Breaching annual allowance limit in civil service pension

Wobble101

I’m in the alpha civil service scheme, and paying additional contributions through EPA so that I can take my pension 2 years early. 

I’d worked out that I would be within the £40k annual allowance in doing this, but then had a temporary promotion spanning the last two tax years. Which is obviously good news but … 

In 21/22 I was about £5k over the AA. The letter makes clear that you can use unused annual allowance from the last three years. In my case I could cover this with unused AA from 2018/19. 

I’ve just received the 22/23 statement. I’m now £17k over the AA. Of the last three years now in scope, 19/20 and 20/21 combined give me just under £10k unused AA. 21/22 is the previous year (and so is recorded on the letter as breaching the AA for that year - but I assume I don’t need to worry about that as it was covered by unused AA from 18/19 - ie see previous para). 

My question - given the above I think I am about £7k over the AA. Do my calculations make sense? I will obviously include this in my tax return but what sort of sum would I be looking at - 40% of £7k? 

I realise if I’d only been one year later I would have been fine as the AA has increased - hey ho. 

I hope this makes sense to someone! Thank you in advance. 

QrizB

Wobble101 said:

My question - given the above I think I am about £7k over the AA. Do my calculations make sense? I will obviously include this in my tax return but what sort of sum would I be looking at - 40% of £7k?

Something like that.

Have you considered "scheme pays"?

https://forums.moneysavingexpert.com/discussion/6405139/use-scheme-pays-or-pay-charge-now

hugheskevi

Wobble101 said:

I’m in the alpha civil service scheme, and paying additional contributions through EPA so that I can take my pension 2 years early. 

I’d worked out that I would be within the £40k annual allowance in doing this, but then had a temporary promotion spanning the last two tax years. Which is obviously good news but … 

EPA has no impact on your Pension Input, so presumably your breach is from the Pension Input arising from pensionable earnings alone?

Wobble101 said:

In 21/22 I was about £5k over the AA. The letter makes clear that you can use unused annual allowance from the last three years. In my case I could cover this with unused AA from 2018/19. 

I’ve just received the 22/23 statement. I’m now £17k over the AA. Of the last three years now in scope, 19/20 and 20/21 combined give me just under £10k unused AA. 21/22 is the previous year (and so is recorded on the letter as breaching the AA for that year - but I assume I don’t need to worry about that as it was covered by unused AA from 18/19 - ie see previous para). 

My question - given the above I think I am about £7k over the AA. Do my calculations make sense? I will obviously include this in my tax return but what sort of sum would I be looking at - 40% of £7k? 

I realise if I’d only been one year later I would have been fine as the AA has increased - hey ho. 

I hope this makes sense to someone! Thank you in advance. 

A pension input of £57,000 from alpha alone would suggest pensionable earnings of around £150,000 - although 2022/23 was odd due to high inflation, which can increase your pension input if you have a lot of alpha past service. Are you sure the pension input figure is accurate given your salary?

Yes, your calculations make sense, but you should also put the numbers into the HMRC Annual Allowance calculator and retain the output for future reference.

The Annual Allowance charge is calculated by adding the amount of the breach to your taxable income and applying the appropriate marginal rate of income tax. 

Wobble101

QrizB said:

Wobble101 said:

My question - given the above I think I am about £7k over the AA. Do my calculations make sense? I will obviously include this in my tax return but what sort of sum would I be looking at - 40% of £7k?

Something like that.

Have you considered "scheme pays"?

https://forums.moneysavingexpert.com/discussion/6405139/use-scheme-pays-or-pay-charge-now

Thank you very much - I had not heard of this at all so will investigate further. 

Wobble101

Prompted by hugheskevi's comment I've just done my own calculation of my PIA to check it against the statement. It is spot on, but only so long as the amounts being used to calculate it include the EPA balance - ie my total benefits in the Alpha scheme.

Can you elaborate on your comment about EPA not being part of the input calculations - is there something I can refer to on this? I've found this information which is not very helpful - it says the following about buying EPA: "An alpha member cannot buy EPA if they have bought the maximum amount of added pension. Otherwise, there is no limit on the amount of an EPA a member can buy. However, the amount of EPA bought counts towards the limit on added pension that a member can buy." epn-479-annex-a-buying-added-pension-and-epa.pdf (civilservicepensionscheme.org.uk)

According to the calculations I'd be liable for tax on £9,919 of this year's contributions. 

michaels

EPA payments make your normal pension available earlier, they don't increase the pension amount and thus don't impact the annual allowance calculation.

If you plan on retiring before the scheme default age then EPA and added pension are of 'equal value' but added pension results in an AA liability whereas EPA does not.

Wobble101

michaels said:

EPA payments make your normal pension available earlier, they don't increase the pension amount and thus don't impact the annual allowance calculation.

If you plan on retiring before the scheme default age then EPA and added pension are of 'equal value' but added pension results in an AA liability whereas EPA does not.

If EPA payments do not result in an AA liability then why does the officially calculated PIA appear to include them? 

When I look at my benefit statement it has a section called 'how your alpha benefits have changed'. In that it shows two lines:

Main alpha pension £5k
EPA 2 £6k 

Under that it says Total = £11k (ie these two sums added together)

When I checked the pension input amount that I had been provided with, I got the same figure, so long as I used the 'total' figure above (ie £11k) in my calculations. Is that not correct? 

Apologies, I am finding this extremely confusing!

hugheskevi

Wobble101 said:

michaels said:

EPA payments make your normal pension available earlier, they don't increase the pension amount and thus don't impact the annual allowance calculation.

If you plan on retiring before the scheme default age then EPA and added pension are of 'equal value' but added pension results in an AA liability whereas EPA does not.

If EPA payments do not result in an AA liability then why does the officially calculated PIA appear to include them? 

When I look at my benefit statement it has a section called 'how your alpha benefits have changed'. In that it shows two lines:

Main alpha pension £5k
EPA 2 £6k 

Under that it says Total = £11k (ie these two sums added together)

When I checked the pension input amount that I had been provided with, I got the same figure, so long as I used the 'total' figure above (ie £11k) in my calculations. Is that not correct? 

Apologies, I am finding this extremely confusing!

EPA benefits accrued still produce a pension input, when it is said EPA doesn't count it means the payment of a voluntary EPA payment does not produce any additional pension input.

For example, assume you accrue £3,000 of alpha pension - that is a pension input of £48,000. 

If you take out an EPA contract to have the pension paid earlier without reduction, you still accrue £3,000 of pension and a pension input of £48,000 but there is no additional input arising from the EPA payment as that simply reduces the Normal Pension age.

Hence the fact you have purchased an EPA is irrelevant in terms of the pension input - it remains the same as if it was just normal pension.

Wobble101

hugheskevi said:

Wobble101 said:

michaels said:

EPA payments make your normal pension available earlier, they don't increase the pension amount and thus don't impact the annual allowance calculation.

If you plan on retiring before the scheme default age then EPA and added pension are of 'equal value' but added pension results in an AA liability whereas EPA does not.

If EPA payments do not result in an AA liability then why does the officially calculated PIA appear to include them? 

When I look at my benefit statement it has a section called 'how your alpha benefits have changed'. In that it shows two lines:

Main alpha pension £5k
EPA 2 £6k 

Under that it says Total = £11k (ie these two sums added together)

When I checked the pension input amount that I had been provided with, I got the same figure, so long as I used the 'total' figure above (ie £11k) in my calculations. Is that not correct? 

Apologies, I am finding this extremely confusing!

EPA benefits accrued still produce a pension input, when it is said EPA doesn't count it means the payment of a voluntary EPA payment does not produce any additional pension input.

For example, assume you accrue £3,000 of alpha pension - that is a pension input of £48,000. 

If you take out an EPA contract to have the pension paid earlier without reduction, you still accrue £3,000 of pension and a pension input of £48,000 but there is no additional input arising from the EPA payment as that simply reduces the Normal Pension age.

Hence the fact you have purchased an EPA is irrelevant in terms of the pension input - it remains the same as if it was just normal pension.

Ah I think I understand. So the figures are correct - I’ve just been ‘unlucky’ that my period of higher pay has happened in the same year as higher than normal inflationary calculations and a year before the AA increase!

I’ve requested a quote to see what the scheme pays option would look like. 

Thanks all. 

Wobble101

Just to close this off, I’ve now heard back from the scheme pays folk and the reduction in my annual pension would be c £250. So I’m going to take that option. If you divide the tax owing by the £250 reduction each year I ‘lose out’ if I live longer than 15 years (sincerely hope I will!) but I can live with that…

Thanks again.