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  • How do I work out how much my pension saving is for different types of pension schemes?

How do I work out how much my pension saving is for different types of pension schemes?

Pension savings are worked out by reference to a 'Pension Input Period (PIP)'. The guidance below explains how you work out pension savings for each different type of pension arrangement.

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Introduction

This page helps you to work out pension savings in the pension input period for each different type of arrangement in a registered pension scheme as this varies depending on what type of pension arrangement you belong to.

Types of pension schemes

Read more about Pension Input Periods (PIPs)

There is an online calculator you can use to help you work out whether you are liable to an annual allowance charge. It also works out any unused annual allowance available to carry forward. There is also a calculator to help you work out your pension savings, if you are in a final salary or money purchase scheme. Follow the link below.

Pension savings annual allowance calculator

Pension savings made to an overseas pension scheme where either you or you employer received tax relief also count towards the annual allowance.

Working out the amount of your pension saving in an overseas pension scheme

Detailed guidance that pension scheme administrators can use to work out the amount of your pension saving can be found in the Registered Pension Schemes Manual (RPSM).

Annual allowance: Pension input amounts from 6 April 2011

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Pension savings under a money purchase arrangement

The amount of pension savings under a money purchase arrangement is simply the total of contributions paid into the arrangement during the PIP. This includes any contribution:

  • you have paid to the arrangement
  • your employer has paid to the arrangement
  • paid by someone else on your behalf

Your contributions should include the tax relief that you get on your pension contributions; that is, the gross amount of your contributions.

If an employer pays contributions to the scheme that have not been allocated to a specific member, and these are later put into your pension arrangement this is an employer contribution that should be included in the amount of your pension input when they are allocated.

What is not included in pension input amount

  • Contributions paid by you, or by someone other than your employer, after you have reached age 75.
  • Investment income or returns.
  • If the arrangement is contracted out of the State Second Pension, minimum payment rebates and contracting out rebates paid by HM Revenue & Customs (HMRC).

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Pension savings under a defined benefits arrangement

The amount of your pension savings under a defined benefits arrangement is the increase in the value of your promised benefits over the PIP. This is the difference between the value of your benefits at the start of the PIP (the opening value) and the value of your benefits at the end of the PIP (the closing value). If the difference is a negative amount then your pension savings for the arrangement is nil. The following example shows you how to work out the opening value, the closing value and the amount of pension saving over the PIP.

Fiona’s scheme gives her a pension of 1/80th pay for each year she’s been a member and a separate lump sum of three times her pension. At the start of the pension input period Fiona's pay is £50,000, and she’s been a scheme member for 15 years 214 days.

How to find the opening value

The opening value of your benefits can be thought of as the amount of money that might be needed to provide the expected benefit. It is a notional ‘capital' value and is determined as follows.

  1. Find the amount of your annual pension. (This is the amount of pension that you would be paid if you retired now at normal pension age and without any extra benefits for ill-health. So, if you took your benefits today, what would you get without any adjustment for early payment?)
    Fiona’s pension would be
    (15 + 214 ÷ 365) ÷ 80 x £50,000 = £9,741.44
  2. Multiply the annual amount of your pension by 16
    £9,741.44 x 16 = £155,863.04
  3. If your scheme also gives you a separate lump sum in addition to your pension, for example many public sector schemes provide a lump sum without having to give up pension, add the amount of the promised lump sum to the amount found after step 2.
    Add on the separate lump sum of three times Fiona’s pension
    £155,863.04 + (3 x £9741.44) = £185,087.36
  4. Increase the total after step 3 by the 12 month increase in the Consumer Prices Index (CPI) to the September before the start of the tax year which you are calculating annual allowance for
    The calculation is being done for the 2012-13 tax year, and the annual CPI increase to September 2011 is 5.2 per cent.
    £185,087.36 x 1.052 = £194,711.90

The value of Fiona’s pension at the start of the pension input period is £194,711.90.

At the end of the pension input period Fiona’s pay is £60,000 and she’s been a member for 16 years 214 days

How to find the closing value

The closing value is the notional ‘capital' value of the expected benefits at the end of the PIP in the same way as you find your opening value, but missing out the final step.

  • Find the amount of your annual pension.
    Fiona’s pension would be
    (16 + 214 ÷ 365) ÷ 80 x £60,000 = £12,439.73
  • Multiply that amount of your pension by 16
    £12,439.73 x 16 = £199,035.68
  • If your scheme also gives you a separate lump sum in addition to your pension, for example many public sector schemes provide a lump sum without having to give up pension, add the amount of the promised lump sum to amount found after step 2
    Add on the separate lump sum of three times Fiona’s pension
    £199,035.68 + (3 x £12,439.73) = £236,354.87

The value of Fiona’s pension at the end of the pension input period is £236,354.87.

Fiona’s pension saving under the arrangement is
£236,354.87 - £194,711.90 = £41,642.97

Certain events can cause the closing value of your benefits to be bigger or smaller than they would otherwise be. These events include:

  • the scheme making or receiving  a transfer for you
  • following a pension share on divorce there is a pension debit or credit attached to your benefits
  • your pension pot being tested against the lifetime allowance, for example because you’ve started taking a pension

Technical guidance on calculating the amount of pension saving under a defined benefits arrangement

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Pension savings under a cash balance arrangement

The method of valuing pension savings to a cash balance arrangement is similar to that for defined benefits arrangements. Your pension savings amount is the increase in the value of your promised pension fund over the pension period. This is the difference between the value of your promised pension pot at the start of the PIP (the opening value) and the value of your promised pension pot at the end of the PIP (the closing value). If the difference is a negative amount then your pension input for the arrangement is nil. The following example shows you how to work out the opening value, the closing value and the amount of pension saving over the PIP.

Mark is a member of a cash balance arrangement. His pension promise is that his pension pot will be increased by 12 per cent of his pay each year with a minimum amount of £10,000. Mark wants to work out what his pension saving is for the tax year 2011-12.

How to find the opening value

This is a two step process.

  1. Find the amount of your promised pension fund
    At the start of his PIP, Mark's fund stands at £156,000.
  2. Increase this amount by the 12 month increase in the CPI to the September before the start of the tax year.
    CPI for September 2010 was 3.1%
    £156,000 x 1.031 = £160,836

How to find your closing value

Your closing value is the amount of your promised pension fund at the end of the PIP.

Mark's pay for the year was £82,000, 12 per cent of which is £9,840. This is less than the promised minimum increase to his pension pot, so £10,000 was added to Mark's promised funds. This brings Mark's closing value to £166,000.

Mark's pension input is the difference between his opening value (£160,836) and his closing value (£166,000). Mark's pension savings amount is £5,164.

Certain events can cause the closing value of your benefits to be bigger or smaller than they would otherwise be. These events include:

  • the scheme making or receiving a transfer for you
  • following a pension share - on divorce there is a pension debit or credit attached to your benefits
  • your pension pot being tested against the lifetime allowance, for example because you’ve started taking a pension.

 
Technical guidance on calculating the amount of pension saving under a cash balance arrangement

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Pension savings under a hybrid arrangement

Under a hybrid arrangement you need to identify the possible types of benefit and their pension input values. The pension input amount for a hybrid arrangement is the greatest of the possible input amount.

So if for example your arrangement offered possible money purchase or defined benefits arrangement you need to work out the pension savings amount as if it were a money purchase benefit and also as a defined benefit. If the defined benefit input amount is higher than the money purchase input amount you use the defined benefit savings amount and vice versa.

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