Annual Allowance

Anyone who pays into a pension scheme has an Annual Allowance (AA). The AA is set by the Government, and is the amount of pension that you can accrue in a financial year before a tax charge is payable.  The AA for 2011/2012 is £50,000.

Your AA is calculated using the increased value of your LG benefits from one financial year to the next.  If this sum is over £50,000, a tax charge is payable.

The following example shows how the Pensions Section calculates an Annual Allowance.

EXAMPLE ONLY

STEP 1

At 31^st March 2011, John has 19 years membership (16 years membership up to 31/03/2008 based on an 80ths accrual rate and 3 years membership from 01/04/2008 which is based on 60ths accrual rate).  He earns a salary of £40,000.  His benefits are worth:

Annual Pension:

£40,000 x (16/80 + 3/60) = £10,000

Multiply inflation increase (set by the HM Treasury)

e.g. 1.02 = £10,200 current value

Lump Sum:

£40,000 x (3 x 16/80) = £24,000

Multiply inflation increase (set by the HM Treasury)

e.g. 1.02 = £24,480 current value

STEP 2

At 31^st March 2012 John will have 20 years membership, earning a salary of £45,000.  His benefits are worth:

Annual Pension:

£45,000 x (16/80 + 4/60) = £12,000

Lump Sum:

£45,000 x (3 x 16/80) = £27,000

STEP 3

Calculate the difference in benefit values:

Annual Pension:

£12,000 - £10,200 = £1,800

Lump Sum:

£27,000 - £24,480 = £2,520

STEP 4

Calculate the increase in benefit value over the 2 financial years:

Annual Pension:

£1,800 x 16* = £28,800

* 16 is a generic factor set by the Government and used in all cases

Lump Sum:                          £2,520

Actual Increase:                 £28,800 + £2,250 = £31,320

As the Annual Allowance limit is £50,000, John has not exceeded it as he has only used £31,320 of his AA.

If he had exceeded his AA limit for that financial year, he could use any leftover allowance from the previous 3 financial years.  The Clwyd Pension Fund would determine this for you.