Understanding your pension.

By Rachel Efetha, Chartered Financial Planner.

If you’re part of a defined benefit (DB) pension scheme, understanding how to calculate your “pension input amount” is key—especially when it comes to ensuring you don’t exceed your annual allowance, which could lead to tax charges. Simply put, your pension input amount is the value of the increase in your pension benefits over a tax year.

Here’s a straightforward guide to help you:

Step 1: Understand Your Annual Allowance

The annual allowance is the maximum amount of pension savings you can make in a tax year without facing tax penalties. For most people, this is currently £60,000 (2023/24), but it may be lower if your income is high (tapered annual allowance) or you’ve already accessed your pension.

Step 2: Find Out Your Opening Value

This is the value of your pension at the start of the tax year. To calculate this, take your pension at the beginning of the year and multiply it by 16 (because your pension is an annual benefit). Then, add any tax-free lump sum you’re entitled to.

For example, if your pension is £10,000 a year at the start of the tax year, the opening value is:

£10,000 × 16 = £160,000

Step 3: Find Out Your Closing Value

Next, calculate your pension’s value at the end of the tax year. Take your pension at the end of the year, multiply it by 16, and add any lump sum.

If your pension has increased to £11,000 a year at the end of the tax year, the closing value is:

£11,000 × 16 = £176,000

Step 4: Calculate the Pension Input Amount

Now, subtract the opening value (adjusted in line with the revaluation factor that your scheme uses) from the closing value. Let’s say the revaluation factor is 3%, so the inflation-adjusted opening value is:

£160,000 × 1.03 = £164,800

Finally, subtract this from the closing value:

£176,000 − £164,800 = £11,200

This £11,200 is your pension input amount. If it’s below your annual allowance, you won’t face any tax charges.

Summary

Calculating the pension input amount for a defined benefit scheme involves comparing the growth in your pension’s value from the start to the end of the tax year. By following these steps, you can work out whether your pension contributions fall within your annual allowance or if you need to take further action.

If you’re ever unsure, it’s a good idea to speak to your pension provider or seek advice from a financial adviser to ensure you stay on top of your pension savings.

How Anstee & Co. can help you understand your pension.

We are a firm of Independent Financial Advisers (IFAs). This means that the financial advice we provide to you is unbiased. Why not arrange a meeting to see how we can help you? The initial meeting is at our cost and is without obligation. Meetings can be arranged at a time and location that is convenient for you.

Our Head Office is located at-

• Kettering, Northamptonshire

Additionally, our financial advisers live and make use of meeting rooms in-

• Bedford, Bedfordshire
• Market Harborough, Leicestershire
• Northampton, Wellingborough and Thrapston in Northamptonshire.

Our expertise covers all aspects of financial planning including pensions, investments, and mortgages.

If you have any thoughts or comments on this article, “Understanding your pension”, then it would be great to hear your views.

Finally, the information contained in this article is for information purposes only and does not constitute financial advice. No action should be taken based on this information alone. Anstee & Co is authorised and regulated by the Financial Conduct Authority (FCA).”