Annual Allowance
Annual Allowance
From 6 April 2011, the Annual Allowance (AA) for tax-privileged pension savings reduced from £255,000 to £50,000. If you exceed the AA you may be subject to a tax charge.
In order to establish whether you have exceeded the AA in any tax year you need to calculate your 'pension input amount' (pension savings) for 'pension input periods' (PIPs) ending in that tax year.
The PIP for all IBM occupational pension plans is aligned with the tax year and runs from 6 April to the following 5 April.
There are different ways in which your pension input amount can be calculated, depending on your IBM pension plan membership:
| Plan membership | Pension input amount calculated on |
| M Plan or new IBM UK PPP members with NO other IBM pension benefits | Basis A |
| Hybrid members of M Plan or IBM UK PPP with benefits in C, N, DSL or I Plan to 5/4/2011 | Basis A and B |
| Enhanced M Plan | Basis A and B |
| I Plan members with continued accrual | Basis B |
Basis A
The pension input amount is the total contributions paid and credited in the tax year; this includes Smart* contributions, any employee contributions, Matched Contributions, ASCs/AVCs etc and Company credits.
Or
Basis B
The pension input amount is the value of the pension accrued in the tax year (with an allowance for the increase in Consumer Price Inflation (CPI)) multiplied by 16, plus any additional contributions (i.e. ASCs/AVCs) made.
If you need to calculate your pension input amount, you can find out how to do it here.
Tax
You will be liable for a tax charge if your total pension input amount in a tax year, less any unused allowance carried forward from earlier years (see below), exceeds £50,000.
Any excess can be charged to tax in whole or in part at 50%, 40% or 20% depending on your taxable income and the amount of the excess. You will need to tell HMRC if you have exceeded the AA, either through your Self Assessment Tax return or, if you haven’t filled in a tax return before, by registering with HMRC.
It is proposed that from April 2013 you will automatically receive a statement from IBM UK Pensions Trust Limited, by 6 October each year, if your pension input amount under the IBM pension plans is higher than the AA for the previous tax year.
The three year 'carry forward' rule
Under the new rules, any unused AA for the three previous tax years can be carried forward and added to the current year's £50,000 AA. The unused AA is based on the new formula as shown below and not the AA before April 2011.
As 2011/12 is the first tax year under the new regime, the carry forward amount will be based on the assumed pension input amounts made in the preceding three tax years i.e. 2008/09 – 2010/11.
The total usable amount is called the 'available AA'.
To find out how to calculate any carry forward available click here.
How your pension input amount is calculated depends on the entitlements you have from your pension plan membership:
| Plan membership | Pension input amount calculated on | |
| 1. M Plan or new IBM UK PPP members with NO other IBM pension benefits | Basis A | |
| 2. Hybrid members of M Plan or IBM UK PPP with benefits in C, N, DSL or I Plan to 5/4/2011 | Basis A and B |
|
| 3. Enhanced M Plan | Basis A and B | |
| 4. I Plan members with continued accrual | Basis B |
When calculating your pension input amount, you should take into account the following:
1. M Plan or new IBM UK PPP members with NO other IBM pension benefits - Basis A
If you want to remain within the Annual Allowance you will need to ensure that any Matched Contributions and ASCs you elect in the annual You* enrolment window, when added to the basic Smart* contributions, AVCs and any corresponding Company contributions (or IBM UK PPP equivalent), will not exceed £50,000 for the forthcoming pension input period.
You should also take into consideration that if you receive a salary increase during the pension input period, basic M Plan Smart* contributions, IBM credits and any Matched Contributions will increase as a result.
Any contributions that you make to an external arrangement should also be included in the calculation.
It is anticipated that very few members will be affected by this.
2. Hybrid members of M Plan or IBM UK PPP with benefits in C, N, DSL or I Plan to 5/4/2011 - Basis A and B
If you want to remain within the Annual Allowance you will need to ensure that any Matched Contributions and ASCs you elect in the annual You* enrolment window, when added to the basic Smart* contributions, AVCs and any corresponding Company contributions (or IBM UK PPP equivalent) AND any pension amount under B will not exceed £50,000 for the forthcoming pension input period.
You should also take into consideration that if you receive a salary increase during the pension input period, basic M Plan Smart* contributions, IBM credits and any Matched Contributions will increase as a result.
Any contributions that you make to an external arrangement should also be included in the calculation.
As pensionable service is ceasing under the DB arrangement on 5/4/2011 and pensionable salary increases have been restricted, it is anticipated that the figure under B will be nil for the majority of Members.
3. Enhanced M Plan members - Basis A and B
If you want to remain within the Annual Allowance you will need to ensure that any Matched Contributions and ASCs you elect in the annual You* enrolment window, when added to the basic Smart* contributions, AVCs and any corresponding Company contributions (or IBM UK PPP equivalent) AND any pension amount under B will not exceed £50,000 for the forthcoming pension input period.
You should also take into consideration that if you receive a salary increase during the pension input period, basic M Plan Smart* contributions, IBM credits and any Matched Contributions will increase as a result.
Any contributions that you make to an external arrangement should also be included in the calculation.
As the pension attributable to your pensionable service accrued to 5/4/2006 is still fully linked to salary increases, and, given the level of Company contributions made in respect of Enhanced M Plan members, it is anticipated that some Enhanced M Plan members will exceed the £50,000 limit.
4. I Plan members with continued accrual - Basis B
You will need to check whether your pension input amount under B exceeds £50,000 for the forthcoming year. You also need to take into account any ASCs and / or AVCs you elect which will fall under A.
All members
Pensions Trust cannot estimate what your pension input amount will be for 2011/12 and cannot provide you with any advice on the matter. If you are concerned you should contact an independent financial adviser.
(You should read the 'Carry forward' section before approaching an independent financial adviser.)
Carry Forward
Members will be able to carry forward any unused Annual Allowance based upon the pension input amounts from the previous three tax years. Examples of how to calculate these unused amounts are shown below.
M Plan Members
The difference between the total contributions paid / credited and the £50,000 AA amount for the three tax years prior to the tax year being assessed can be carried forward to the tax year of assessment.
The amount of contributions (within the IBM Pension Plan only) which should be compared to the AA is detailed in the Statutory Money Purchase Illustrations which are issued every May.
An example of how carry forward works for an M Plan member who has no other pension savings is shown below:
| Tax Year / PIP | Total paid / credited | Available AA | Carry forward |
| 2008/09 | £30,000 | £50,000 | £15,000 |
| 2009/10 | £35,000 | £50,000 | £15,000 |
| 2010/11 | £40,000 | £50,000 | £10,000 |
| Amount to carry forward to add to 2011/12 AA |
£45,000 |
||
| 2011/12 | £55,000 | £95,000 | £25,000* |
Despite the contributions in 2011/12 being greater than £50,000, no AA charge will be incurred as the amount is compared to £95,000 (AA of £50,000 + £45,000 carry forward).
*In 2012/13, it will be possible to carry forward £25,000 (£15,000 and £10,000 for 2009/10 and 2010/11 respectively) that was unused in 2011/12.
HMRC have confirmed that where negative amounts have accrued prior to 5/4/2011 these will not be offset against unused annual allowance for the following years and will be set to zero:
| Tax Year / PIP | Total paid / credited | Available AA | Carry forward |
| 2008/09 | £60,000 | £50,000 | (less £10,000 = £0) |
| 2009/10 | £40,000 | £50,000 | £10,000 |
| 2010/11 | £65,000 | £50,000 | (less £15,000 = £0) |
| Amount to carry forward to add to 2011/12 AA |
£10,000 |
||
| 2011/12 | £55,000 | £60,000 | £5,000 |
NB If the carry forward was in respect of 2008/9 this would have to be used in 2011/12 or it will drop out of the 3 year period and be ‘lost’.
Current members of the C, N, DSL, I and Enhanced M Plans
To calculate the amount that can be carried forward, you will need to determine the amount of the increase in your deferred pension values for the three tax years prior to the tax year being assessed.
Deferred pension values are included in your annual Pension Benefit Statements. You will also need the relevant CPI for the 12 month period ending in the September of the previous year.
An example of how carry forward works for a current member of the C, N, DSL or I Plan is shown below (for tax year 2010/11).
| Deferred pension at start of period (6/4/2010) | £10,000 |
| Plus CPI from September 2009 (1.1%) | £10,110 |
| Multiplied by 16 | £161,760 |
| Deferred pension at end of period (5/4/2011) | £11,000 |
| Multiplied by 16 | £176,000 |
| Total deferred pension input amount for 2010/11 | £176,000 - £161,760 = £14,240 |
| Carry forward value for 2010/11 excluding any ASCs/AVCs | £50,000 - £14,240 = £35,760 |
| If £20,000 ASCs/AVCs have been paid/credited, the carry forward value would be | £50,000 - (£14,240 + £20,000) = £15,760 |
Further advice
IBM (UK) Pensions Trust Limited is unable to provide the historical 'carry forward' information on an individual basis and is also unable to provide any personal advice on any of the above information.
You will need to consider your own particular circumstances and may wish to seek independent professional advice.
Last Updated: 17/02/2012
