On track to exceed Annual Allowance in 2022/23 tax year. What should I do?

tojoslaffy

I am 51 and hope to retire at 55. I am in a defined benefit scheme. My current pay is £62k, jumping to approx £66k in Jan due to a delayed pay increase.  I purchased 28 years 262 days of additional service credit over 6 separate contracts a few years back and am currently paying an additional 43.9% (£2250) of my income into my pension in addition to my normal pension savings. I have taken advantage of carry forward in 2020/21 and will do so again 2021/22 but, due to an unexpected pay rise, my Pension Input Amount will be approx £65k in 2022/23 but I will only have an annual allowance of £53k. My dilemma is whether to cancel all or some of these contracts now to reduce my Pension Input Amount. But this will mean that I will loose future tax relief, particularly when the inflation rate will mean I am unlikely to exceed my Annual allowance in future years. Alternatively I could take the tax hit now of approx 4/5k and retain the contracts. Any advice welcome

Bimbly

Is your employer matching any of this "additional 43.9% (£2250)" (per month, I assume)? Or is it purely your own contribution from your own salary? 

As I understand it, if you go over your annual allowance, you won't get the tax relief (or, rather, you'll have to pay the tax). https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge

It *could* still be worth making those contributions if your employer is adding to them.

Why would you need to cancel the contracts? (This is extra work, right?) Can't you keep the contracts and just stop or reduce your extra pension payments? Then restart them again when exceeding the AA isn't an issue?

tojoslaffy

Don't think the employer contributes - just the benefit of the tax relief. Contracts can't be amended, just cancelled. Thanks

NedS

You are effectively giving up salary now to buy more 'salary' (pension) in the future. If you purchase this future pension out of taxed pay now due to exceeding the AA, AND pay tax on that income in the future, then you are effectively being taxed twice (not generally a good thing).

Are you able to reduce in such a way that would get you close to your AA?

tojoslaffy

I think it boils to whether I continue with my additional pension payments of £2250 per month (£27000 per year) additional payments and pay the £4/5k tax bill for 2022/23 or cancel the additional payments and loose the 40% pension tax credit (£10800 per year?) that I would receive if I maintain them over the next 3 years…or am I getting this totally wrong?

tojoslaffy

As I said before, due to the high Inflation rate I don’t foresee exceeding my annual allowance over the next 3 years if I maintain the additional payments…

NedS

Are you able to cancel for the remainder of this year only, and then restart your additional payments in April 2023?

gwapenut

Can you carry forward any from the previous 3 tax years to buy a little breathing space?