It’s rare nowadays to be in, what used to be called, a “Final Salary” pension. We now call these “Defined Benefit” pensions because they are now not typically based on your final salary but on your service and income levels throughout the period of membership.
If you work for the NHS, Local Authority, Education or Police it’s likely that you will be a member of one of these schemes.
Whilst you don’t have an “invested pot” the scheme allocates a “notional pot” in the background to enable it to pay you an inflation linked pension for the rest of your life. This “pot” grows to reflect this increasing pension the longer you are a member of the scheme.
This is different to the rest of us who rely on contributions from both ourselves and our employer to an invested pension arrangement, from which we will need to draw directly from in retirement or purchase an annuity (income for life).
If you have taxable income of under £110,000 you are allowed growth of £40,000 or less in 19/20. If you are likely to exceed this, they must send you a statement by 6 October.
For those not in a defined benefit scheme you just need to ensure total contributions including tax relief don’t exceed this figure.
So, if you get one of these what should you do?
- Don’t ignore it. The onus is on you to check your own tax position for each tax year. We’ve seen some hefty interest penalties for those who have “filed” their growth statements away.
- Taxable income under £110,000? If you have taxable income of under £110,000 and the growth is less than £40,000 and if you know that you haven’t contributed to any other pension, relax. You can file this away knowing that you have no further tax liability.
- Taxable income of over £110,000? You need to add the growth (less any personal contributions you’ve made) plus any other taxable income you’ve received in 19/20. If this exceeds £150,000, for every £2 of excess your Annual Allowance of £40,000 is “tapered” by £1 down to £10,000. You then need to assess this tapered Annual Allowance against your growth statement. If the growth exceeds your tapered Annual Allowance you need to look at unused allowances from previous years.
- Check the position from the three preceding tax years You may be able to use unused allowances. If you can, relax.
- All allowances used and still over? You will need to report the liability on your tax return due end January 2021. If the tax due is over £2,000 your scheme may be able to pay the tax for you.
Confused? We don’t blame you. The rules are very complicated. Robson Laidler’s tax team can help with these calculations. Get in touch with them here.
From a forward planning perspective Robson Laidler Wealth provide a cost v benefit as part of our overall planning service. This might be useful for those affected by current tax liabilities, which arise due to these excesses. Get in touch here.