09 Mar 2015

A question about : Two questions re: SIPP/pension allowance and tax

Have been working on maximising my pension contributions this year to make maximum use of previous unused annual allowance. My goal this year is to make pension contributions up to my total earnings (which are higher than the annual allowance this year). I contribute to:

a) Defined benefit scheme (regular payments).
b) Defined benefit scheme (AVC contract to buy added years).
c) AVCs to employer-sponsored money purchase scheme
d) SIPP with Fidelity

My first question is regarding calculation of calculated use of annual allowance. My pensions Department has calculated my annual allowance used in each of the relevant Paying In Periods (the on-going year and the past 3 PIPs).

From the worksheets they have given me, this appears to be based on two amounts: (1) the increase in the Total pensionable Service over the year (which is essentially 1 year of service), plugged into a formula, and (2) my payments of AVCs into the money purchase scheme.

There is no mention of the monthly AVCs I have been paying in order to purchase added years. Is this an error, or is the contract for additional years counted towards the year in which I took out the contract?

Second question(s) is/are with regard to the tax relief on the SIPP contributions. So far, the net contributions have shown up as purchased units in the various investments. The tax relief part is still showing, after a couple of weeks, as cash. Three associated questions:

1) How long does it typically take SIPP providers to credit the tax relief amount in the relevant funds? I presume Fidelity are just waiting to receive this from HMRC (I have seen from previous threads that some providers find this up-front and others wait until they have cash in hand from HMRC)
2) If this occurs after the end of the current tax year, I presume this won't have any knock-on effect as the net payment was during 2014-2015 (i.e., the tax relief won't be debited against next year's pension contribution allowance) - is this correct?
3) What unit prices will apply to units purchased with the tax relief? I know when I buy units in ISAs and SIPPs, even though the transaction may show with a date several days later, the unit price is on the date of the initial transaction (i.e., payment). Will the unit rice be the same as on the day of the net purchase, or on the date that the tax relief is received from HMRC?

Thanks for any advice!

Best answers:

  • The PIA (pension input amount) calculation for DB schemes is far more complicated than just being based on an increased year of service. It's basically the increase in value of the pension, so stuff like salary changes and inflation are accounted for. Try the HMRC calculator, see what you get: http://www.hmrc.gov.uk/tools/annual-allowance/index.htm
    For the SIPP tax relief counts in the tax year of your contributions eg if you make a contribution in March 2015 and tax relief is not paid till May the total counts as a gross contribution for the 2014/15 tax year.
    The other questions will be specific to Fidelity. I would imagine they'll use the unit price when they purchase the units. I think the "settlement date" is usually a few days after the purchase date which is why you see payments go out a few days after purchase.
  • See https://www.gov.uk/tax-on-your-priva...ion-tax-relief
    Though this explains it better: http://adviser.royallondon.com/techn...ns-the-basics/
    The thing to remember is that the "100% of earnings" limit is a limit on tax relief for personal contributions, you can put in more but you don't get tax relief (though this will cause problems and some SIPP's T&Cs state that you shouldn't, I think you'd have to tell the scheme and they'd pay back the tax relief).
    You don't technically get tax relief on employer contributions, the employer does. So employer contributions aren't relevant.
    ETA: the other important thing to remenber is that the "100% of earnings limit" applies to the tax year, not the pension input period (the PIP is only relevant for the AA).