Is CPI included when calculating pension input for Annual Allowance (Alpha Defined Benefit pension)

pathsofdarkness

hugheskevi said:

The key point is that there is a mismatch between the year of CPI the starting value is based upon and the CPI by which the pension is increased. Usually this doesn't matter very much, but with a huge difference between one year to the next in the rate of inflation it does. If inflation falls back the following year the process works in reverse, but some members may be pushed into paying a charge they wouldn't otherwise have paid, or leave and not benefit from the subsequent year, etc.

Aha! That explains (for the most part) why the number I came up with in my original post is different to what MyCSP have just emailed to me.

MyCSP told my my Pension Input Amount in 2021/22 was £38,269.55 but I was calculating £32,997; however re-doing my calculation based on this information gets me much closer (£37,271).

I'm guessing the rest of the difference is due to the amount that gets accrued between 1-5 April each ear which isn't on my Annual Benefit Statement. 

I still find all of this really confusing. 

EDIT: Actually I can't work out what inflation rate I should use for step 3? This is way over my head.

hugheskevi

pathsofdarkness said:

EDIT: Actually I can't work out what inflation rate I should use for step 3? This is way over my head.

You are calculating 2021/22 and Step 3 involves adjusting the starting amount. That means September 2020 CPI is used, which was 0.5%.

You have done far better than the vast majority of members ever manage, you definitely aren't in over your head!

pathsofdarkness

hugheskevi said:

pathsofdarkness said:

EDIT: Actually I can't work out what inflation rate I should use for step 3? This is way over my head.

You are calculating 2021/22 and Step 3 involves adjusting the starting amount. That means September 2020 CPI is used, which was 0.5%.

You have done far better than the vast majority of members ever manage, you definitely aren't in over your head!

Thanks

NedS

pathsofdarkness said:

hugheskevi said:

pathsofdarkness said:

EDIT: Actually I can't work out what inflation rate I should use for step 3? This is way over my head.

You are calculating 2021/22 and Step 3 involves adjusting the starting amount. That means September 2020 CPI is used, which was 0.5%.

You have done far better than the vast majority of members ever manage, you definitely aren't in over your head!

Thanks

I agree, most people are either completely unaware that there are limits and they may have breached them (e.g, I have a large bonus, I'll just pay the lot into my pension), or base the calculation on their (and maybe their employers) contributions to the scheme rather then pension input amounts.

I thought your first post was excellent - a really clearly laid out explanation of your calculations. I asked exactly the same question as you regarding the application of CPI in the calculation a few months ago, so you are definitely not alone, and received the same excellent support from our resident expert @hugheskevi

michaels

So supposing inflation this year is 10% and next year is 4%, could the inflation adjustment give a negative pension input?!

hugheskevi

michaels said:

So supposing inflation this year is 10% and next year is 4%, could the inflation adjustment give a negative pension input?!

Pension inputs cannot be negative, they have a floor of zero.

You could have a situation though whereby a member has a nil, or very low, input despite contributing the entire year.

NedS

hugheskevi said:

michaels said:

So supposing inflation this year is 10% and next year is 4%, could the inflation adjustment give a negative pension input?!

Pension inputs cannot be negative, they have a floor of zero.

You could have a situation though whereby a member has a nil, or very low, input despite contributing the entire year.

and which could give them plenty of carry forward scope for the coming 3 years should inflation rise again. Under normal circumstances, carry forward acts to smooth out large differential increases in inflation, assuming contributors are not contributing right up to the max £40k allowance, year in, year out.

Unfortunately this year, when I arguably need it most, I don't have much carry forward available as for the last two years I've made contributions right up to the £40k annual allowance.

BillyHorner

hugheskevi said:

BillyHorner said:

When calculating a PIA for 22/23, isn't it just the CPI rate for September 2021 that matters, not the likely CPI rate for September 2022?

Yes and no. In the HMRC calculation formula of pension input it is only CPI rate for September 2021 that matters.

However, in the calculation of benefits for closing amount, the pension is increased in line with inflation shortly before the closing amount is calculated. That increase is based on September 2022 CPI.

Notwithstanding this, I'm confused as to how a rise in CPI to 10%+ would have a detrimental impact on the PIA? The purpose of adjusting the opening balance by CPI is to protect the member from the affects of inflation, not penalise them for it. Surely, it is a recognition that if, say, the closing balance has increased by 5% but CPI inflation was also 5%, the member has not seen any real terms growth in their pension, so would have a PIA of nil?

For illustration, ignore any new pension accrual in a year, and just examine what happens to the pension a member brought into the year.

Assume a member starts the year with £20,000 of accrued annual pension. To calculate the starting value for Annual Allowance this is increased by 3.1% (September 2021 CPI) and multiplied by the standard factor of 16, giving a capital value of £329,920.

At the end of the year the £20,000 is increased by 10% based on (assumed) September 2022 CPI. The closing capital value is £352,000 (£20,000 x 10% x 16). The pension input is closing value minus opening value, which is £22,080. That is the pension input arising solely from the pension brought into the year, there have been no new contributions and yet over half of the standard Annual Allowance has been used.

The key point is that there is a mismatch between the year of CPI the starting value is based upon and the CPI by which the pension is increased. Usually this doesn't matter very much, but with a huge difference between one year to the next in the rate of inflation it does. If inflation falls back the following year the process works in reverse, but some members may be pushed into paying a charge they wouldn't otherwise have paid, or leave and not benefit from the subsequent year, etc.

Apologies for taking ages to reply again and I really appreciate the detailed response. However, and I know that you understand a great deal more about pensions than I do, but are you absolutely certain about HMRC uprating the closing balance by CPI?

The reason I ask is that this is not how it is explained in the HMRC manual (see link below). That states the following:

The amount of pension savings under a defined benefits arrangement is the increase in the value of the individual’s promised benefits over the pension input period. This increase is the pension input amount for the pension input period. The increase is the difference between the value of the individual’s benefits immediately before the start of the pension input period (the opening value) and the value of the individual’s benefits at the end of the pension input period (the closing value).

How to calculate the opening balance:

1. Find the amount of the member's annual pension that had built up immediately before the start of the pension input period.
2. Multiply the annual amount of that pension by 16.
3. If the member's rights include a separate lump sum in addition to the pension, add the amount of the lump sum built up immediately before the start of the pension input period to the amount found after step 2.
4. Increase the total after step 3 by the 12 month increase in the CPI to the September before the start of the tax year for which the calculation is being done.

How to calculate the closing balance:

1. Find the amount of pension that had built up by the end of the pension input period.
2. Multiply that amount of pension by 16.
3. If the member's rights include a separate lump sum in addition to the pension, add the amount of the lump sum to the amount found after step 2
   

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm053301

As you can see, it doesn't state anything about uprating the closing balance by CPI from the previous September, only the opening balance. That is consistent with this information leaflet from the NHS Business Services Authority, regarding the process for calculating the Annual Allowance in respect of NHS pensions.

https://www.nhsbsa.nhs.uk/sites/default/files/2020-01/Process for calculating the Annual Allowance-20200128-(V4) .pdf

Again, it only refers to uprating the opening balance by CPI, not the closing balance. In fact, it even states right at the end of the leaflet that one of the reasons why a Pension Input Amount might be nil is because "the growth in CPI, used in the opening value outweighs the actual growth of the NHS benefits".

Anyway, that's my thoughts/research on the subject. Happy to be put right if I'm completely wrong.

hugheskevi

BillyHorner said:

are you absolutely certain about HMRC uprating the closing balance by CPI?

HMRC does not uprate the closing balance by CPI.

Schemes apply revaluation, which for April 2023 will be based on September 2022 CPI, shortly before the end of the Pension Input Period. This revaluation therefore forms part of the closing value of the pension.

BillyHorner

hugheskevi said:

BillyHorner said:

are you absolutely certain about HMRC uprating the closing balance by CPI?

HMRC does not uprate the closing balance by CPI.

Schemes apply revaluation, which for April 2023 will be based on September 2022 CPI, shortly before the end of the Pension Input Period. This revaluation therefore forms part of the closing value of the pension.

Thanks. Think I get it now.

I’m presuming that’s just for the CARE element of such pensions?