from a DB scheme (Forces pension is DB). I’m not aware of any reduction in the AA that would apply here.

OK - sounds like you are aware and confirmed the rules.

It seems odd to me that a DB and DC scheme would be treated differently in this regard, but if them are the rules then them are the rules.

zagfles

Simes122 said:

Ok thanks both - I’m seeing the problem with scheme pays.  

As additional info, I’m in Scotland as well.  My forces pension is about £36.5k gross, and the HR threshold up here is £43662.  For obvious reasons, I can only Sal sac down to min wage, but that plus my forces pension means anything I don’t Sal sac to min wage is taxed at 41%.   So I Sal sac to the max (min wage) to avoid that problem.    There is a double whammy with the Scottish system in that the NI threshold is £50k.  So between £43k and £50k earnings, you only receive £45.75 for every £100 earned - so clearly sacrificing to the max is my best option otherwise I’m on less than half pay here in Scotland. 

But, then I run out of annual allowance, which I absolutely want to fully exploit in my last year, otherwise I’m giving up lots of tax and NI needlessly.

so if scheme pays is not the answer, is ‘me pays’ a better option (to ensure I’ve used the full £40k AA?)

Id save the NI because that would have disappeared via Sal sac.  I’m answering my own question I realise I think…..id be paying tax with money id already paid tax on, or but…with potentially my tax free drawdown.  Let’s assume the latter.  Id only then be paying back relief I shouldn’t have had, but would have saved 13.25% NI in the process?

Im not talking huge overpayments above annual allowance (unless that was advantageous) - just enough to ensure I used every drop of the £40k AA in my final year of employment.  Would that be more efficient than forgoing any available AA? Thanks!

I can't see how you'd benefit if you exceeded the AA whether you use scheme pays or not. I can't how see paying the AA charge yourself could ever be better than using scheme pays from a DC scheme.

What do you mean "with potentially my tax free drawdown"? You said you'd be a higher rate taxpayer in retirement. You only generate 25% extra tax free cash with extra pension contributions, at most. So as above calcs show with scheme pays, you're worse off. Pay yourself, and it'll be even worse:

£100 sal sac into the pension produces £100 in the pension (assuming no employer match/NI saving paid). Then on withdrawal after 25% tax free and 41% tax on 75% produces £69.25. But pay the AA charge yourself, that's £41. So your £100 gross has turned into £28.25 net!!

Compare with £100 taken as salary, after 13.25% NI and 41% tax would leave £45.75.

And it could be even worse. If you're a higher rate taxpayer in retirement you must be close to or even over the LTA. In which case that extra £100 pension could be reduced to £75, no tax free cash so reduced to £44.25 after 41% tax. So after the £41 AA tax you've already paid, you've managed to turn £100 of gross income into £3.25 !!

I think the only you'd "benefit" is if you don't spend it before dying and a non-taxpayer inherits the pension pot!

Simes122

zagfles said:

Simes122 said:

Ok thanks both - I’m seeing the problem with scheme pays.  

As additional info, I’m in Scotland as well.  My forces pension is about £36.5k gross, and the HR threshold up here is £43662.  For obvious reasons, I can only Sal sac down to min wage, but that plus my forces pension means anything I don’t Sal sac to min wage is taxed at 41%.   So I Sal sac to the max (min wage) to avoid that problem.    There is a double whammy with the Scottish system in that the NI threshold is £50k.  So between £43k and £50k earnings, you only receive £45.75 for every £100 earned - so clearly sacrificing to the max is my best option otherwise I’m on less than half pay here in Scotland. 

But, then I run out of annual allowance, which I absolutely want to fully exploit in my last year, otherwise I’m giving up lots of tax and NI needlessly.

so if scheme pays is not the answer, is ‘me pays’ a better option (to ensure I’ve used the full £40k AA?)

Id save the NI because that would have disappeared via Sal sac.  I’m answering my own question I realise I think…..id be paying tax with money id already paid tax on, or but…with potentially my tax free drawdown.  Let’s assume the latter.  Id only then be paying back relief I shouldn’t have had, but would have saved 13.25% NI in the process?

Im not talking huge overpayments above annual allowance (unless that was advantageous) - just enough to ensure I used every drop of the £40k AA in my final year of employment.  Would that be more efficient than forgoing any available AA? Thanks!

I can't see how you'd benefit if you exceeded the AA whether you use scheme pays or not. I can't how see paying the AA charge yourself could ever be better than using scheme pays from a DC scheme.

What do you mean "with potentially my tax free drawdown"? You said you'd be a higher rate taxpayer in retirement. You only generate 25% extra tax free cash with extra pension contributions, at most. So as above calcs show with scheme pays, you're worse off. Pay yourself, and it'll be even worse:

£100 sal sac into the pension produces £100 in the pension (assuming no employer match/NI saving paid). Then on withdrawal after 25% tax free and 41% tax on 75% produces £69.25. But pay the AA charge yourself, that's £41. So your £100 gross has turned into £28.25 net!!

Compare with £100 taken as salary, after 13.25% NI and 41% tax would leave £45.75.

And it could be even worse. If you're a higher rate taxpayer in retirement you must be close to or even over the LTA. In which case that extra £100 pension could be reduced to £75, no tax free cash so reduced to £44.25 after 41% tax. So after the £41 AA tax you've already paid, you've managed to turn £100 of gross income into £3.25 !!

I think the only you'd "benefit" is if you don't spend it before dying and a non-taxpayer inherits the pension pot!

Thanks - I see what you mean.

All I meant is that 25% of my withdrawals would be tax free, thus if I were using that "untaxed" money to pay my tax liability, I'd only be paying tax once, but would have saved 13.25% due to the NI saving.   But I realise, I'd then be forgoing tax free cash, which I'd need to ultimately replace (taxed at 41%, so no gain there!).

With the likely 10% inflation in the autumn, I'm expecting a healthy increase to my forces pension in April 23 (around my second career retirement date) - with that plus my USS Uni DB pension, will place me at or around the HR threshold (in Scotland) of £43662.  Thus anything taken from my USS DC pot on top of that will be 25% TF, 41% taxed.    But I'm well clear of the LTA.   My forces pension has been in payment since I was aged 51, in 2015, and has used 52% of my LTA according to my latest statement.    I will have a USS DC Pot of around £200k when I retire next Apr/May, but my DB pension will only be around £4-£4.5k, so I stay well clear of LTA given most of my pension value is DB.

I think what I'm trying to do, is not leave tax relief on the table.   I'm looking at retiring in Apr/May 23.  I'll have used my AA this year by October, so will turn off additional contributions then, exposing me to Tax/NI for the last few months.  But I won't know till Oct 23 when I get my pension statement, if I had any unused Annual allowance this tax year.  But I think I can avoid triggering an MPAA event by using savings to supplement my DB pensions until I've figured out whether I can contribute any more once I've stopped working - ie, all I need to do is not take my pension until I've worked out if there is any more tax relief to be had.  And then move to England to pay 20% instead of 41% tax on my DC pension!

Simes122

I think there is a way to benefit from Scheme pays.  If some unused Intermediate/Lower Rate headroom exists in retirement.

Lets say I put in £10000 via Sal Sac (over annual allowance)
Generates a tax liability of 41% - ie, a tax bill of £4100.
Scheme pays £4100 from DC pot.

£10000 - £4100 = £5900 left in DC pot from above.

25% TF =£1475
75% taxable = £4425
If tax is paid at 21%: Tax = £929.25
Net Payable = £4970.75
(vs £4575 via PAYE @41%)

So slightly better if I can pull that out within my 21% intermediate band, which I can if I defer taking my Uni DB pension (and that generates around a 3% benefit each year I don't take it early).  I can't get my head around whether that just shifts the issue in time (ie I will have more in my DC pot now that'll be taxed later at 41% when I do take my Uni DB pension).

michaels

For me, BR taxpayer

Take as salary £100 less 20% tax, 13.25% NI gives £66.75

Into pension £110 as get 10% of employers NI saving.

Scheme pays 20% AA charge £22 leaves £88

15% tax on withdrawal £13.20 leaves £74.80

Grumpy_chap

It must be an edge case for BR tax payer to exceed AA.

You would need generous employer contribution percentage plus SS to NMW. 

zagfles

Simes122 said:

I think there is a way to benefit from Scheme pays.  If some unused Intermediate/Lower Rate headroom exists in retirement.

Lets say I put in £10000 via Sal Sac (over annual allowance)
Generates a tax liability of 41% - ie, a tax bill of £4100.
Scheme pays £4100 from DC pot.

£10000 - £4100 = £5900 left in DC pot from above.

25% TF =£1475
75% taxable = £4425
If tax is paid at 21%: Tax = £929.25
Net Payable = £4970.75
(vs £4575 via PAYE @41%)

So slightly better if I can pull that out within my 21% intermediate band, which I can if I defer taking my Uni DB pension (and that generates around a 3% benefit each year I don't take it early).  I can't get my head around whether that just shifts the issue in time (ie I will have more in my DC pot now that'll be taxed later at 41% when I do take my Uni DB pension).

Yes if you just create a bit of spare BR band by moving income to a time when you'll pay HR tax, you've not achieved anything, as income that would have been taxed at BR will now be taxed at HR!

You probably just need to attempt to calculate the likely PIA before the end of the tax year and try not to exceed the AA. I presume you've worked out how much carry forwards (if any) you have?

zagfles

Grumpy_chap said:

It must be an edge case for BR tax payer to exceed AA.

You would need generous employer contribution percentage plus SS to NMW. 

He'll mean a BR tax payer at the margin, not before the SS, eg salary £70k, SS £35k plus £5k employer conts, no c/f so all AA used at that point. He's then a BR taxpayer and need to decide whether to contribute more and exceed the AA on that basis.

With 10% employer NI saving paid into the pension plus the 13.25% employee ie total 23.25% NI saving which is a bigger saving than the extra tax paid by getting taxed (almost) twice at BR.