DB Pension Statement. Total Pension Input

Dunky62

Hi
Have just had my latest statement from Railpen.  Says I have a TPI  of 59k!!!    They have said it is because of inflations effect on the benefits.
It is an 1/80th scheme with 3x pension lump sum.  I now have  27years service
My understanding is that the opening value is  26/80 x  last years salary.  Multiplied by 16, then add last years lump sum.  A   C.P.I. is then applied to this figure.

Closing value is  27/80  x this years salary. Multiplied by 16.  Add this years lump sum

Subtract Opening value from  Closing value to get  T.P.I.

My salary has only increased by 3% in the last year.
I am beginning to wonder if they have applied a large  C.P.I.  figure to the Closing value.

My last 3 years T.P.I. have been   14.6k,   18k  and  11k.

I have queried this with them and am waiting for reply.

Any thoughts?

Thanks 

cloud_dog

Dunky62 said:

Says I have a TPI  of 59k!!!   

Hi...sorry to jump on your bandwagon, but I am also interested in the potential inflation impact on the PIA.  Specifically, if one of the knowledgeable posters, can explain how this would work with the AA? 

Milltir

If your statement is for the tax year 2021/22 then the CPI value applied to the opening value is from the previous September (i.e. 2020) which was 0.5%.

NedS

This thread has some nice worked examples:

https://forums.moneysavingexpert.com/discussion/6370123/is-cpi-included-when-calculating-pension-input-for-annual-allowance-alpha-defined-benefit-pension/p1

cloud_dog said:

Dunky62 said:

Says I have a TPI  of 59k!!!   

Hi...sorry to jump on your bandwagon, but I am also interested in the potential inflation impact on the PIA.  Specifically, if one of the knowledgeable posters, can explain how this would work with the AA? 

The potentially high CPI inflation figure this September, will affect Pension Input Amounts for this tax year (2022/23). The starting value will be uplifted by 3.1% from last years inflation figure whereas the closing value will be uplifted potentially by ~10% (Sept CPI figure) which will lead to a ~7% increase additional to any contributions and other salary driven increases.

As a result, many people with large DB pensions may exceed the £40k annual allowance. Normally this can be offset by unused annual allowance from the last 3 years which can be carried forward, but if you've been maxing out contributions up to the AA then you may well be in trouble (exceeding the AA)

rickenbacker330

I can't see why inflation would be applied to the closing amount. Surely it's only applied to the opening amount so that you're not penalised by inflation.

Dunky62

My thoughts exactly rickenbacker330. The HMRC guidance i have looked at only  indicated that a C.P.I.  figure is applied to the opening amount.

cloud_dog

NedS said:

As a result, many people with large DB pensions may exceed the £40k annual allowance. Normally this can be offset by unused annual allowance from the last 3 years which can be carried forward, but if you've been maxing out contributions up to the AA then you may well be in trouble (exceeding the AA)

This is why I was very interested in the situation highlighted by @Dunky62.  I have been sacrificing my salary to ensure I get close to the AA for the last 5 years (and with SS my reported salary is less than £40k), so any C/F would be minimal, maybe a few hundred pounds.

EDIT: Thanks @Neds for the link to the Alpha discussion thread.  Based on that information I did a quick calculation (which I will have another go at tomorrow), and it comes out at £43k, and that doesn't include the additional contributions I have sacrificed in.  Oh boy, I think I'm going to be in a world of hurt.

NedS

rickenbacker330 said:

I can't see why inflation would be applied to the closing amount. Surely it's only applied to the opening amount so that you're not penalised by inflation.

Correct, but...

Dunky62 said:

My thoughts exactly rickenbacker330. The HMRC guidance i have looked at only  indicated that a C.P.I.  figure is applied to the opening amount.

The closing amount is based on the value at the end of the tax year, 5/4/2023. However, on 1/4/2023, a few days prior, the pension is revalued by CPI inflation from the previous Sept (Sept 2022). Some schemes are uncapped and the full CPI figure will be used (maybe ~10%), others may be capped at 2.5% or 5% or some other value set by the scheme.

There is no separate application of inflation again to the closing amount as it has just been applied a few days earlier by the scheme.

But the point still stands - this year's Pension Input Amount will effectively be the increase due to contributions plus increases due to any pay increase plus the difference in inflation between last year and this - potentially around 7% which for a large DB pension can consume a substantial amount of the £40k annual allowance

NedS

cloud_dog said:

NedS said:

As a result, many people with large DB pensions may exceed the £40k annual allowance. Normally this can be offset by unused annual allowance from the last 3 years which can be carried forward, but if you've been maxing out contributions up to the AA then you may well be in trouble (exceeding the AA)

This is why I was very interested in the situation highlighted by @Dunky62.  I have been sacrificing my salary to ensure I get close to the AA for the last 5 years (and with SS my reported salary is less than £40k), so any C/F would be minimal, maybe a few hundred pounds.

EDIT: Thanks @Neds for the link to the Alpha discussion thread.  Based on that information I did a quick calculation (which I will have another go at tomorrow), and it comes out at £43k, and that doesn't include the additional contributions I have sacrificed in.  Oh boy, I think I'm going to be in a world of hurt.

Are you able to reduce your contributions now, in year, to ensure you do not exceed your AA (with any carry forward), or at least minimise the amount by which you've exceeded it?
I am buying a large chunk of extra added DB pension this year, and was also putting around £500/month into my SIPP. I've stopped my monthly SIPP contributions until I know the September inflation figure and can work out exactly how much headroom I have. Last January when I entered into the contract to buy added DB pension I had modelled CPI at 7.5% but now it looks more like being 10% but at least I can reduce my SIPP contributions accordingly.

hugheskevi

NedS said:

The closing amount is based on the value at the end of the tax year, 5/4/2023. However, on 1/4/2023, a few days prior, the pension is revalued by CPI inflation from the previous Sept (Sept 2022). Some schemes are uncapped and the full CPI figure will be used (maybe ~10%), others may be capped at 2.5% or 5% or some other value set by the scheme.

Just to note that this is very scheme-specific, and every scheme will be different.

At one extreme, if a scheme is final salary and is only based on salary over last 12 months, then it would be unaffected by inflation and just track salary. Whereas a public sector career average scheme will be fully affected. Other schemes will be affected in different ways depending on exactly what their rules say.

This may be quite difficult to find, as unfortunately a lot of scheme literature is simplified, whereas the calculation of pension input is based on the precise scheme rules. So you have to research in some detail exactly how your individual scheme calculates benefits. To make things worse, Annual Benefit Statements may use simplifications, eg, in the Civil Service the figures for final salary pensions on statements are simply based on service and salary as at 31 March. That is not how benefits are calculated under the scheme rules though, so anyone relying on figures from their statements to calculate their pension input will be incorrect.

cloud_dog

NedS said:

cloud_dog said:

NedS said:

As a result, many people with large DB pensions may exceed the £40k annual allowance. Normally this can be offset by unused annual allowance from the last 3 years which can be carried forward, but if you've been maxing out contributions up to the AA then you may well be in trouble (exceeding the AA)

This is why I was very interested in the situation highlighted by @Dunky62.  I have been sacrificing my salary to ensure I get close to the AA for the last 5 years (and with SS my reported salary is less than £40k), so any C/F would be minimal, maybe a few hundred pounds.

EDIT: Thanks @Neds for the link to the Alpha discussion thread.  Based on that information I did a quick calculation (which I will have another go at tomorrow), and it comes out at £43k, and that doesn't include the additional contributions I have sacrificed in.  Oh boy, I think I'm going to be in a world of hurt.

Are you able to reduce your contributions now, in year, to ensure you do not exceed your AA (with any carry forward), or at least minimise the amount by which you've exceeded it?

I am contributing approx £3k pm.  I will request a stop to allow time to better understand the (possible) situation