Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
‘Can I put my stipend in my stakeholder pension?’
Dean, address not given
‘I’m a clergyman in a final salary pension scheme. Can I still put my full annual stipend into my stakeholder pension, or is there some notional value placed upon the DB (defined benefit) membership?’
Tom Selby, AJ Bell senior analyst, replies:
For those unfamiliar with the term, a stipend is a regular fixed sum paid as a salary or as expenses to a clergyman, teacher or public official.
Savers in the UK receive tax relief on money paid into a pension, with most subject to an annual allowance (including tax relief) of £40,000.
You are only allowed to personally pay in 100% of your relevant UK earnings into a pension in any tax year. So someone who is paid £30,000, for example, can’t make a total annual pension contribution of more than £30,000.
Those earning above £150,000 may have a lower annual allowance – you can find more information on how this so-called ‘taper’ works here.
In addition, anyone who has taken taxable income from their defined contribution pension from age 55 has their annual allowance reduced to just £4,000. This does not apply to defined benefit pensions like yours.
Whatever the level of your annual allowance, it will apply across all your pension arrangements – including defined benefit and defined contribution. Stakeholder pensions are simply a form of defined contribution pension where charges are capped.
Working out how much of your defined contribution annual allowance you have used is relatively straightforward – it’s simply the amount that has gone into your fund, including tax relief, during the year.
Figuring out how much annual allowance you have used in your defined benefit scheme is a little trickier.
First you need to take the value of your benefits at the start of the year and multiply it by 16. Then you have to add any lump sum entitlement, before finally increasing your pension value by the CPI inflation figure from the previous September. This provides your ‘opening value’.
Next you need take the total amount of pension built up during the year and multiply this amount by 16. You then add any lump sum entitlement built up in the pension. You may also need to make adjustments if you have transferred money in or out of the account. This gives you the ‘closing value’.
The difference between the ‘opening value’ and ‘closing value’ is the amount of annual allowance used up in your defined benefit scheme.
If you speak to your defined benefit scheme administrator they should be able to do the sums for you.
If you do breach the annual allowance, HMRC will levy a charge designed to claw back any tax relief you have received during the year.
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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.