Pension Annual Allowance... exceeded?!?

[Melchett01]

Originally Posted by 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

heights good,

I'd be really interested if you get an answer to the inconsistencies in PIA (13/14, 14/15 specifically). I noticed exactly the same thing and asked FPS and got precisely nowhere. They came back with the usual factors - promotions, pay rises etc - which is fine when the totals are going up, but why does it also drop in some years? If benefits grow as a function of salary, length of service and accrual rate, then the numbers should surely increase in a predictable manner. Or am I missing something?

Once again, the PPRuNe virtual crewroom springs into action to resolve tax and pension issues that the MOD is unwilling or unable to answer. Pretty poor show really.

[SirToppamHat]

Back to the subject material, and thank you to all those who have shared useful information, I do fall into that small group of recently promoted OF4s and am told that the letter will hit me at the 2-year point. I presume that this is in line with the time needed in rank to qualify for the pension?

I have to say that as a very old member of the AFPS 75 scheme, already at the 31-year point on the ladder, I think I am in for a horrid bill.

Keep up the good work all.

STH

[Melchett01]

Originally Posted by SirToppamHat

Back to the subject material, and thank you to all those who have shared useful information, I do fall into that small group of recently promoted OF4s and am told that the letter will hit me at the 2-year point. I presume that this is in line with the time needed in rank to qualify for the pension?

I have to say that as a very old member of the AFPS 75 scheme, already at the 31-year point on the ladder, I think I am in for a horrid bill.

Keep up the good work all.

STH

STH,

Correct on all counts! You may get one the year after as well, as I have, albeit for a far smaller amount - assuming they don’t move the 40K limit goalposts in the budget. There may be further tax down the line if under McCloud you opt to move back onto the 75 scheme for the extra 5 years. I’ll have to do the maths and think carefully as it would likely mean another bill for me, albeit with the sweetener of leaving with OF4 on 75 rather than 15.

[Countdown begins]

Has anyone had to go through the whole nause because they invested in a private Pension?

[create_it83]

Doctors and Dentists are the most likely to have gone through this. If you know one, a friendly MO may be able to help. Colleagues have had problems that are compounded either by additional income (e.g. rental) that adjusts the threshold or from private personal pension payments overflowing their AA.

[Sandy Parts]

Originally Posted by Countdown begins

Has anyone had to go through the whole nause because they invested in a private Pension?

All the related paperwork mentions that the statement from Veterans UK only covers your current service pension. Any other pension investments also have to be considered and the tax man expects you to know when you exceed the AA (even if you don’t get a letter). Something to think about when topping up a SIPP. HMRC get info from the banks and other financial organisations every year about your accounts so they can chase you up a few years later (hence ‘tax recalculation’ letters that are issued retrospectively if your declared figures don’t match the bank’s). Most of us will be PAYE rather then self-assessment so a letter to HMRC is needed to declare your SIPP contributions to reclaim the extra tax if eligible (40 or 41% rather than the default). This is then matched to the amount declared by the SIPP provider. All in all, a real pain and the govt promised to look into it but then only exempted certain professions from memory - not even sure if that was enacted in the end.

[popeye107]

Originally Posted by Sandy Parts

All the related paperwork mentions that the statement from Veterans UK only covers your current service pension. Any other pension investments also have to be considered and the tax man expects you to know when you exceed the AA (even if you don’t get a letter). Something to think about when topping up a SIPP. HMRC get info from the banks and other financial organisations every year about your accounts so they can chase you up a few years later (hence ‘tax recalculation’ letters that are issued retrospectively if your declared figures don’t match the bank’s). Most of us will be PAYE rather then self-assessment so a letter to HMRC is needed to declare your SIPP contributions to reclaim the extra tax if eligible (40 or 41% rather than the default). This is then matched to the amount declared by the SIPP provider. All in all, a real pain and the govt promised to look into it but then only exempted certain professions from memory - not even sure if that was enacted in the end.

Thanks, Sandy for that post, I'm in a similar position and thought by now all the computer systems were talking.

Countdown, I do an annual tax return for MMA and personal pension additions that Al R helped me with. I'm quite happy to pay the tax, but not so happy to pay an accountant!! I know it's £150_ VAT, but I should be able to work it out, if the grey cells hadn't started going.
I overshot my allowance last year by £6,550 and there's oodles of unused allowance from the previous 3 years so there was nothing to declare on the tax return 19/20, but I'm more interested in this FY. As it stands, and it's sheer guesswork as the PIA seems a totally random figure- up and down for no reason, If I take a guess it will be the PIA for 19/20 plus a bit for inflation or what have you, then I will overshoot again by ??£17k. Again there are parts of previous years to hoover up, then by the helpful calculators linked here I will owe circa £1k. The galling part is the actual tax return...what goes where etc. Easy to add personal pension bits, but PIA plus personal pension = a witch doctor or accountant!
I've asked the AFPS again, but it was heavily hinted that people are paid to do these calcs. I have a feeling I will just have to pay.

[Easy Street]

If you have the patience and attention to detail / grammatical nuance to read the primary source pension legislation, it should be possible to calculate your PIA from first principles. I have succeeded in creating a spreadsheet that replicates the Pension Calculator figures for my own particular career circumstances, and use it to predict my PIAs - accurately so far! Doing so for the whole range of possible careers would be a huge undertaking and undoubtedly why those who’ve succeeded expect to be paid for their work. But if you boil it down to just your own case then it might be DIYable depending on your comprehension, maths and Excel skills.

If you want to give it a try, the AFPS75 legislation is here (look mainly at Schedule 2 Part D and note that there have been several amendments since 2010) and the accompanying pension code tables are here. The AFPS15 transitional provisions are linked from the first page.

In relation to the OP, I had a quick skim to see what might have caused the spikes in PIA; one possible culprit is commissioning, which at one point involved a transition period of 5 years on WO pension contributions (a large jump from Sgt?) and then a further jump to the officer pension. The relevant clauses have been amended during the period in question so this would be one to go through with a fine-toothed comb.

[LoeyDaFrog]

What if.......

If someone was already in receipt of their, say AFPS75 pension, but was also accruing AFPS15 benefits as they were in an FTRS job, could they expect a similar letter? Asking for a mate (cough cough)

[Easy Street]

Originally Posted by LoeyDaFrog

If someone was already in receipt of their, say AFPS75 pension, but was also accruing AFPS15 benefits as they were in an FTRS job, could they expect a similar letter? Asking for a mate (cough cough)

You will certainly not breach the annual allowance by accruing AFPS15 in a FTRS job: at 1/47 accrual you’d need to be on a salary of £1.88M to reach £40k input! What you might need to check is your lifetime allowance. Work out the value of your AFPS75 pension at the time you started drawing it, deduct this amount from the lifetime allowance (currently £1.0731M), and the remainder is the headroom you have to make AFPS15 contributions (at 1/47th salary each year) without becoming liable for more tax. It’s in the guide here; the rule of thumb is that your total AFPS annual pension income would need to exceed £46.6k for there to be a LTA issue.

[SirToppamHat]

Well having spent the evening working through the figures various and based on the advice info above (gratefully received) I reckon that during the FY 22/23 I will be looking at a tax bill of just over £26K (based on current figures). Calculations are simplified by being on the AFPS 75 only, and I used the 16x change in value to get to the overall benefit for each year, allowing me to reveal the approximate available allowance from each of the previous 3 years (40,000 - (change x 16)) to offset the increase during the 'killer year'. Without the ability to offset, I would have been facing a bill more like £59K.

Of course, we have yet to see anything anything firmer than blancmange regarding McLeod; my understanding is that the sunset date for other schemes is Mar 22. I take this to mean that wef Apr 22, we will all be forced onto an inferior scheme (irrespective of age).

[Fortissimo]

Originally Posted by SirToppamHat

Well having spent the evening working through the figures various and based on the advice info above (gratefully received) I reckon that during the FY 22/23 I will be looking at a tax bill of just over £26K (based on current figures). Calculations are simplified by being on the AFPS 75 only, and I used the 16x change in value to get to the overall benefit for each year, allowing me to reveal the approximate available allowance from each of the previous 3 years (40,000 - (change x 16)) to offset the increase during the 'killer year'. Without the ability to offset, I would have been facing a bill more like £59K.

Of course, we have yet to see anything anything firmer than blancmange regarding McLeod; my understanding is that the sunset date for other schemes is Mar 22. I take this to mean that wef Apr 22, we will all be forced onto an inferior scheme (irrespective of age).

Correct, everyone will be moved onto a new scheme (AFPS22) from Apr 22 but you should also have reserved rights from whatever schemes you were in previously. If you stayed on AFPS75 then I am not sure McLeod will affect you other than in removing the option to stay on your existing scheme in Apr 22. I think the consultation has now closed but you do not need to be a cynic to appreciate that the resulting HMT policy decision is unlikely to be beneficial to all concerned.

On tax bills, it won't just be £26K. Assuming you put your self-assessment in on time, you will indeed have that added to the bill, which will need to be paid by 31 Jan. Unfortunately, because of the size of the bill you will also be asked for a Payment on Account of a further £13K on 31 Jan and the same amount on 31 Jul, making it a £52K in-year hit from your take-home pay. That is because the tax system sees you have effectively underpaid by £26K (which you therefore owe immediately) and assumes you will owe the same amount when you submit your SAA at the end of the year. Rather than you owing them the money (which is the equivalent of a £26K loan accrued over the year), they collect it up front but generously allow you a few months to scrape the cash together in 2 instalments. You might be able to secure a personal loan to fix the problem in the short term but there are no guarantees that you will not run into the same problem in future years - hopefully this does not occur during the term of that first loan. The effect is still the same on your pocket.

The 'cash now' problem is why many people end up using Scheme Pays. The immediate advantage is that AFPS(whatever) pays the tax bill direct from your pension pot, which has the happy knock-on effect of removing the associated Payment on Account. If you have not submitted your SAA yet, try adding an arbitrary excess Pension Input Amount of eg £40K, see what bill it generates, and then go back and select Scheme Pays - you should see your bill zeroed with no future payments demanded. Whilst Scheme Pays will reduce your immediate tax bill it can only be achieved by reducing your pension benefits, though this must be a fair reduction. It will also be a permanent effect, much like commutation, and will affect you for life. There may be advantages if you run into the Lifetime Allowance limit as it could possibly reduce taxes on your pension when it becomes payable.

In all the above it is worth remembering, as LJ posted on 28 Dec, that even if you breach some of the tax limits you will eventually be better off than someone who does not.

Lastly, however marvellous the PPrune Crewroom is, where pensions are concerned there is no substitute for expert professional advice!

• Join the Forces Pension Society
• Find an IFA who understands the AFPS

[Easy Street]

Originally Posted by fortissimo

There may be advantages if you run into the Lifetime Allowance limit as it [Scheme Pays] could possibly reduce taxes on your pension when it becomes payable.

Interested to know more about this. I had rather assumed that Scheme Pays payments would be treated as crystallised benefits in the LTA calculation, seeing as they are taking the place of “real” money in a tax payment. If there is a chance that they won’t be treated as crystallised benefits, that would be a material factor in upcoming decisions over my own (thankfully smaller) tax bill. How official, and how tentative, are the ‘may’ and the ‘possibly’?

[Fortissimo]

If there is a chance that they won’t be treated as crystallised benefits, that would be a material factor in upcoming decisions over my own (thankfully smaller) tax bill. How official, and how tentative, are the ‘may’ and the ‘possibly’?

Having done some more reading, the HMRC online tax manual (https://www.gov.uk/hmrc-internal-man...nual/ptm056460) suggests that Scheme Pays would not be a Benefits Crystallisation Event and that the payments are handled via a 'notional negative DC account'. The tax reductions (I think!) would arise from the reduced benefits which translate for a Defined Benefits scheme into a lower equivalent LTA.

My understanding is that you would need to request Scheme Pays with AFPS (via DBS) by 31 July 2021 for the tax year to Apr 20. You should before then have notified an interest and asked for the scheme's proposed reduction of your benefits so that you can see what the impact will be before you have to make an irrevocable decision for the year concerned.

Caveat: I am not an expert in pensions and tax, so my interpretation may be wrong! It would be sensible for people to do their own research, but make sure you get independent advice from a suitably qualified person before you make any decisions.

[LoeyDaFrog]

Thanks

Originally Posted by Easy Street

You will certainly not breach the annual allowance by accruing AFPS15 in a FTRS job: at 1/47 accrual you’d need to be on a salary of £1.88M to reach £40k input! What you might need to check is your lifetime allowance. Work out the value of your AFPS75 pension at the time you started drawing it, deduct this amount from the lifetime allowance (currently £1.0731M), and the remainder is the headroom you have to make AFPS15 contributions (at 1/47th salary each year) without becoming liable for more tax. It’s in the guide here; the rule of thumb is that your total AFPS annual pension income would need to exceed £46.6k for there to be a LTA issue.

Easy - thanks for the steer that proved rather useful. I've known about the LTA (one of the few things I remember from the finance brf in resettlement) but not the details or how to work it out.

[Lima Juliet]

Originally Posted by Easy Street [img]images/buttons/viewpost.gif[/img]
You will certainly not breach the annual allowance by accruing AFPS15 in a FTRS job: at 1/47 accrual you’d need to be on a salary of £1.88M to reach £40k input! What you might need to check is your lifetime allowance. Work out the value of your AFPS75 pension at the time you started drawing it, deduct this amount from the lifetime allowance (currently £1.0731M), and the remainder is the headroom you have to make AFPS15 contributions (at 1/47th salary each year) without becoming liable for more tax. It’s in the guide here; the rule of thumb is that your total AFPS annual pension income would need to exceed £46.6k for there to be a LTA issue.

Originally Posted by LoeyDaFrog

Easy - thanks for the steer that proved rather useful. I've known about the LTA (one of the few things I remember from the finance brf in resettlement) but not the details or how to work it out.

Just to point out that you can earn more than £46.6k without breaching the LTA - here is how in the following example:

- You retired or were made redundant after 22 years as a Wg Cdr with a £25k immediate pension on AFPS75 in FY2010/2011.
- In 2010/2011 the LTA was £1.8M.
- On retirement, your amount out of the LTA is calculated as 20x £25k = £500k plus your £75k tax free lump sum. So total £575k, which is ~32% of your LTA at this ‘Benefit Crystallisation Event (BCE). So that still leaves you with 68% of your LTA.
- The day after retirement you start a Wg Cdr FTRS role that you serve another 18 years to age 60 - your combined benefits are £15k tax free lump sum and a pension at age 60 of £25k.
- At the time of retirement the LTA is £1.2M (estimate) and you have 68% of that remaining before you pay 55% tax on any lump sum over the LTA taken at the that point or 25% reduced monthly pension over that LTA prior to income tax. 62% of £1.2M is £816k, which is the remainder of your LTA.
- At the point of retirement your amount out of your LTA is 20x £25k = £500k plus £15k lump sum. Which is £515k and still leaves £301k left of the £816k LTA remaining.
- So you are well within LTA. However, you have £25k of FTRS pension, plus an Index Linked pension from your previous AFPS75 pension of roughly £35k (assuming inflation stays around 2%). Total would be £60k on retirement plus a handy £15k tax free lump sum. With no LTA breached.

So what am I trying to say? Those that were made redundant in 2010/11 that subsequently rejoin as a Regular or FTRS are quids in when it comes to AFPS15 as long as you stay to age 60. The accrual rate of 1/47th and the fact that you will career average at the higher rank that you rejoin at, means that AFPS15 is pretty lucrative too.

[Countdown begins]

Are PIA letters void if you subsequently return to 05

Thanks for the posts above, one may have inadvertently hit my nail.
With the McCloud judgement going through, we will probably all get the chance to return to previous schemes until 2022, for instance 05 which was a much slower accrual rate compared to 15. So, and I am a novice, that will reduce my PIAs back to 2015, and consequently the letter I have from Glasgow is not accurate until I make that decision, if that’s my final choice? Whilst I understand an end of year tax return is for the end of a FY there’s now a strong possibility tax returns may have to be revisited by some who return to 05.
I may have this totally this wrong, but to me, 05 with its slower accrual rate (1/70 versus 1/47) is quite the deal if I’m going to leave before I make age 60.

[alfred_the_great]

Originally Posted by Countdown begins

Thanks for the posts above, one may have inadvertently hit my nail.
With the McCloud judgement going through, we will probably all get the chance to return to previous schemes until 2022, for instance 05 which was a much slower accrual rate compared to 15. So, and I am a novice, that will reduce my PIAs back to 2015, and consequently the letter I have from Glasgow is not accurate until I make that decision, if that’s my final choice? Whilst I understand an end of year tax return is for the end of a FY there’s now a strong possibility tax returns may have to be revisited by some who return to 05.
I may have this totally this wrong, but to me, 05 with its slower accrual rate (1/70 versus 1/47) is quite the deal if I’m going to leave before I make age 60.

i doubt very much the McCloud judgement will return you to the pre-15 scheme.

I suspect all of us will be moved onto the 15 scheme, regardless of age or length of service.

[Lima Juliet]

Countdown begins - I believe you are correct. The McCloud judgement is going unstitch a lot for many people and EVERYONE will be different. That is why it is taking a while to roll out, they have to get it right or they “jump out of the frying pan and into the fire”! They will also need to provide a means of bespoke calculations of all options for a lot of public servants!

[Lima Juliet]

Originally Posted by alfred_the_great

i doubt very much the McCloud judgement will return you to the pre-15 scheme.

I suspect all of us will be moved onto the 15 scheme, regardless of age or length of service.

That is the whole point of McCloud, it will offer you the chance to return to AFPS75 or AFPS05 if you were incorrectly and mandatorily moved to AFPS15 on the grounds of your age.

Detail here: https://forcespensionsociety.org/201...-armed-forces/