In a defined benefit pension arrangement, the annual allowance usage is a notional contribution based on the increase in benefits accrued over the pension input period. As part of our Bitesize Technical series, Senior Technical Consultant, Joshua Croft, explains the rules around defined benefit accrual:
- How DB contributions are measured against the member’s annual allowance.
- How to calculate annual allowance usage.
- Worked examples.
- how net pay differs to salary sacrifice.
Watch the bitesize video now or scroll down to read through the key talking points.
Key insights on defined benefit accrual
How is the annual allowance used in a defined benefit scheme?
Defined benefit schemes calculate annual allowance usage based on increase in accrued benefits over the pension input period. The pension input amount is the growth in a member's savings during the pension input period, calculated by the difference between opening and closing values.
What is a pension input period?
This is the 365-day period over which the growth in the member’s pensions savings is assessed.
What is a pension input amount?
This is the monetary amount the pension savings have grown by in the pension input period. For DB schemes, this is based on the growth in benefits. For the defined contribution money purchase schemes, it is based on the contributions that have been paid.
How do you calculate annual allowance usage?
The calculation involves converting the opening value (initial benefit) into a capital value adjusted for inflation, and similarly calculating the closing value without inflation adjustment. Growth in scheme benefits is found by subtracting the opening value from the closing value.
More Bitesize Technical
Employer contributions explained
Learn more about employer contributions. Watch the video here.
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