Annual allowance as a deferred member of a pension scheme
Discussion
It may be that an accountant, a PH-minded taxperson or FA will have an informed view on this.
Take a member of an unfunded defined benefit scheme who finds that they are facing a 67.5% marginal tax rate because of tapered AA and are also heading close to the LTA, so they are thinking of opting out of continuing to contribute to the scheme (and not contributing further to any pension at all). To their surprise the deferred membership still means that although they are not contributing, the pension remains final salary and inflation-linked, (they had expected that the benefits would not be indexed for the period between opting out and normal retirement age).
Clearly, after a year of not contributing they would have no annual increase in annual input amount as a result of having spent a further year in the scheme and thereby garnering another xth of final salary as pension but what about the CPI-related uplift in the virtual pot? For the sake of argument, say someone had a £0.9m virtual pot and there was CPI of 5%? That would mean an annual input amount of £45k, breaching the AA even without tapering.
Now, forget the LTA as that is going up by CPI, but what about the AA? Some say that the CPI-related increase is not counted, others that it is, as the member, though not contributing, and deferred is still an "active" member as their DB is related to their ongoing employment.
Thoughts welcomed.
Take a member of an unfunded defined benefit scheme who finds that they are facing a 67.5% marginal tax rate because of tapered AA and are also heading close to the LTA, so they are thinking of opting out of continuing to contribute to the scheme (and not contributing further to any pension at all). To their surprise the deferred membership still means that although they are not contributing, the pension remains final salary and inflation-linked, (they had expected that the benefits would not be indexed for the period between opting out and normal retirement age).
Clearly, after a year of not contributing they would have no annual increase in annual input amount as a result of having spent a further year in the scheme and thereby garnering another xth of final salary as pension but what about the CPI-related uplift in the virtual pot? For the sake of argument, say someone had a £0.9m virtual pot and there was CPI of 5%? That would mean an annual input amount of £45k, breaching the AA even without tapering.
Now, forget the LTA as that is going up by CPI, but what about the AA? Some say that the CPI-related increase is not counted, others that it is, as the member, though not contributing, and deferred is still an "active" member as their DB is related to their ongoing employment.
Thoughts welcomed.
Appears that any increase in excess of CPI counts towards your annual allowance, see:
https://www.pensionsadvisoryservice.org.uk/content...
https://www.pensionsadvisoryservice.org.uk/content...
JohnP68 said:
Appears that any increase in excess of CPI counts towards your annual allowance, see:
https://www.pensionsadvisoryservice.org.uk/content...
Many thanks - that seems to be very clear - "If you have ended your active membership of a scheme and are not therefore building up service,https://www.pensionsadvisoryservice.org.uk/content...
increases in your benefits can be disregarded. An increase in your deferred benefits is allowed, provided that it is not more than either CPI or as specified in the scheme rules."
ETA - if the theoretical worker but deferred had a big pay increment then they could (quite reasonably) be liable for an AA charge on the effect that that DB-linked increase would have on the pension but the key question re CPI is answered.
Edited by Revisitph on Friday 21st September 21:47
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