Help sought with annual allowance charge

Fphelp123 · 25 January 2020 at 5:57PM

Hi firstly I would like to say how much I have learned from this board and the site, am now mortgage free, mostly debt free and saving for my children. I have a conundrum tha5 I just couldn’t work out and so I have finally joined and stopped lurking.

I am in the ni civil service and am going to shortly have a 12 month temporary promotion which will see my salary rise from 51k to 71 k, but I have worked out some potential issues.

I have some banked classic service and am now in alpha but when I work out the additional effect with the temporary rise I get some very high annual allowance figures. My figures are approximate as I don’t have a confirmed start date yet.

Extra classic pension £3000 times the HMRC calculation of 16 = £48,000

Plus extra £9000 lump sum = £57,000 plus alpha pension of approx £2000 times 16 = £32,000

Annual allowance- £89,000

Am I correct in the calculations even though my classic benefits fall greatly upon going back to normal pay?

I will have around £25k of carry forward allowance but that still leaves £24,000 on which to pay the annual allowance charge so it will be a charge of £9600 plus I lose my £2500 child benefit all of the extra income is taxed at 40% and my alpha contribution rate increases on my whole salary by almost 2% so in effect the pay rise would end as a pay cut

Am I working this out correctly?

My idea to avoid this is to opt out of alpha for 12 months and go with the partnership pension where the employer contributes up to 16.5% Which is £11,700 and I contribute around £21,000 which is under the annual allowance and I avoid all of the charges outlined above.

Would this work?

Are there any dangers with this I have not thought of? I think I can opt back into alpha in 12 months when my pay is back to usual.

Any help or insights greatly appreciated thanks.

Dazed_and_confused · 25 January 2020 at 6:07PM

Would opting out of Alpha mean your Classic service was finalised and you become a deferred pensioner. In turn meaning your Classic pension would be based on the best of 3 recent years (plus annual inflation increases) rather than your eventual final salary?

Fphelp123 · 25 January 2020 at 6:27PM

I hadn’t considered that, is that what happens if you opt out but then opt in again?

Dazed_and_confused · 25 January 2020 at 6:34PM

No idea to be honest but i suspect that once you are a deferred pensioner you are deferred for good.

Maybe worth you checking this aspect with PCSPS?

Not sure how this could be impacted by the firefighters court victory either.

Fphelp123 · 26 January 2020 at 9:13PM

I read the alpha scheme rules and I think that provided I opt back in within 5 years my banked service in classic will relate to my final pay when I retire. The scheme guide isn’t an easy read but I think that would be the situation.

hugheskevi · 26 January 2020 at 11:23PM

plus alpha pension of approx £2000 times 16 = £32,000

Looks high - £71,000 x 2.32% accrual rate x HMRC factor 16 = £26, 355.

Am I correct in the calculations even though my classic benefits fall greatly upon going back to normal pay?

They look broadly correct, but you need to factor in inflation allowance on starting pension value, and unless the pay increase takes effect from 6 April the impact will be spread across 2 tax years.

Am I working this out correctly?

Yes

My idea to avoid this is to opt out of alpha for 12 months and go with the partnership pension where the employer contributes up to 16.5% Which is £11,700 and I contribute around £21,000 which is under the annual allowance and I avoid all of the charges outlined above.

Would this work?

Are there any dangers with this I have not thought of? I think I can opt back into alpha in 12 months when my pay is back to usual.

Any help or insights greatly appreciated thanks.

Whilst tax is unwelcome, foregoing the additional £3,000 pension for life is equally unwelcome and needs extremely careful thought. A £9,600 tax charge would reduce pension by significantly less than £3,000 if the tax charge is paid via Scheme Pays.

Classic looks at best salary over the last 3 years, so one option would be to remain in alpha for 2 years after your salary reduces, then switch to Partnership to preserve your classic pension calculated on the higher salary.

I read the alpha scheme rules and I think that provided I opt back in within 5 years my banked service in classic will relate to my final pay when I retire. The scheme guide isn’t an easy read but I think that would be the situation.

Correct.

Dazed_and_confused · 26 January 2020 at 11:42PM

I read the alpha scheme rules and I think that provided I opt back in within 5 years my banked service in classic will relate to my final pay when I retire. The scheme guide isn’t an easy read but I think that would be the situation.

Correct.

Even if the op is opting back into Alpha not Classic?

hugheskevi · 27 January 2020 at 12:05AM

Even if the op is opting back into Alpha not Classic?

Yes. You are either an active member of both, or a deferred member of both, unless you have a break of more than 5 years and then rejoin in which case classic would remain deferred and they would re-join alpha as an active member.

Fphelp123 · 27 January 2020 at 6:19PM

hugheskevi wrote: »

Looks high - £71,000 x 2.32% accrual rate x HMRC factor 16 = £26, 355.

They look broadly correct, but you need to factor in inflation allowance on starting pension value, and unless the pay increase takes effect from 6 April the impact will be spread across 2 tax years.

Yes
Whilst tax is unwelcome, foregoing the additional £3,000 pension for life is equally unwelcome and needs extremely careful thought. A £9,600 tax charge would reduce pension by significantly less than £3,000 if the tax charge is paid via Scheme Pays.

Classic looks at best salary over the last 3 years, so one option would be to remain in alpha for 2 years after your salary reduces, then switch to Partnership to preserve your classic pension calculated on the higher salary.

Correct.

Thanks, the accrual rate in NI was due to change to 2.75% this year, I am not sure if McCloud changed this but it hasn’t been announced if it did.

The £3000 increase in classic will disappear after 3 years unless I opt out for over 5 years after I get back so it will just be the £1900 of alpha pension I will lose.

I really don’t understand the scheme pays option but I read it can be costly if you use it with a long time to retirement, I have over 20 years until retirement from classic or at least 28 before alpha retirement, would that mean I would pay 20 odd years interest on the tax charge if I take scheme pays? I am fairly confident of finishing on a higher salary than currently when I do retire so I don’t think the opt out over 5 years option is for me.

If I did go for a year of partnership pension can I transfer my avc pot into it then I would have a nice additional sum if I wanted to retire earlier and leave m6 alpha pension until I was 68 or for a few years anyway?

Thanks for the help I am struggling with this one, why are the pension scheme rules so confusing?

hugheskevi · 27 January 2020 at 7:08PM

I really don’t understand the scheme pays option but I read it can be costly if you use it with a long time to retirement, I have over 20 years until retirement from classic or at least 28 before alpha retirement, would that mean I would pay 20 odd years interest on the tax charge if I take scheme pays?

The deduction is calculated actuarially, using a discount rate of CPI+2.4% (which you can think of like an interest rate), so about 4.5%-5% p/a. However, the deduction is made pre-tax, so is tax efficient.

If I did go for a year of partnership pension can I transfer my avc pot into it then I would have a nice additional sum if I wanted to retire earlier and leave m6 alpha pension until I was 68 or for a few years anyway?

You could transfer in other pensions if you wished. If your AVC is with the Civil Service pension scheme and in Legal and General there would be little point, as both Partnership and the AVC scheme are in the same Master Trust, so have same investment options, charges, etc.

Thanks for the help I am struggling with this one, why are the pension scheme rules so confusing?

The Classic rules were written in the early 1970s. Lots of things have changed since then, eg, the idea of many salaries being stagnant for over a decade in cash terms would have been preposterous given the inflation back then.

Fphelp123 · 27 January 2020 at 9:14PM

Thanks, schema pays definitely doesn’t seem to be a good option for me With the interest so I am discounting that. Can I use my civil service AVC pot to pay the annual allowance charge immediately on my defined benefit pension?

Even though my classic benefits will likely disappear a £1900 alpha pension at 68 could be worth more than a £35k partnership pension growing for the next 28 years it makes it a very crystal ball type of decision.

The only thing I am thinking is I always planned to commute extra for a lump sum which would make the partnership pension attractive for a year instead. But again who knows what my thoughts will be in 20 years.

Help sought with annual allowance charge

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