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Annual Allowance Questions and Answers

1. What is the Annual Allowance?

2. How is it calculated?

3. Am I at risk of exceeding it?

4. I'm concerned I may exceed the Annual Allowance?

5. What happens if I exceed it?

6. What is the Annual Allowance Charge?

7. What are my options if I exceed the Annual Allowance?

8. What is Carry Forward?

9. What is the Pension Input Amount?

10. What is the Pension Input Period?

11. What happens if there is negative growth in my pension savings over a pension input period (PIP)?

12. What if my pension arrangements have different PIPs?

13. Are there any exemptions?

14. What if I am retired through Ill health and receive enhanced benefits?

15. What about contributions to other pension arrangements?

16. Can Preserved/Deferred benefits from another pension scheme be included?

17. What effect will Additional Pension have?

18. What if I retire early with an actuarially reduced pension?

19. What is the effect if I retire and commute part of my pension into a lump sum?

20. How is the Annual Allowance calculated for members with Mental Health Officer status?

21. Is the Annual Allowance related to the contributions that I make?

22. If I transfer into the NHS, Teachers, Police or Fire Schemes, is this counted against the Annual Allowance?

23. What is the opening value of my benefits with the NHS, Teachers, Police or Fire Schemes?

24. What is the closing value of my benefits with the NHS, Teachers, Police or Fire Schemes?

25. What is included in the Pension Input Amount?

26. What is included in a Pension Savings Statement?

27. When will you send me a Pension Savings Statement if I request one?

28. Is the details of my benefit statement applicable to the Annual Allowance calculation?

29. I am a General Medical Practitioner - when will my provisional Pension Savings Statements be sent out?

30. What about my contributions to other pension arrangements?

31. Can I get information from SPPA about the Annual Allowance if I do not exceed the limit?

 

1. What is the Annual Allowance?

The Annual Allowance (AA) is the limit on how much tax-free pension savings you can make in any one year. If your pension saving in any year is over the Annual Allowance you may have to pay extra tax. On 6th April 2014, the AA was reduced to £40,000 and contributions made to pension savings above this limit subject to tax at the individual's highest marginal rate.

2. How is it calculated?

In defined benefit schemes such as schemes administered by SPPA, the AA is not based on the contributions that you pay into the scheme but is based on the growth in the value of your benefits. The growth in your benefits is measured over a 'Pension Input Period' (PIP). The attached examples show how your annual allowance is be calculated.

Annual Allowance Examples

 

3. Am I at risk of exceeding it?

The vast majority of members will not be affected. However, members may be affected if they:

    • receive a significant pay rise such as being promoted to a higher paid role,
    • are a high earner and earn pension at a higher rate of accrual or with long pensionable membership.
    • Significant increase in membership (e.g. a change from part-time to full-time, doubled membership for e.g. Mental Health Officer's and Police Officers).
    • Purchasing added years and/or additional pension.
    • Application of any late retirement factors.
    • Receipt of a clinical excellence award in the NHS.
    • Ill health retirement where there has not been an enhancement to your benefits but the outstanding costs of a purchased or added years and/or an additional pension are waived.
    • Ill health retirement with an enhancement to your membership.
    • Contributions paid to other pension savings arrangements, including a Money Purchase MPAVC Scheme.

 

4. I'm concerned I may exceed the Annual Allowance?

You should speak to a financial or tax advisor. You will need to calculate your pension value from all your pension providers for the relevant year and if this has exceeded the AA you will also need to calculate the last three years

You will receive an AA statement from us by 6th October if you exceeded your AA with us in the previous scheme year.

 

5. What happens if I exceed it?

If you exceed the AA (this has been £40,000 since 2014/15), you will be taxed at your highest marginal rate on the amount over the AA. For example, if your pension input amount is £65,000, the £15,000 over the AA may be subject to tax. However, this may be offset or reduced by carry forward.

 

6. What is the Annual Allowance Charge?

The Annual Allowance Charge is a tax charge on the individual. It arises where the total pension input amount for an individual, in Pension Input Period (PIP) which end in the tax year concerned, exceeds the amount of the annual allowance for that tax year and any unused annual allowance from the previous three years.

When the total pension input amount exceeds the annual allowance, the annual allowance charge will be levied on the excess.

 

7. What are my options if I exceed the Annual Allowance?

If you exceed the AA and your total tax liability is in excess of £2,000 you can ask the scheme to pay the whole or part of the amount to HMRC on your behalf. A mandatory requirement for the Scheme Pays only applies if the member's savings within the scheme are more than the AA (£40,000) and the requirement for the scheme to pay only applies to the tax charge incurred within the scheme.

As such, you should talk to your scheme administrator and take independent financial advice before deciding whether to ask your scheme to pay anything or not. Any scheme pays election must reach us by the designated timescales e.g. for 2016/17 the deadline is 31 July 2018.

Where your tax liability is under £2,000 this must be paid directly to HMRC.

Please note that SPPA will not offer the facility to pay your AA charge liability on a voluntary basis.

HMRC have produced a members guide with information about scheme pays which you may find useful.

 

8. What is Carry Forward?

If you exceed the AA in any one tax year you can look back up to three previous years to see if you have any unused allowance from these years. If you do, you can 'carry forward' any unused allowance and add this to your allowance in the current year.

There is a strict order in which available Annual Allowance must be used up:

■ The AA for the current tax year should be used first.

■ Unused AA from the three earlier years is then used - beginning with the available AA from the earliest tax year first.

(N.B. - AA excesses from years 2008/09, 2009/10 and 2010/11 are not counted, e.g. pension growth for the PIP 2009/10 is £54,000; the carry forward is £0 not -£4,000.)

This means that if your pension's growth exceeds the £40,000 in any one year e.g. due to a promotion, you may not have extra tax to pay, depending upon your individual circumstances.

 

    9. What is the Pension Input Amount?

The Pension Input Amount (PIA) is the capitalised value of your pension and lump sum growth. To work it out you take the value of your pension and lump sum at the start of the PIP (plus an allowance for inflation) and subtract it from the value of your pension and lump sum at the end of the PIP. The result of this calculation is measured against the AA. A factor of 16 plus any change in the value of the lump sum (if any).

10. What is the Pension Input Period?

The Pension Input Period (PIP) is the period over which the AA is worked out. For SPPA this period is 1st April to 31st March each year. In 2015/16 HMRC changed the PIPs for all schemes to align with the tax year and to assist the transition the 2-10/16 year was split into two mini PIPs from 1 April 2015 to 8 July 2015 and 9 July 2015 to 5 April 2016. For more details please see our web page on Changes for 2015/16.

11. What happens if there is negative growth in my pension savings over a pension input period (PIP)?

The pension input amount is the difference between the value of your benefits at the start of the pension input period (the opening
value) and the value of your benefits at the end of the pension input period (the closing value). If this difference is a negative amount, your pension
savings or pension input amount would be treated as 'nil' for that pension input period and the full annual allowance (£40,000.00 for 2014/15) would remain available to you. This can happen where CPI is higher than any pay increase received.

 

12. What if my pension arrangements have different PIPs?

The AA for a tax year is tested against pension saving (made in PIPs) ending in that tax year. If you are a member of more than one pension scheme and your PIPs end on different days, the pension savings applicable will be where the PIP ends in the same financial year e.g.

PIP1 - 06/04/2011 to 05/04/2012 savings applicable

PIP2 - 01/04/2011 to 31/03/2012 savings applicable

However, if you join another scheme and your PIP with them is 01/06/2011 to 31/05/2012 savings are not applicable as this period ends in a different financial year.

Example

You are a member of two pension schemes. Scheme A has a PIP in line with the tax year. Scheme B has a PIP that runs to 31st March.

Your pension savings in scheme A for the period 6 April 2011 to 5 April 2012 are £20,000 and in scheme B are £15,000 for the year to 31 March 2012.

Your total pension savings for 2011/12 are £35,000 so you do not have to pay any AA tax charge.

On 1 June 2011 you join pension scheme C and make pension savings of £50,000 in the year to 1 June 2012 (the PIP for scheme C) in that scheme.

Even though some of the contributions to scheme C may have been made in 2011/12, they do not count towards your AA in that year. Instead they are taken into account in 2012/13, the tax year in which the PIP for scheme C ends.

All schemes aligned to the tax year from 2015/16.

 

13. Are there any exemptions?

The Annual Allowance will not be applied:

■  our medical advisors have confirmed that you have met the HMRC severe ill health criteria e.g. in the year of death or in a serious/terminal ill health case (by this we mean life expectancy of less than a year),

■ to deferred/preserved benefits in the scheme (unless the benefits are accrued in the current PIP).

 

14. What if I am retired through ill health and receive enhanced benefits?

Members who are retired through ill health and are awarded Upper Tier (NHS) or Total Incapacity Benefits (Teachers) will be subject to a further HMRC severe ill health test. This is defined as "unlikely because of ill health to be able to do any type of gainful work, other than to an insignificant extent, before state pension age".

Members who meet HMRCs severe ill health test will be exempt from the AA restrictions. However, members who meet the scheme criteria but do not meet the HMRCs test will be subject to the AA restrictions. The scheme Medical Adviser will assess on HMRCs test.

It is, therefore, in your own interest to ensure that your application for ill health retirement is accompanied with sufficient medical evidence to support your application.

The HMRC severe ill health test is applicable only if the test is assessed, therefore it is important to ensure that this is the same tax year as your benefits will be paid. 

15. What about contributions to other pension arrangements?

Your total pension savings are subject to the AA test therefore, any contributions you are paying to other registered pension schemes will also need to be included when calculating how much your pension has grown by in any one year. SPPA has no knowledge of your pension contributions held elsewhere, and it is your responsibility to ensure that you include all pension savings in your calculations.

 

16. Can Preserved/Deferred benefits from another pension scheme be included?

Preserved/deferred benefits are exempt from the new AA regime. However, if they have been accrued in the current PIP they will have to be included.

17. What effect will Additional Pension have?

You should be aware that any large increase to a member's pension via the purchase of Additional Pension will need to be assessed against the AA. If the growth in benefits in the PIP falling in the relevant tax year exceeds £40,000 plus the amount available by way of carry forward from the previous three tax years, an AA charge may become payable.

18. What if I retire early with an actuarially reduced pension?

The start of the PIP is worked out as if you had retired at that date (no reduction would be applied). The end of the PIP is worked out taking the actuarial reduction in pension.

 

19. What is the effect if I retire and commute part of my pension into a lump sum?

The closing value for a Pension Input amount is calculated on the pension and lump sum figures prior to commutation.

 

20. How is the Annual Allowance calculated for members with Mental Health Officer status?

The values at the start and the end of the PIP are calculated as if the member was taking their benefits at the date.

21. Is the Annual Allowance related to the contributions that I make?

No, it is the growth in your pension value i.e. for final salary benefits it is based on your service and salary.

22. If I transfer into the NHS, Teachers, Police or Fire Schemes, is this counted against the Annual Allowance?

If you transfer your benefits into the NHS, Teachers, Police or Fire Schemes this will be excluded in the year of the transfer. Unless the transfer was from a final salary occupational scheme that participates in the Public Sector Transfer Club (Club) and the transfer was made on or after 28 January 2015.

23. What is the opening value of my benefits with the NHS, Teachers, Police or Fire Schemes?

This is the value of your benefits at the beginning of the pension input period converted into a capital value, which is increased by the CPI from the previous September.

24. What is the closing value of my benefits with the NHS, Teachers, Police or Fire Schemes?

Is the value of the benefits at the end of the pension input period converted into a capital value.

25. What is included in the Pension Input Amount?

The growth in your NHS, Teachers, Police or Fire Pension Scheme benefits including any doubled years, added years or additional pension being purchased.

26. What is included in a Pension Savings Statement?

The pension savings statement will include the following information:

  • The amount of the Annual Allowance for the relevant tax year,
  • The pension input amount for the pension input period,
  • The pension input amount for the previous three pension input periods,
  • The amount of the Annual Allowance in the previous three relevant tax years.

27. When will you send me a Pension Savings Statement if I request one?

Provided we have received all the relevant information from your employer to calculate the pension input amount we will write to you by 6 October, or within three months of receiving your request (requests can only be accepted from 6 April following the relevant tax year). Please state if you want a statement for the NHS Pension Scheme or the NHS MPAVC Scheme; however, remember that the NHS MPAVC providers will be issuing annual benefit statements.

28. Is the details on my benefit statement applicable to the Annual Allowance calculation?

The details on your benefit statement relates to the scheme year, 1 April to 31 March. Although this would give an idea of what your Pension input amount would be. The Annual Allowance relates to the financial year, 6 April to 5 April.

29. I am a General Medical Practitioner - when will my provisional Pension Savings Statements be sent out?

NHS Pensions aim to provide pension savings statements when the pensionable profit/pay has been confirmed. You can assist NHS Pensions by completing your annual certificate of pensionable profit on time.

30. What about my contributions to other pension arrangements?

Your total pension savings are subject to the Annual Allowance test so any contributions you are paying to other registered pension schemes will also need to be included when assessing whether your total pension input amount exceeds the Annual Allowance during the pension input period.

31. Can I get information from SPPA about the Annual Allowance if I do not exceed the limit?

Yes. Members will be able to request a pension saving statement from NHS Pensions if necessary. However, you would only need this information if you have the pension provisions with other pension provider(s) and you need to add the pension input amounts together to determine your overall Annual Allowance position.

Link to Scottish Government Website