Calculations

Question 1

Example
At the start of the pension input period that started on 15 November
2013, James had been a member of a defined benefit scheme for 15 years. The scheme had an accrual rate of 1/60th and James’ pensionable remuneration was £63,000. James has no entitlement to a separate pension commencement lump sum; he would have to give up some of his pension entitlement in order to receive a lump sum payment. At the end of the pension input period ending 14 November 2014, James had been a member of the scheme for 16 years and his pensionable remuneration was £69,000. The increase in the CPI as at September 2013 was 2.7%

Answer 1

15/60 x £63,000 x 1.027 x 16 = £258,804
16/60 x £69,000 x 16 = £294,400
£294,400 - £258,804 = £35,59

Question 2

David, aged 60 is retiring and taking benefits from his employer’s defined benefit scheme in 2017/18. He is entitled to a scheme pension of £40,000 per annum plus a PCLS of £100,000.
How are his benefits valued?

Answer 2

His benefits are valued as follows:

£40,000 scheme pension x 20 = £800,000 (BCE 2)
PLUS
£100,000 PCLS (BCE 6) = £900,000 total

£900,000 is less than the lifetime allowance in 2017/18 of £
1 million so there will not be a Lifetime Allowance Charge

Question 3

Jane has an entitlement to PCLS of £500,000 on 5 April 2006.
She started to draw her benefits in 2011/12, when the lifetime allowance was £1.8 million. Jane’s maximum PCLS in 2011/12 was £500,000 x £1.8 million / £1.5million = £600,000
Let’s suppose Jane decided to defer drawing her benefits until
2017/18. In this situation, although the standard lifetime allowance has fallen back to £1 million, the calculation will be exactly as it was for 2011/12, as the lifetime allowance of £1.8 million will still apply for the purpose of this calculation

Question 4

Chris has an occupational pension fund valued at £2,000,000 on 5 April 2006 with PCLS entitlement of £600,000 i.e.30%. She
successfully applied for enhanced protection. Chris’ fund value in
2015/16 is £2,400,000. Therefore in 2015/16, Chris’ PCLS entitlement is £2,400,000 x 30% = £720,000.

If Chris decides to defer taking her bene fits until 2017/18, when the value of her fund is £2,500,000, then her PCLS entitlement is £2,500,000 x 30% = £750,000

Question 5

Example 1 - tapering does not apply
James has a salary of £180,000 and £20,000 of investment income in the 2021/22 tax year.
His employer makes a contribution of £20,000 and he personally makes a contribution of £20,000.
His adjusted income is £220,000.
(£200,000 income chargeable to income tax + £40,000 total pension input - £20,000 personal contribution)
His threshold income is £180,000.
(£200,000 income chargeable to income tax - £20,000 personal contribution)
As the adjusted income is below £240,000 James annual allowance is not tapered.

Question 6

Example 1 - tapering does not apply
James has a salary of £180,000 and £20,000 of investment income in the 2021/22 tax year.
His employer makes a contribution of £20,000 and he personally makes a contribution of £20,000.
His adjusted income is £220,000.
(£200,000 income chargeable to income tax + £40,000 total pension input - £20,000 personal contribution)
His threshold income is £180,000.
(£200,000 income chargeable to income tax - £20,000 personal contribution)
As the adjusted income is below £240,000 James annual allowance is not tapered.

Question 7

Example 2 - adjusted income above £240,000
Georgina has salary of £220,000 and investment income of £10,000 in the 2021/22 tax year.
Her employer makes a £30,000 contribution and she personally makes a contribution of £10,000.
Her adjusted income is £260,000.
(£230,000 income chargeable to income tax + £40,000 total pension input - £10,000 personal contribution)
Her threshold income is £220,000.
(E230,000 income chargeable to income tax - £10,000 personal contribution)
As both the adjusted and threshold income are above the relevant limits Georgina is subject to the taper. Her £20,000 excess income above the adjusted income limit reduces her annual allowance by £10,000 to £30,000.
As her total contributions are £40,000 she would be subject to the annual allowance charge on the £10,000 excess, unless she had carry forward available.

Question 8

Example 3 - using personal contributions to reduce threshold income
Julian has his own business and has income made up of salary and dividends of £205,000 that is subject to income tax in 2021/22.
He maximised his pension contributions in 2018/19 and 2019/20 but made no contributions in 2020/21 due to reinvestment in the business
In 2021/22 he wants to maximise his contribution from the business, making use of his carry forward from 2020/21.
If the employer contributes the full £80,000 (£40,000 in respect of the 2020/21 unused annual allowance, and £40,000 for 2021/22) his situation is:
Adjusted income would be £285,000.
(£205,000 income chargeable to income tax + £80,000 total pension input)
Threshold income would be £205,000.
(£205,000 income chargeable to income tax)
As both the adiusted and threshold income are above the relevant thresholds Julian would be subject to the taper.
The £45,000 excess adjusted income reduces the annual allowance for 2021/22 by £22,500 to £17,500.
The excess of £22,500 in 2021/22 would be subject to the annual allowance charge.
Alternatively, Julian could make a personal contribution of £5,000, and his company make an employer contribution of £75,000. In this scenario the situation would be as follows:
Adjusted income would be £280,000
(£205,000 income chargeable to income tax + £80,000 total pension input - £5,000 personal contribution)
Threshold income would be £200,000.
(£205,000 income chargeable to income tax - £5,000 personal contribution)
As the threshold income does not exceed £200,000 Julian’s annual allowance would not be tapered so no annual allowance charge would apply.