Pension Annual Allowance... exceeded?!?

[heights good]

I have just received a letter from Veterans UK saying I have exceeded my "standard tax-free pension savings limit of £40,000 for tax-year 2019-20 based solely on the growth in your FPS benefits,"

I am shocked to say the least, I am nowhere near OF4 level, nor likely to ever reach those dizzy heights. Is this a mistake or a new tax grab to off-set the McCloud Judgement by HMRC?

Any help is greatly appreciated as I have just submitted my self-assessment, which is now incorrect and will need amended

HG

[alfred_the_great]

Welcome to the suck.

At a guess, you’re a mid-seniority OF3 and/or PAS on the same kind of pay, who has AFPS 75 rights, and has just hit their 16 year point?

If you go the annual allowance calculator, use the figures provided in conjunction with this genuinely good handout

https://assets.publishing.service.go..._MASTER-OS.pdf

you’ll have all the answers you need.

I suspect (based on personal experience) that your unused AA from the last three years will see you safe.

[Door Slider]

Originally Posted by heights good

I have just received a letter from Veterans UK saying I have exceeded my "standard tax-free pension savings limit of £40,000 for tax-year 2019-20 based solely on the growth in your FPS benefits,"

I am shocked to say the least, I am nowhere near OF4 level, nor likely to ever reach those dizzy heights. Is this a mistake or a new tax grab to off-set the McCloud Judgement by HMRC?

Any help is greatly appreciated as I have just submitted my self-assessment, which is now incorrect and will need amended

HG

I’ve had that letter twice in recent years, just follow the instructions and calculations.

I did not exceed the limit on either occasion.

The letter usually means that due to promotion, moving onto PAS or other circumstance that you “maybe” near to the limit or have exceeded it, not that you have. Usually, unused portion of previous years allowance is enough to take you below the threshold, at your level anyway, not so once you get higher up the greasy pole.

The handout is actually rather good.

[flyingorthopod]

Don't forget you can offset any professional membership fees and other deductibles against your threshold income to reduce it a bit. .ay not be much but if you have anything to offset it might help sneak under the bar.

[Lima Juliet]

This year’s guide:

https://assets.publishing.service.go...2020_Guide.pdf

[heights good]

Originally Posted by alfred_the_great

Welcome to the suck.

At a guess, you’re a mid-seniority OF3 and/or PAS on the same kind of pay, who has AFPS 75 rights, and has just hit their 16 year point?

If you go the annual allowance calculator, use the figures provided in conjunction with this genuinely good handout

https://assets.publishing.service.go..._MASTER-OS.pdf

you’ll have all the answers you need.

I suspect (based on personal experience) that your unused AA from the last three years will see you safe.

OF3 - No, I have happily peaked at Flt Lt
PAS - No
AFPS 75 - Yes
16 yr point - Not applicable, IPP not reached yet.

Now you can see my confusion, I dont seem to hit any of the obvious or normal triggers... more digging required me thinks.

[heights good]

Originally Posted by Lima Juliet

This year’s guide:

https://assets.publishing.service.go...2020_Guide.pdf

Thank you, this is a great guide!

[Easy Street]

Originally Posted by heights good

OF3 - No, I have happily peaked at Flt Lt
PAS - No
AFPS 75 - Yes
16 yr point - Not applicable, IPP not reached yet.

It does seem odd with the combination above. Are you sure you haven't reached your AFPS75 IPP? It will have been hidden from your sight since transferring to AFPS15 but it remains at the 16/38 point; it was not aligned to the 20/40 IPP which will now be the headline one in your records.

[heights good]

Originally Posted by Easy Street

It does seem odd with the combination above. Are you sure you haven't reached your AFPS75 IPP? It will have been hidden from your sight since transferring to AFPS15 but it remains at the 16/38 point; it was not aligned to the 20/40 IPP which will now be the headline one in your records.

100% sure.

[Corporal Clott]

heights good

It doesn’t sound right. Look at the guide that LJ posted and see how it works out as it may be an administrative error? Just go through that process guide and see if the figures are right. If they are wrong then try contacting DBS through a JPA iSupport request, or try the Fg Branch Advisors as they are hooked into the Pay and Pension teams. They also have a virtual Crew Room on Defence Connect so you can try dropping them a line before the end of the Christmas block leave period.

Talking of Admin - I hear a rumour that under Astra the Scribblies will be named the Personnel Operations Profession. Which means that Scribbly officers will become Personnel Operations Officers (or POOs for short) - I thank you, you heard it hear first...

[Melchett01]

Welcome to the annual kick in the nuts. I’ve had one for the last 2 years. Last year’s made my eyes water and was big enough to change my financial planning over the medium term; this year’s is pennies in comparison, but that’s not really the point, it’s wrong!

I won’t bore you with the fine detail, and bearing in mind I’m not an IFA, I will just say there are a couple of things I think about when faced with this scenario. You may of course be in a very different boat, but fwiw.

1. Join Forces Pension Society if you’re not already a member. They will run a ruler over it and tell you what’s going on. You may not understand what they are saying - I didn’t and my Met degree means I am at least averagely numerate (or was at one point)! However they will tell you if it’s right or wrong.

2. When doing your tax return look for everything you can to offset the charge. If you are on a posting of less than 2 years (according to your AO) you come under temporary workplace rules and there’s all sorts you can claim back. Rift, who advertise in various Service magazines can advise but so can any other half decent accountant for a lot less. Better still, if you look on the Rift website it outlines the legislation and you’ve probably got enough wits to DIY and save a packet. I did that, was the best afternoon’s work I’ve done for a long time.

3. Even if you are over 2 years, if you pay accommodation for work relate duties ie live in during the week and the Mess isn’t your full time home - that’s claimable. I managed it last year, took a bit of explaining but it went through in the end and sliced a grand off the bill.

4. Be careful with Scheme Pays. It looks good up front but is horrendously expensive. Unlike a bank loan where you pay only the capital & interest, Scheme Pays takes an initial lump sum off your pension and then makes an annual deduction every year for the rest of your life. Daylight robbery! And over the course of a lifetime you can potentially overpay massively if you live to a ripe old age. It’s like the bank chasing you for a loan after you’ve paid it. I’ve never found anyone able to explain the rationale for legalised theft by the Government of its own employees, so be aware. You may not have the cash lying about to pay the tax, but given the excessive, almost punitive charges under Scheme Pays, it may be worth looking at a bank loan instead - as my accountant recommended to me. It’s far cheaper in the long run as you’re only paying for the duration of the loan rather than forever.

As I said, not advice, I’m not qualified, just my thoughts and experiences I’m happy to pass on.

[heights good]

Melchett, thanks for the advice, very much appreciated.

Thankfully I have been doing self-assessment for nearly 20 yrs and my mother is a financial advisor... hence the confusion.

Anything that the government offers for easiness I ALWAYS look into the small print as it is inevitably a shafting.... without Vaseline!

[Melchett01]

Heights good,

Well that’s vaguely good news - you aren’t being thrown to the lions unaware. Keep us informed, it does sound an odd one!

[heights good]

So, it appears I don't actually owe tax... I think?! I will be checking with HMRC on Tuesday when they are back to work.

However, why on earth are my pensions savings SO erratic?

19/20 - £40,312
18/19 - £18,609
17/18 - £15,502
16/17 - £79,255
9 Jul 15 - 5 Apr 16 - £10,303
6 Apr 15 - 8 Jul 15 - £3,750
14/15 - £6,790
13/14 - £7,866

I am on AFPS 75/15 so have no clue what on earth is happening with anything or why my pensions savings are so different year to year. My salary certainly hasn't changed that much every year and I am not PA.

Perhaps a magic 8-ball

[Party Animal]

Slight thread drift but Melchy has raised the question bubble - on the subject of tax; are we allowed to claim for mess bill standing charges on our annual tax returns? I have heard conflicting advice in the past. On a previous Sqn, one pilot claimed the tax man had explicitly stated he couldn’t whilst another pilot said the tax man told him he could! Having just returned from another 6 monther overseas, it felt a bit galling to have to pay £28 a month mess bill despite having warned out. Personally, I’ve never tried to claim for mess bills before but if anyone has anything to add?

[PPRuNeUser0211]

Originally Posted by Party Animal

Slight thread drift but Melchy has raised the question bubble - on the subject of tax; are we allowed to claim for mess bill standing charges on our annual tax returns? I have heard conflicting advice in the past. On a previous Sqn, one pilot claimed the tax man had explicitly stated he couldn’t whilst another pilot said the tax man told him he could! Having just returned from another 6 monther overseas, it felt a bit galling to have to pay £28 a month mess bill despite having warned out. Personally, I’ve never tried to claim for mess bills before but if anyone has anything to add?

Not an IFA, but I believe the argument used before was that the mess is providing a service for the money you give and therefore isn't tax deductible. It's not a professional body that you can claim membership fees for afaik.

[Lima Juliet]

heights good

Those figures are your pension input amounts (PIAs) and they will vary for various reasons - promotion and change of pension scheme would be a couple of factors. Have a read of this that explains PIAs reasonably simply: https://adviser.royallondon.com/tech...-amounts-2015/

So, the AFPS75, AFPS05 and AFPS15 all have different accrual rates that can affect the PIA in a given tax year (75 accrues at a variable rate (much faster at the start), AFPS05 at 1/70 and AFPS15 at 1/47). Also, your promotion and access to pay levels can have an effect too. Finally, with your PPruNe nickname, would it be right to assume you are a Commissioned Crewman? If so, there are some significant wage changes surrounding NCO to Commissioned Officer status if I recall correctly?

From my experience, these matters are rarely comparable from individual to the next. There are so very many variables in the calculation of PIA that 2 people that even entered the Services on the same day at the same rank are getting different treatment when it comes to Annual Allowance.

I think all the advice given so far is good. Use that link I shared with you. Work out your PIAs. Consider sporting ~£40 on the Forces’ Pension Society for some impartial and expert advice. Drop DBS a note at Glasgow if you don’t understand anything or you need to query it. Or try the Branch Advisors if you get really stuck. Sadly, you do have to put the work in on this (I’ve just spent an afternoon working out my complicated Life Time Allowance (LTA) situation to see how close I am getting to that - again, everyone is different and so there is no “pink” answer to crib!).

Good luck

[SirToppamHat]

Originally Posted by pba_target

Not an IFA, but I believe the argument used before was that the mess is providing a service for the money you give and therefore isn't tax deductible. It's not a professional body that you can claim membership fees for afaik.

My understanding also, but it is a kick in the teeth if you have to pay but are unable to make use of the services due to deployments or, as we have seen recently, their removal on COVID19 grounds. In my own mess, a meeting was held which considered whether a 'subs holiday' might be in order; the proposal was defeated in favour of taking a more long-term approach. I believe the vote swung on the promise of there being a hell of a party when this is all over, but that's hearsay.

[Melchett01]

Originally Posted by Party Animal

Slight thread drift but Melchy has raised the question bubble - on the subject of tax; are we allowed to claim for mess bill standing charges on our annual tax returns? I have heard conflicting advice in the past. On a previous Sqn, one pilot claimed the tax man had explicitly stated he couldn’t whilst another pilot said the tax man told him he could! Having just returned from another 6 monther overseas, it felt a bit galling to have to pay £28 a month mess bill despite having warned out. Personally, I’ve never tried to claim for mess bills before but if anyone has anything to add?

I've heard similar conflicting things too, although I have never claimed it before. That said, I can see how you might structure an argument in favour of a claim - QRs requires, indeed orders, you to be a member of the Mess, therefore incurring charges. If you weren't employed by HM, you wouldn't be a Mess member and therefore you might argue that the costs arise purely in the course of your duties and are therefore purely a workplace expense. However, from what I can gather, HMRC have gone after people before on the grounds of dual use i.e. you rent a single bed flat for work in town, fine. You rent a 2 bed flat in town for work with the additional expectation of friends and family visiting, then it's dual use and therefore not applicable. You'd have to unravel that one and I don't know how you'd do it, especially if the Mess was your home full time. I claimed accommodation charges because I could show I was weekly commuting from a permenant home address, and was doing so purely for work purposes. Not sure how the Mess as a social institution would be viewed, even though we are directed to be members.

I guess you could claim it and see if they ask questions. The form now just has a box for business expenses without any room to explain, so you could just put it in and see what happens if you're feeling brave.

[Lima Juliet]

heights good

This is a snippet that I cut out and kept from the FPS’s Pennant magazine (May 2018) when it was online. It explains a lot and why some people really benefit from joining it.

“It cannot possibly be right, can it?”

Of all the issues brought to us by our members, there is probably none which causes more upset, misunderstanding, and sometimes anger, than Annual Allowance. In the last few years it has seemingly come from nowhere to become a major source of concern. Anthony Henderson, our new Head of Pensions, talks to Pennant about it, and gives some good advice.



What is Annual Allowance?

It is not an allowance at all really, it’s a tax. A tax on your pension increase in a particular tax year. It applies to all pension schemes.

Very simply, if that increase in value exceeds £40,000 (which is the current 'annual allowance') you will pay tax on the increase at your marginal tax rate – which will generally be 40% (although occasionally 45% of course).



What is the history behind this?

It was first introduced in April 2006. It was introduced because pension investment is tax efficient and the Government did not want people taking too much advantage of this. The allowance was then set at £215,000 which did not affect many people in the Armed Forces as very few would have had pensions that would grow by that much. And in the years following it became even higher – climbing to £255K in the financial year 2011. But then it reduced to £50,000 in 2011/12 and that was the first time the Armed Forces really became aware of it. Since 2014/15 it has been £40,000.



How is the pension value calculated?

If you are in a defined contribution scheme it is very simple – it will just be the amount of money you have paid into the scheme during the year (and if you approach the £40K limit then you can turn off the tap and stop contributing). But for defined benefit schemes like the Armed Forces schemes it is not so straightforward - you do not pay in, but your pension's growth is based on things like your rank, salary, length of employment and other variables.



How it works is that the difference between your pension value at the beginning of the tax year and at the end is multiplied by 16 - this is a Government Actuary’s Department figure based on the calculation that were you in a private pension scheme you would have to pay £16 in for every £1 pension growth – which incidentally shows just how difficult it would be to fund our pension benefits through a private sector type scheme. For schemes with an automatic lump sum payment, that also needs to be taken into consideration too.



Complicated!?

Yes, but you don’t have to do it yourself – the calculation is done for you by Veterans UK. But it does mean that you can breach the £40,000 threshold – and therefore become liable for tax – without really knowing about it.



So who is affected now?

Higher earners will be vulnerable but it’s not as simple as that. If you were just on the 2015 pension scheme to get accruals anywhere near £40,000 you have to be earning just short of £120K, and very few people earn that sort of money.



However, many people serving now have protected rights under the old schemes and here it gets tricky. Because of the way the 1975 scheme behaves there will sometimes be significant uplifts in pension awards partway through a tax year – these can lead to an annual allowance breach. It is wrong to assume a simple read across to rank; we find that no two cases are the same.



Is there any protection?

Yes! You can carry forward any unused annual allowance from the previous three years. So if you have not exceeded the annual allowance threshold in those years you can take the allowance you did not use up and add it to the allowance for the current year. And your pensions increase will be matched against that higher number – this could give you much more protection and reduce your vulnerability.



So that means many people who breach in a single year will not face a tax charge?

Yes, last year about 4,000 people were notified that they had exceeded the limit in-year but, because of the carry forward, well over 3,000 of them did not face a charge.



What is the annual cycle of this?

The key measurement is between pension value at the beginning and at the end of the tax year – this is called the Pension Input Period (PIP). So beginning in April Veterans UK look at the two figures, work out the difference, multiply by the GAD factors. They can then see who has breached the £40,000 allowance. And then they write to all affected individuals. These letters would go out round about September - about 4,000 last year. So that if people submit paper self-assessment tax returns they will have this information ready for their tax declaration. If you have breached but there is no charge, because of carry over, you simply acknowledge the letter; if you have a charge then you have to take this up with HMRC. But of course Veterans UK only have visibility of pensions growth from your Armed Forces pension - the reason they tell everyone who has breached even if they do not have a charge is that those people may have other pension accruals that need to then be incorporated into the figures on their tax return. So you must declare to Glasgow whether you have other pensions.



So for some people this can be a big shock!?

Yes, we see that a lot in the Society. Last year a number of people got in touch and said, “I have received this letter; I do not understand it, it is just not fair! It cannot possibly be right can it?” But in most cases it is right and the shock is because they were unaware that this was in the background.



What do you say when people tell you they are shocked and upset about this?

First I say they must send us the breach notification; we need visibility of the letter so we can explain it to them. We also explain to them about 'Scheme Pays'.



Scheme Pays?

If the tax bill is under £2,000. then you just have to take care of it yourself. But if it is over £2,000 you can go for something called 'Scheme Pays', which essentially means the MoD settles the bill on your behalf and you pay back the MoD from your pension when it comes into payment over the period of your lifetime. There are advantages and disadvantages in doing this, and we often talk our members through the options.



Many people say it is not worth me being promoted because of this!?

You will always be better off as a result of promotion. We have had people talk about leaving the services to avoid the charge, opting out of the scheme or joining a different scheme. None of these are particularly good ideas. Someone who is promoted, and breaches, and pays a tax charge, will be better off financially than someone who does none of those things. What I say to people is it’s like joining the services and saying “I will stay as a corporal throughout my entire career because by doing so I will never pay tax at 40% - that’ll show ‘em!” Besides, if you leave to avoid this you will almost certainly have to take up some other career with a pension scheme which will be also subjected to annual allowance – it does not just apply exclusively to the Armed Forces!



What is your advice to those who may be affected by this, or fear they may get a letter?

Do not panic! If you receive a letter and you are a member, send it to us – we will check it and we will then explain to you how this came about, and explain the options to you if you have a charge. And if you have not yet got a letter do nothing – let Veterans UK do their work. If you do receive a letter then give us a shout – but do not lose sleep over it.