Calculator giving zero DB Input - Can I put all my earnings into a SIPP?

LarryCiantapuffi

Hi - I tried to look for this matter in many places (including this forum) but cannot find a straight answer. I hope that you can help me.

I work at a local council and I am a member of a LGPS DB pension scheme. This is my only pension. I want to put money into a SIPP whilst staying within tax relief limits. To put money into a SIPP, I need to work out how much DB pension INPUT I have this tax year, and deduct this INPUT from the tax-relief allowance total. In my case, due to my salary being lower than 60K, my tax-relief allowance is my annual earnings. When I use a DB input calculator (I use the M&G "Defined Benefit Pension input amount tool", sorry, cannot post a link), it takes pensionable pay at start, pensionable pay at end, years of service, CPI and accrual rate. It then gives me the DB INPUT for the year.  
In my case, my pensionable pay at the END of the period is LESS than my pensionable pay at the START of the period because I have reduced my hours during the year. For this reason, the calculator gives me a negative DB INPUT, which I understands means ZERO DB INPUT.

2 questions please.

1) With the DB INPUT being negative, can I take this as having contributed ZERO into the DB pension, and therefore being able to open a SIPP for the ENTIRETY of my annual earnings, and stay WITHIN tax relief limits?

2) Is my DB INPUT considered zero for the purpose of calculating any additional pension contributions that I can make, or does this also really mean that during this entire year I have lost any growth in my DB pension, as if I had not worked at all?

Many thanks in advance.

Dazed_and_C0nfused

Are you conflating the tax relief and annual allowance limits?

LarryCiantapuffi

Dazed_and_C0nfused said:

Are you conflating the tax relief and annual allowance limits?

hi - in my case I believe they are both the same. Because my salary is, say 30K, the maximum I can put into a pension to ensure tax relief is therefore 30K, regardless of any unused 3-prior year allowance AND regardless of the 60K allowance limit. So yes, I am conflating them. Is this incorrect?

Bobziz

Why SIPP rather than AVC ?

zagfles

LarryCiantapuffi said:

Hi - I tried to look for this matter in many places (including this forum) but cannot find a straight answer. I hope that you can help me.

I work at a local council and I am a member of a LGPS DB pension scheme. This is my only pension. I want to put money into a SIPP whilst staying within tax relief limits. To put money into a SIPP, I need to work out how much DB pension INPUT I have this tax year, and deduct this INPUT from the tax-relief allowance total. In my case, due to my salary being lower than 60K, my tax-relief allowance is my annual earnings. When I use a DB input calculator (I use the M&G "Defined Benefit Pension input amount tool", sorry, cannot post a link), it takes pensionable pay at start, pensionable pay at end, years of service, CPI and accrual rate. It then gives me the DB INPUT for the year.  
In my case, my pensionable pay at the END of the period is LESS than my pensionable pay at the START of the period because I have reduced my hours during the year. For this reason, the calculator gives me a negative DB INPUT, which I understands means ZERO DB INPUT.

2 questions please.

1) With the DB INPUT being negative, can I take this as having contributed ZERO into the DB pension, and therefore being able to open a SIPP for the ENTIRETY of my annual earnings, and stay WITHIN tax relief limits?

2) Is my DB INPUT considered zero for the purpose of calculating any additional pension contributions that I can make, or does this also really mean that during this entire year I have lost any growth in my DB pension, as if I had not worked at all?

Many thanks in advance.

You're using the calculator wrongly, or the wrong calculator. You won't get a zero PIA just because you cut your hours. It can sometimes happen where the scheme uses a significantly different inflation period to HMRC, but not through reducing hours. 

For a start, LGPS accrual is now CARE (career average) isn't it? Is the calculator assuming a final salary scheme? If it is it'll give completely the wrong answer. In any case, even with a final salary scheme, if you cut your hours they will base it on full time equivalent salary and pro-rate the accrual, otherwise everyone who cut their hours before retirement would get their pension slashed!! 

But anyway the PIA is probably irrelavent. The tax relief limit does NOT use PIAs, it's your contributions alone which count, because you only get (direct) tax relief on what you contribute. Effectively your taxable pay, as your LGPS  contributions will already have been deducted from pay before tax is applied. 

So as an example salary £30k, your LGPS conts £3k, so taxable pay, £27k so £27k is your max GROSS SIPP contribution so £21600 net is the max amount you can pay in and get tax relief.

Your annual allowance is £60k, assuming you've not triggered the MPAA. The annual allowance does NOT depend on salary except for very high earners (£200k+). With a salary of £30k and sticking to the tax relief limit, you won't get anywhere near it except in unusual circumstances (eg if you have a final salary link for some of your pension and get a big payrise).  

Dazed_and_C0nfused

LarryCiantapuffi said:

Dazed_and_C0nfused said:

Are you conflating the tax relief and annual allowance limits?

hi - in my case I believe they are both the same. Because my salary is, say 30K, the maximum I can put into a pension to ensure tax relief is therefore 30K, regardless of any unused 3-prior year allowance AND regardless of the 60K allowance limit. So yes, I am conflating them. Is this incorrect?

PIA can be complicated but a change in hours would usually mean, in a CARE scheme, you still accrued some pension, just less than on your previous hours.

Or in a final salary scheme reducing your hours tends to impact the service accrued, your pension is still based on FTE pay.  But each year on reduced hours is adding less service.

But PIA is a factor for annual allowance.

You are really querying the tax relief limit.  Salary isn't usually relevant for tax relief purposes. What do you expect your P60 to show your taxable earnings as for 2024-25?  

d6fs1l

The answer to q2 is that the value of your pension has declined in real terms. A negative pension input shows that your closing benefits are less than your opening benefits (as adjusted for CPI).

Are you sure that this calculation is correct? Remember that your accrued benefits will generally be adjusted (to some extent, depending on the scheme) for inflation each year.

QrizB

d6fs1l said:

Are you sure that this calculation is correct? Remember that your accrued benefits will generally be adjusted (to some extent, depending on the scheme) for inflation each year.

I think the OP is using this tool:

https://www.mandg.com/pru/tools-calculators/defined-benefit-pension-input-tool/index.html

It looks to me as though it's intended for a Final Salary pension, so will be unhelpful for a CARE scheme.

LarryCiantapuffi

Thank you all for the answers. I am now very confused.

1)      This thread is purely about trying to understand the maximum salary I can put into a SIPP tax free. I understood that for calculating this amount, I needed to know how much I already contributed to my DB scheme. And to know how much I contributed, I need a calculator as the calculation is complex. Is this incorrect?  

2)      Yes, the calculator quoted IS the one I was using (I am unable to paste links in here, sorry). I am on the CARE system and my scheme’s accrual rate is 49. When I enter this accrual rate, 14 years of service, a pensionable salary at start of 40000 and a pensionable salary at end of 35000, with 6.7% CPI for 2024/5, the calculator gives a DB INPUT which is negative, i.e. Closing value of £171,428.57= (£10714.29 x 16) LESS Opening value               £195,108.57= ((£11428.57 x 16) ) uprated by CPI @ 6.7% = £0 DB INPUT

3)      Is this the wrong calculator for me? Is there another calculator I should be using?

4)      I do not understand why some people are talking about the 60K allowance as this is not applicable when you want to stay within tax-relief limits AND you earn less than 60K. I thought tax-relief will only be possible UP TO my gross salary for a given year, so the 60K allowance limit is thus not applicable. HRMC: “You can get tax relief on private pension contributions worth up to 100% of your annual earnings.” – I read this as tax relief being completely dependent on your salary. Therefore I am confused with one of the comments made “Salary isn't usually relevant for tax relief purposes.” Can someone put 60K into a pension tax free if they earn 35K?

5)      One answer says “So as an example salary £30k, your LGPS conts £3k, so taxable pay, £27k so £27k is your max GROSS SIPP contribution so £21600 net is the max amount you can pay in and get tax relief.” – I get this, but how do I calculate “LGPS conts” without using the calculator above? Or Are you saying that only MY contribs are counted for tax relief purposes, and not the contribs of my employer towards the same DB pension?

Thanks again.

Sarahspangles

I think your Pension Input Amount calculation is being skewed by going part time. The value of your pension doesn’t go into reverse when you go part time. I don’t know how the calculation should be made though. If you went part time at the end of the tax year it would be easier to calculate. Maybe you could use a calculation based on you not having reduced your hours as a ‘worst case’.

The reason you ought to check your PIA is that it can be surprisingly high. On an NHS middle manager salary mine was over £17k a year.

So first you check you’re not exceeding your relevant UK earnings limit. Then you add your PIA to your gross SIPP contribution and work out if you’ve exceeded £60k. It’s not a problem if you have so long as you paid into your pension in previous years and have some unused allowance to carry forward. If you make large contributions over several years it’s important to keep an eye on, as eventually you run out out of available carry forward.

Dazed_and_C0nfused

LarryCiantapuffi said:

Thank you all for the answers. I am now very confused.

1)      This thread is purely about trying to understand the maximum salary I can put into a SIPP tax free. I understood that for calculating this amount, I needed to know how much I already contributed to my DB scheme. And to know how much I contributed, I need a calculator as the calculation is complex. Is this incorrect?  

2)      Yes, the calculator quoted IS the one I was using (I am unable to paste links in here, sorry). I am on the CARE system and my scheme’s accrual rate is 49. When I enter this accrual rate, 14 years of service, a pensionable salary at start of 40000 and a pensionable salary at end of 35000, with 6.7% CPI for 2024/5, the calculator gives a DB INPUT which is negative, i.e. Closing value of £171,428.57= (£10714.29 x 16) LESS Opening value               £195,108.57= ((£11428.57 x 16) ) uprated by CPI @ 6.7% = £0 DB INPUT

3)      Is this the wrong calculator for me? Is there another calculator I should be using?

4)      I do not understand why some people are talking about the 60K allowance as this is not applicable when you want to stay within tax-relief limits AND you earn less than 60K. I thought tax-relief will only be possible UP TO my gross salary for a given year, so the 60K allowance limit is thus not applicable. HRMC: “You can get tax relief on private pension contributions worth up to 100% of your annual earnings.” – I read this as tax relief being completely dependent on your salary. Therefore I am confused with one of the comments made “Salary isn't usually relevant for tax relief purposes.” Can someone put 60K into a pension tax free if they earn 35K?

5)      One answer says “So as an example salary £30k, your LGPS conts £3k, so taxable pay, £27k so £27k is your max GROSS SIPP contribution so £21600 net is the max amount you can pay in and get tax relief.” – I get this, but how do I calculate “LGPS conts” without using the calculator above? Or Are you saying that only MY contribs are counted for tax relief purposes, and not the contribs of my employer towards the same DB pension?

Thanks again.

1.  Not 100% sure what you mean by "tax free".  Contributions to a SIPP will be made using the relief at source method so they have no impact whatsoever on the amount of taxable income you have.  What do can do is move income from being taxed at 40% to being taxed at 20%.  But that doesn't seem relevant to you as your income isn't high enough.  You will of course get the basic rate tax relief added to your net contribution.  So £100 from you becomes £125 in the pension.  There is no direct link between the tax you pay and the pension tax relief you can receive.

2.  AIUI the PIA is only relevant for annual allowance purposes.

4.  PIA values can be much higher than you might expect as @Sarahspangles mentions.  I think the point you are missing though is that your salary and your earnings for tax and (relief at source) pension contribution purposes are completely different.  As you in a DB scheme you are probably contributing to that pension using the net pay method.  So a salary of £40k might well mean you only have taxable earnings of say £36k.  It is the £36k that is important, not the £40k.  

Again, not sure exactly what you mean by "tax free" but yes you can get £60k into a pension when you earn (for tax purposes) £35k.  Lots of posters on here are able to utilise salary sacrifice.  This results in additional employer contributions but as you agree to give up some salary to obtain those additional employer contributions they might fall under your definition of "tax free".

5.  Again I think you are conflating the tax relief rules and the annual allowance rules.  If your taxable earnings are £27k what do you think the tax relief limit is?