These values are calculated as:
Opening value
- The pension benefits at the start of the tax year are capitalised by multiplying the accrued pension by 16.
- If the scheme provides a separate lump sum in addition to the pension, the accrued lump sum is added to this value (this is typically seen in older public sector schemes).
- This total value is then allowed to be increased by the annual percentage CPI from September of the previous year. If the CPI figure is negative, the total remains the same, it does not decrease.
Closing value
- This is the increased pension amount at the end of the input period multiplied by 16.
- Add in the increased amount of any separate lump sum.
Subtract the opening value from the closing value and any positive result is the pension input amount for the tax year.
If the result is negative, which can occur when the CPI figure to use for up-rating the opening value is quite large and the actual accrual during the year is small, then the pension input amount is just zero, not the negative amount.
Accurate figures for the input amount for a DB scheme would normally need to be obtained from the scheme administrator, but below is an example of how the calculation works:
Natalie has been a member of a public sector pension scheme for 22 years. At the start of the input period (April 6 2022) she had exactly 22 years' service. Her pensionable salary was £50,000. By the end of the input period (April 5 2023), she had accrued an additional year of service and her pensionable salary had increased to £53,000.
The scheme accrual rate for pension is 1/80 of pensionable salary and 3/80s for the additional lump sum.
The CPI percentage from September 2021 was 3.1 per cent.
The opening value is:
Pension at start of pension input period: | 22/80 x £50,000 = £13,750 |
Capitalised value: | £13,750 x 16 = £220,000 |
Lump sum at start of pension input period: | (3 x 22)/80 x £50,000 = £41,250 |
Total: | £220,000 + £41,250 = £261,250 |
Increased by 3.1 per cent CPI: £261,250 x 1.031 = opening value of £269,348.75 | |
The closing value is:
Pension at end of pension input period: | 23/80 x £53,000 = £15,237.50 |
Capitalised value: | £15,237.50 x 16 = £243,800 |
Lump sum at end of pension input period: | (3 x 23)/80 x £53,000 = £45,712.50 |
Total: | £243,800 + £45,712.50 = £289,512.50 |
Closing value = £289,512.50 | |
Input amount for 2022-23: £289,512.50 - £269,348.75 = £20,163.75
Claiming carry forward
There is no requirement from HMRC to make a claim for carry forward, or to make an election to use carry forward.
However, it is prudent to keep a return of the calculations made and when carry forward has been used in case HMRC require evidence to support pension contributions claimed on tax returns.
Many providers have carry forward calculators, that not only do all the hard work for you, but also have the ability to download and print the carry forward reports that can be given to clients and stored on their record.
Richard Cooper is business development manager at The London Institute of Banking & Finance
