In some cases, it is possible to use unused allowance from the previous three years to help when there are years in which contributions or deemed contributions are high.
Carry forward was invented to help smooth DB accrual because it isn’t easy to restrict this in any one year, unlike contributions to DC pension schemes.
Again, the tests for DB schemes and DC schemes are so significantly different that they are not testing like for like.
DB schemes’ deemed contributions bear no resemblance to the amount actually used to secure the accrual each year – this is understandable because in many cases it isn’t disclosed how much an employer is paying into a pension scheme each year.
The multiple has been reviewed since the introduction of this test in 2006, increasing from 10 times the benefit to 16 times, but now factoring in inflation.
This means that it is very difficult for anyone in a DB scheme to make a good estimate of their annual allowance usage before the scheme provides the data.
On the other hand, it is easier to estimate with a DC scheme as it is what you put in, including employer contributions and any tax relief claimed by the scheme.
As you can see, it appears when looking at the annual allowance that it is more suited to testing DC pension schemes than DB accrual.
The future
The future of these allowances is uncertain, but it seems unlikely that they could be changed significantly in the short term, due to the way in which individuals often have a mix of different types of pensions.
It could be that we need to consider if the tests should be split, but there would then be a need to be able to deal with the multiple types of pension schemes available and actively in force at this time.
What is clear, however, is that the multiples used to test benefits in DB pension schemes are ripe for a review, which in theory would be an easy way to level up or down the benefits members can accrue both annually and in their lifetime.
It would not resolve the wider issues in the pension world with regard to the lack of ability to plan, and with regard to those who are penalised by good investment growth in DC schemes or significant pay rises in DB schemes.
With the lifetime allowance currently frozen, this will clearly mean that more people will be affected by the lifetime allowance charges in the coming years and that it will become ever more restrictive because it isn’t keeping pace with inflation.
