Estimating the amount of annual allowance used in defined benefit pensions scheme

Bobziz

Hi,

I'm trying to calculate how much of my annual pension allowance I'll use this year through my DB scheme. I'm using the tool provided here: Defined Benefit Pension input amount tool (mandg.com). 

The calculator returns a negative value, which I manually calculate to be - 7225. Is this likely to be correct and if so does that mean that I wont use any of my AA ?

My calculation is as follows: ((18629*16)+5031) - ((17867 * 16) + 4971) * 6.7%) = -7225.

Many thanks.

NoMore

If the PIA comes out as negative then this is treated as zero AA used. 

Bobziz

NoMore said:

If the PIA comes out as negative then this is treated as zero AA used. 

Thank you. So no doubt a stupid question, but how come the AA is treated as zero if both my pension and lump sum will have increased ? Not that I'm complaining but it seems strange that I can contribute an amount but still have my full AA in tact.

NoMore

Its because the actual value of your benefits have not increased due to inflation. Basically your salary that defines the benefits has not increased in line with the inflation increase applied to the PIA value.

Bobziz

Thank you @NoMore that makes sense.

zagfles

There's usually a lag between the inflation figures HMRC use for the PIA calculation and the scheme uses for increases in the accrued pension. As inflation has been volatile in recent years this can have a big impact. Another year you might see the PIA being massive because of this. 

Bobziz

Thanks, I believe my scheme uses cpi at September so same as the HMRC PIA figure.

Yes my PIA has varied massively since 2020/21 but as my salary increases are fairly predictable, I can have a good stab at predicting my AA available for other pension contributions.

hyubh

Bobziz said:

Thanks, I believe my scheme uses cpi at September so same as the HMRC PIA figure.

Yes my PIA has varied massively since 2020/21 but as my salary increases are fairly predictable, I can have a good stab at predicting my AA available for other pension contributions.

The particular issue when inflation shot up was that the AA calculation is done vis-a-vis tax years (originally it wasn't, but it has been tax years for a while now). If you have a CARE scheme where the scheme year runs 1 April to 31 March, then revaluation of benefits will occur on 1 April. This means the pension at the end of the AA pension input period (PIP) will have had the big increase from the previous September already applied. Public sector schemes (or at least, some of them) had their CARE revaluation date changed to allow for this.