DB pensions (in particular Teachers' Pension) and Annual Allowance

BobR64

My wife is a teacher and enrolled in the Teachers' Pension Scheme. She doesn't make any AVCs or anything but she does have a SIPP and is considering adding a reasonably large additional amount to it this year. I mentioned to her that there is an Annual Allowance for how much you can add to pensions (without incurring a tax charge) and she has asked me to look into how much that would be for her.

As I have only ever worried about this in the context of DC pensions, this is new to me. With a DC pension, it is relatively straightforward as you are simply looking at actual amounts paid into your pension(s). As I understand it with DB pensions, there is something called the Pension Input Amount which is the difference in accrued benefits between the end and beginning of a "Pension Input Period" (which I believe in practice is the tax year). This is what I found on the TPS site:

In the Teachers’ Pension Scheme, the pension input amount is calculated broadly as follows:

• Opening calculation = [(pension x 16) + lump sum] x Consumer Price Index
• Closing calculation = (pension x 16) + lump sum
• Pension input amount = closing calculation - opening calculation

I understand that it is possible to get an exact statement from the TPS, but (a) goodness knows how long it would take and (b) presumably we'd have to wait until the end of the year when it is too late. Instead, I have done a rough calculation as a guide and the idea will be to put in less than this. 

From what I can see from the three statements going back to March 24, including one that was generated today, there has hardly been any change in the lump sum (in fact it went down between 24 and 25!). Therefore, simply multiplying the pension that will be accrued this year by 16 should provide an overestimate of the Pension Input Amount (as we are ignoring the CPI adjustment). Given that her pension is now accrued under the career average scheme, the change in pension should be her salary divided by 57. That means the TP contributions use about 16/57 of her allowance this year, given that her salary is less than 60k. She has already made some SIPP contributions that would need to be subtracted from the remaining allowance.

Does this seem about right? I just wanted a sanity check that I hadn't got something completely wrong here.

xylophone

Below may help


https://www.mandg.com/wealth/adviser-services/tech-matters/pensions/tax-relief/pension-contributions-questions?src=301&domain=pruadviser_techinsights

Under

Q. My client is an active member of his employer’s defined benefit pension scheme. He also wants to make a personal pension contribution.



https://www.teacherspensions.co.uk/members/faqs/working-life/annual-allowance-and-lifetime-allowance.aspx

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

hugheskevi

The mention of lump sum suggests final salary benefits as well as career average benefits, so they need to be calculated separately. If the lump sum fell in cash terms there be a negative input in the final salary part to offset against the career average input.

The career average pension has in-service revaluation that is higher than CPI, so that needs to be factored in.

From what I can see from the three statements going back to March 24, including one that was generated today, there has hardly been any change in the lump sum (in fact it went down between 24 and 25!). Therefore, simply multiplying the pension that will be accrued this year by 16 should provide an overestimate of the Pension Input Amount (as we are ignoring the CPI adjustment). Given that her pension is now accrued under the career average scheme, the change in pension should be her salary divided by 57. That means the TP contributions use about 16/57 of her allowance this year, given that her salary is less than 60k. She has already made some SIPP contributions that would need to be subtracted from the remaining allowance.

With a salary under £60k, member contributions to the Teachers Pension and having already made SIPP contributions, it seems unlikely she would even breach the £60K limit, and if she did it wouldn't be much - assuming she had carry-forward available there doesn't seem to be any issue.

She can request a Pension Savings Statement for 25/26 which will give a lot of useful information, although they aren't supplied until October 6th (statutory deadline, may be sent earlier), so that is more to inform future years.

BobR64

hugheskevi said:

The mention of lump sum suggests final salary benefits as well as career average benefits, so they need to be calculated separately. If the lump sum fell in cash terms there be a negative input in the final salary part to offset against the career average input.

The career average pension has in-service revaluation that is higher than CPI, so that needs to be factored in.

Thank you for the extra details. I think both of these things would make the real Pension Input Amount smaller than the one from my rough calculation. This is OK, as I am happy over estimate this; the aim is not to use up the allowance down to the last pound but just be sure that it is not being exceeded.

With a salary under £60k, member contributions to the Teachers Pension and having already made SIPP contributions, it seems unlikely she would even breach the £60K limit, and if she did it wouldn't be much - assuming she had carry-forward available there doesn't seem to be any issue.

As she earns well under 60k, I think the relevant limit in her case is her salary this year, so that is the amount we want to avoid breaching.

Dazed_and_C0nfused

BobR64 said:

hugheskevi said:

The mention of lump sum suggests final salary benefits as well as career average benefits, so they need to be calculated separately. If the lump sum fell in cash terms there be a negative input in the final salary part to offset against the career average input.

The career average pension has in-service revaluation that is higher than CPI, so that needs to be factored in.

Thank you for the extra details. I think both of these things would make the real Pension Input Amount smaller than the one from my rough calculation. This is OK, as I am happy over estimate this; the aim is not to use up the allowance down to the last pound but just be sure that it is not being exceeded.

With a salary under £60k, member contributions to the Teachers Pension and having already made SIPP contributions, it seems unlikely she would even breach the £60K limit, and if she did it wouldn't be much - assuming she had carry-forward available there doesn't seem to be any issue.

As she earns well under 60k, I think the relevant limit in her case is her salary this year, so that is the amount we want to avoid breaching.

As a teacher in TPS her salary is almost certainly irrelevant.

It's her taxable earnings, which will be a fair bit less than her salary, which are what's important.

Her payslip should clearly show the difference between salary and taxable earnings.

BobR64

@hugheskevi @Dazed_and_C0nfused

Thank you for your comments, which prompted me to look into this again. Having done this, I now think I have been getting myself confused. I thought the Annual Allowance got reduced to your earnings if you earned less than 60K. I now understand (I think!) that the Annual Allowance is separate from the fact that you can (more or less) only claim tax relief up to your earnings. I think I may even have previously read posts on this forum that have made this point and for whatever reason it hasn't gone in!

So, would I be correct in thinking that, in looking at how much more she could put into her SIPP, the Pension Input Amount calculation is completely irrelevant?

@Dazed_and_C0nfused: If I understand what you are saying in the below, the taxable earnings will exclude pension contributions so this is the remaining amount she could potentially further contribute this year. Is that correct?

As a teacher in TPS her salary is almost certainly irrelevant.

It's her taxable earnings, which will be a fair bit less than her salary, which are what's important.

Her payslip should clearly show the difference between salary and taxable earnings.

Dazed_and_C0nfused

BobR64 said:

@hugheskevi @Dazed_and_C0nfused

Thank you for your comments, which prompted me to look into this again. Having done this, I now think I have been getting myself confused. I thought the Annual Allowance got reduced to your earnings if you earned less than 60K. I now understand (I think!) that the Annual Allowance is separate from the fact that you can (more or less) only claim tax relief up to your earnings. I think I may even have previously read posts on this forum that have made this point and for whatever reason it hasn't gone in!

So, would I be correct in thinking that, in looking at how much more she could put into her SIPP, the Pension Input Amount calculation is completely irrelevant?

@Dazed_and_C0nfused: If I understand what you are saying in the below, the taxable earnings will exclude pension contributions so this is the remaining amount she could potentially further contribute this year. Is that correct?

As a teacher in TPS her salary is almost certainly irrelevant.

It's her taxable earnings, which will be a fair bit less than her salary, which are what's important.

Her payslip should clearly show the difference between salary and taxable earnings.

What she is likely to see is something like this.

Salary £40k
10% net pay pension contributions.
Taxable pay £36k

Assuming this is her only source of pensionable income it's the £36k that is the relevant when it comes to pension contributions which will attract tax relief.  £36k being the maximum gross contribution possible for tax relief purposes.