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Contribution limit confusion
Posted: September 16th, 2020, 7:35 pm
by Darka
I'm having difficulty working out how much we can contribute to my wife's pension without triggering the annual allowance charge by exceeding her allowance.
For example, say she earns £30,000, can we pay in the full £30,000 and get tax relief on top, or is the limit of her salary including the tax relief.
I've looked into this before, and again today but various websites seem to contradict each other.... e.g.
YouInvest have "If you earn £30,000, you should be able to contribute £30,000 gross to your pension. Of this, £24,000 will be your own money, and the taxman will add basic-rate (20%) tax relief of £6,000."
But a government site says: "You can get tax relief on private pension contributions worth up to 100% of your annual earnings." which seems to say you can pay in the whole £30,000 and get relief on top... this was my understanding until I read the YouInvest page.
She has a DB pension too, a small one but really not sure how that interferes with this either.
Can anyone help clarify this for me, as the more I read the more confusing it's getting!?
regards,
Darka
Re: Contribution limit confusion
Posted: September 16th, 2020, 10:42 pm
by Chrysalis
YouInvest are correct.
When you say, she has a DB pension, is she still contributing to that? If so, she will need to calculate how much of her annual allowance is used up by those contributions. That is a calculation which is not related to her contributions but to the amount by which her pension entitlement increases. There’s information lower down on this page:
https://www.pensionsadvisoryservice.org ... -allowance
Re: Contribution limit confusion
Posted: September 16th, 2020, 10:46 pm
by mc2fool
Darka wrote:I'm having difficulty working out how much we can contribute to my wife's pension without triggering the annual allowance charge by exceeding her allowance.
For example, say she earns £30,000, can we pay in the full £30,000 and get tax relief on top, or is the limit of her salary including the tax relief.
I've looked into this before, and again today but various websites seem to contradict each other.... e.g.
YouInvest have "If you earn £30,000, you should be able to contribute £30,000 gross to your pension. Of this, £24,000 will be your own money, and the taxman will add basic-rate (20%) tax relief of £6,000."
But a government site says: "You can get tax relief on private pension contributions worth up to 100% of your annual earnings." which seems to say you can pay in the whole £30,000 and get relief on top... this was my understanding until I read the YouInvest page.
No, they're not contradictory. You have to remember what tax
relief means, which is you are relieved from paying any tax on the contributions, i.e. the contributions are gross.
The simple case of this is where your employer takes the contributions out of your gross pay without deducting income tax, then the gross amount goes directly into your pension. However, if you make the contribution yourself then HMRC assumes you are doing so out of
net earnings and "refunds" you the tax you paid such that the end amount is gross (of course, due to the personal allowance the tax a BRT pays on their annual earnings isn't actually 20%...).
HL makes it clear in simple language:
"
You should ensure that you do not contribute any more than 100% of your earnings after tax relief has been received, or £3,600 if this is greater.".
https://www.hl.co.uk/pensions/tax-relief
Re: Contribution limit confusion
Posted: September 17th, 2020, 6:08 am
by Darka
Thanks both, I think it was a simple case of the more I read the more confused I got
HL's explanation is much clearer.
regards,
Re: Contribution limit confusion
Posted: September 17th, 2020, 6:09 am
by Darka
Chrysalis wrote:YouInvest are correct.
When you say, she has a DB pension, is she still contributing to that? If so, she will need to calculate how much of her annual allowance is used up by those contributions. That is a calculation which is not related to her contributions but to the amount by which her pension entitlement increases. There’s information lower down on this page:
https://www.pensionsadvisoryservice.org ... -allowance
Thanks, will have a read and I believe that the DB pension providers can do the calculation for me.
Re: Contribution limit confusion
Posted: September 17th, 2020, 1:06 pm
by Chrysalis
Darka wrote:Chrysalis wrote:YouInvest are correct.
When you say, she has a DB pension, is she still contributing to that? If so, she will need to calculate how much of her annual allowance is used up by those contributions. That is a calculation which is not related to her contributions but to the amount by which her pension entitlement increases. There’s information lower down on this page:
https://www.pensionsadvisoryservice.org ... -allowance
Thanks, will have a read and I believe that the DB pension providers can do the calculation for me.
They will do the calculation, if requested, but only in retrospect for the previous tax year, which doesn’t really help you work out the headroom for contributions in the current year.
Re: Contribution limit confusion
Posted: September 17th, 2020, 1:18 pm
by mc2fool
Chrysalis wrote:They will do the calculation, if requested, but only in retrospect for the previous tax year, which doesn’t really help you work out the headroom for contributions in the current year.
According to HL, "
Defined benefit pensions – e.g. final salary schemes: you must call your pension provider and ask for your ‘pension input amount’ in the current tax year. "
https://www.hl.co.uk/pensions/contributions and click on GET YOUR ANNUAL ALLOWANCE FACTSHEET (downloads a PDF).
Re: Contribution limit confusion
Posted: September 17th, 2020, 3:06 pm
by Darka
That makes sense, will organise a call.
thanks
Darka
Re: Contribution limit confusion
Posted: September 17th, 2020, 5:30 pm
by pochisoldi
You might want to try calculating the input amount yourself using the info at
https://adviser.royallondon.com/technic ... unts-2015/Note that there will be no pension input amount if the pension is "frozen" (i.e. you aren't earning any extra years), and the annual increase of the pensionable amount is increased by CPI capped at 2.5% (iirc).
Re: Contribution limit confusion
Posted: September 18th, 2020, 8:18 am
by Chrysalis
mc2fool wrote:Chrysalis wrote:They will do the calculation, if requested, but only in retrospect for the previous tax year, which doesn’t really help you work out the headroom for contributions in the current year.
According to HL, "
Defined benefit pensions – e.g. final salary schemes: you must call your pension provider and ask for your ‘pension input amount’ in the current tax year. "
https://www.hl.co.uk/pensions/contributions and click on GET YOUR ANNUAL ALLOWANCE FACTSHEET (downloads a PDF).
Well, whatever HL say, my DB pension provider will only give me an annual allowance statement for the previous year. The fact sheet doesn’t give the calculation needed either.
Re: Contribution limit confusion
Posted: September 18th, 2020, 8:22 am
by Chrysalis
pochisoldi wrote:You might want to try calculating the input amount yourself using the info at
https://adviser.royallondon.com/technic ... unts-2015/Note that there will be no pension input amount if the pension is "frozen" (i.e. you aren't earning any extra years), and the annual increase of the pensionable amount is increased by CPI capped at 2.5% (iirc).
Unless you are still employed by the same organisation and your pension is related to your current pensionable pay (as can be the case for people with membership of closed final salary public sector schemes)
Re: Contribution limit confusion
Posted: September 18th, 2020, 8:32 am
by pochisoldi
Chrysalis wrote:mc2fool wrote:Chrysalis wrote:They will do the calculation, if requested, but only in retrospect for the previous tax year, which doesn’t really help you work out the headroom for contributions in the current year.
According to HL, "
Defined benefit pensions – e.g. final salary schemes: you must call your pension provider and ask for your ‘pension input amount’ in the current tax year. "
https://www.hl.co.uk/pensions/contributions and click on GET YOUR ANNUAL ALLOWANCE FACTSHEET (downloads a PDF).
Well, whatever HL say, my DB pension provider will only give me an annual allowance statement for the previous year. The fact sheet doesn’t give the calculation needed either.
Stop being so negative.
Tell us whether you are an active member or not (inactive=unlikely to have an input amount).
Ask for last year's figure - it will give you a figure that you can use to validate your calculation.
Use the Royal London information to calculate last year's input amount. Then compare with the one from the pension provider.
Then use the RL information to estimate this year's figure.
Pochisoldi
Re: Contribution limit confusion
Posted: September 18th, 2020, 12:21 pm
by kempiejon
Chrysalis wrote:
Well, whatever HL say, my DB pension provider will only give me an annual allowance statement for the previous year. The fact sheet doesn’t give the calculation needed either.
I received some advice a few years ago on doing my own calculations, please check if these are relevant to your scheme and remember that it was several years ago that I got this detail. I enquired at
www.pensionsadvisoryservice.org.ukTo calculate the amount of savings you need to work out the opening value, the closing value and then the difference between the two amounts.
Opening value: Find the total amount of annual pension built up immediately prior to the start of the year and multiply this amount by 16. Next add any lump sum entitlement built up in the pension plan as of the same valuation date. You then have to increase the pension by inflation using the CPI figure for September prior to your valuation date to get your opening value.
Closing value: Find the total amount of annual pension built up by the end of the year and multiply this amount by a flat 16. Next add any lump sum entitlement built up in the pension plan as of the same valuation date. There is no enhancement for inflation in this calculation, but you may need to make adjustments to this figure if there have been any transfers out/in that need to be taken into account.
Pension savings to be tested: Simply take away the opening value from the closing value to work out the difference between the two figures and therefore the amount that has been saved in to your defined benefit pension on your behalf.
The figure that emerges should now be taken away from your actual annual allowance to find out what you can pay gross into a defined contribution pension (ie, your SIPP). Bare in mind however that your annual allowance will be the lower of £40,000 or 100% of your earnings.
Re: Contribution limit confusion
Posted: September 18th, 2020, 5:24 pm
by Chrysalis
pochisoldi wrote:Chrysalis wrote:mc2fool wrote: According to HL, "
Defined benefit pensions – e.g. final salary schemes: you must call your pension provider and ask for your ‘pension input amount’ in the current tax year. "
https://www.hl.co.uk/pensions/contributions and click on GET YOUR ANNUAL ALLOWANCE FACTSHEET (downloads a PDF).
Well, whatever HL say, my DB pension provider will only give me an annual allowance statement for the previous year. The fact sheet doesn’t give the calculation needed either.
Stop being so negative.
Tell us whether you are an active member or not (inactive=unlikely to have an input amount).
Ask for last year's figure - it will give you a figure that you can use to validate your calculation.
Use the Royal London information to calculate last year's input amount. Then compare with the one from the pension provider.
Then use the RL information to estimate this year's figure.
Pochisoldi
I was merely adding information that might be useful to the OP, because the HL guidance is not useful. I’m not sure any DB scheme will give you an projection of your input value in year, but I know mine would not. The OP should not assume he can get it in year.
I don’t actually need to know my pension input value any more, but when I did, I did my best to estimate it. If you have complicated memberships, with additional purchased benefits, it’s pretty difficult. So I had to make a best guess at the headroom for SIPP contributions. The OP may find the same, perhaps his affairs will be more straightforward.
Re: Contribution limit confusion
Posted: September 18th, 2020, 5:33 pm
by mc2fool