LGPS and SIPP - how much to add

Plasticman

My wife is a member of the LGPS and also has a SIPP. She would like to increase her SIPP contributions but doesn't want to exceed the annual allowance which for her is her current earnings (as she earns under £40K).

Three questions:

1. For "annual earning" should we be using the pay figure from her P60?
2. Is the limit based just on her contributions or her contributions + tax relief?
3. With the LGPS they provide a calculator to work out how much of your allowance has been used up in a tax year. You can enter the figures from your annual pension benefits statement. That means though that you're doing it retrospectively and therefore it's too late to do much about it. Am I missing something? 

If this doesn't make sense I'm happy to clarify!  

Linton

1) "Annual earnings" is simply pre-tax/NI total gross earned income.
2) The limit is based on "pension contribution" which means amount paid in+tax relief added to pension by HMRC.  The amount paid in should never be used in pension calculations, always work in gross figures.  
3) Is the LGPS calculator for the earnings limit or the £40K limit?  The earnings limit is simple to calculate, your wife should know her expected gross annual earnings without a calculator.  The £40K limit calculation with DB pensions is more complicated and needs the Pension Benefit data which is only known for certain after the event.  

Plasticman

Linton said:

1) "Annual earnings" is simply pre-tax/NI total gross earned income.
2) The limit is based on "pension contribution" which means amount paid in+tax relief added to pension by HMRC.  The amount paid in should never be used in pension calculations, always work in gross figures.  
3) Is the LGPS calculator for the earnings limit or the £40K limit?  The earnings limit is simple to calculate, your wife should know her expected gross annual earnings without a calculator.  The £40K limit calculation with DB pensions is more complicated and is only known for certain after the event.

Thanks - that's really clear. The calculator tells you how much of the annual allowance you've used in £ based on the growth of the LGPS pension. So presumably that's the same amount whether it's based on £40K or her earnings. As you say though, you can only work it out after the event.

Linton

Plasticman said:

Linton said:

1) "Annual earnings" is simply pre-tax/NI total gross earned income.
2) The limit is based on "pension contribution" which means amount paid in+tax relief added to pension by HMRC.  The amount paid in should never be used in pension calculations, always work in gross figures.  
3) Is the LGPS calculator for the earnings limit or the £40K limit?  The earnings limit is simple to calculate, your wife should know her expected gross annual earnings without a calculator.  The £40K limit calculation with DB pensions is more complicated and is only known for certain after the event.

Thanks - that's really clear. The calculator tells you how much of the annual allowance you've used in £ based on the growth of the LGPS pension. So presumably that's the same amount whether it's based on £40K or her earnings. As you say though, you can only work it out after the event.

The term "annual allowance" refers to the £40K limit.  The earnings limit is a restriction on the Annual Allowance.

MX5huggy

You’re confusing the two separate limits and the rules around them (which happens all the time).

There’s the Annual Allowance (AA) and the tax relief limit. You have to comply with each separately.

The AA is £40k per year but you have carry over from previous years, DB scheme (such as LGPS) use up AA with the calculation of the Pension Input Amount. As you have identified this is only available after the event. 

Tax Relief is limited to gross salary there is no carry over. PIA to is not relevant to tax relief available it’s simply how much pension contribution has received tax relief. 

Normally it’s safe to say your limit is the lower of AA or Gross income but it’s not here because. (And it might be best if you put up your numbers)

If they earn £35000 but Salary Sacrifice £15000 to pension via AVC’s so really earn £20000. Inflation and a pay rise (new job) plus LGPS contributions gives a big increase in PIA of £20000 so £35k of AA already used up. They’ve only used a little of the tax relief limit on their LGPS contributions. SIPP contribution could be £20000 (minus the LGPS contributions).
Giving a AA total of £55000 presuming they have AA available to carry forward from previous years. On a notional salary of £35k and an actual salary of £20k. 

OldBeanz

Also has she considered an AVC? She can pay all her taxable income into that, then if drawn at the same time as the main benefits can be used as a 25% tax free lump sum. It is the cherry on top. 

Plasticman

MX5huggy said:

You’re confusing the two separate limits and the rules around them (which happens all the time).

There’s the Annual Allowance (AA) and the tax relief limit. You have to comply with each separately.

The AA is £40k per year but you have carry over from previous years, DB scheme (such as LGPS) use up AA with the calculation of the Pension Input Amount. As you have identified this is only available after the event. 

Tax Relief is limited to gross salary there is no carry over. PIA to is not relevant to tax relief available it’s simply how much pension contribution has received tax relief. 

Normally it’s safe to say your limit is the lower of AA or Gross income but it’s not here because. (And it might be best if you put up your numbers)

If they earn £35000 but Salary Sacrifice £15000 to pension via AVC’s so really earn £20000. Inflation and a pay rise (new job) plus LGPS contributions gives a big increase in PIA of £20000 so £35k of AA already used up. They’ve only used a little of the tax relief limit on their LGPS contributions. SIPP contribution could be £20000 (minus the LGPS contributions).
Giving a AA total of £55000 presuming they have AA available to carry forward from previous years. On a notional salary of £35k and an actual salary of £20k. 

Thanks @MX5huggy that's really helpful. You're right that I hadn't understood the two separate limits and their rules.

At the risk of appearing a bit dim, what I'm not getting my head around is how somebody knows how much of the tax relief limit their LGPS contributions have used.

Plasticman

OldBeanz said:

Also has she considered an AVC? She can pay all her taxable income into that, then if drawn at the same time as the main benefits can be used as a 25% tax free lump sum. It is the cherry on top. 

She didn't becuase she wasn't expecing to be in the LGPS for long - but that's now changed and we need to get a better understanding of the benefits of SIPP vs AVC.