Defined Benefit Pension How to Work Out Annual Allowance

Published / Last Updated on 20/05/2018

How to work out the annual allowance used for a defined benefit pension scheme.

Example 1:  1/60th Scheme (includes lump sum), Salary £50,000pa

Last Year:  10 years in Scheme
10/60ths X £50,000 = £8,333 pa pension entitlement
X 16 (government multiple) = £133,333
+ inflation adjustment e.g. 3% = £137,333 deemed opening value

This Year (extra year service):  11 years in Scheme
11/60ths X £50,000 = £9,166 pa pension entitlement
X 16 (government multiple)= £146,666 deemed closing value

This year - Last year (inflation adjusted) = deemed annual allowance used up
£146,666 - £137,333 = £9,333 Annual Allowance Used

Example 2:  1/80th Scheme + Lump Sum 3n/80ths separate cash), Salary £50,000pa

Last Year:  10 years in Scheme
10/80ths X £50,000 = £6,250 pa pension entitlement
X 16 (government multiple) = £100,000 deemed value
+ Lump Sum 3n/80ths:  3 X 10/60ths X £50,000 = £18,750 cash
TOTAL = £100,000 + £18,750 = £118,750
+ inflation adjustment e.g. 3% = £122,312 deemed opening value

This Year (extra year service):  11 years in Scheme
11/80ths X £50,000 = £6,875 pa pension entitlement
X 16 (government multiple)= £110,000 deemed value
+ Lump Sum 3n/80ths:  3 X 11/60ths X £50,000 = £20,625 cash
TOTAL = £110,000 + £20,625 = £130,625 deemed closing value

This year - Last year (inflation adjusted) =
£130,625 - £120,312 = £10,313 Annual Allowance Used

 


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