As you all know, the Treasury has announced that, with effect from 6th April 2011, the Annual Allowance that individuals are permitted to increase the value of their pension fund, before incurring an income tax liability, is to be reduced from £255,000 to £50,000 in a given year. Furthermore, the multiplication factor to be used for calculation of income tax liabilities is to be increased from 10 (plus lump sum) to 16 (plus lump sum).
I've worked out how to work this one out now:
(Value of Pension at the end of the Year x 16) - (Value of Pension at the beginning of the Year x 16 x CPI) = annual increase in value
If the difference in value is less than the £50,000 Annual Allowance then you're in the clear - otherwise you will be taxed at 40% of the remainder
Here's a working example for a Lt Cdr/Maj/Sqn Ldr (OF-3) promoted to Cdr/Lt Col/Wg Cdr (OF-4) in 2009 after 18 years of service and how his/her OF-4 pension will fair after the 2 years in substantive rank:
Start 6 Apr 11 as 1 yr OF-4 pension (pro-rata at 50% of between OF-3 to OF-4) is £22k and lump sum of £66k
Value of pension is £22k x 16 = £352k + £66k = £418k x 1.031 (this is CPI) = £431k
Finish 5 Apr 12 as 2 yr OF-4 pension (100%) is £25k and lump sum of £75k
Value of pension is £25k x 16 = £400k + £75k = £475k
Difference between start and end of year on full pension following promotion is £44k - which is less than £50k - which means no Tax Bill
Also, you can carry forward any unused allowance - so in this example you could carry forward £6k of unused allowance. I understand you can carry forward up to 3 years.
If you want to work out yours the new tri-service pension codes are at
Ministry of Defence | About Defence | Corporate Publications | Personnel Publications | Armed Forces Pensions Compensation and Veterans | Pension Codes
Panic over, for most of us...
LJ
PS. I am not a Financial Advisor, so you may want to check out some of my advice, but I believe the calculation is correct.