ACCA Advanced Taxation (ATX) Practice Exam

Which of the following formulas best describes adjustment income for pensions?

1. Net income + employee contributions

2. Net income + employee OPC + employer contributions

3. Net income - employee contributions

4. Net income + employer contributions

The correct answer is: Net income + employee OPC + employer contributions

Adjustment income for pensions reflects the total amount that needs to be considered to determine the contributions made towards a pension plan. This typically includes both employee contributions and employer contributions, as well as any applicable overlay costs that might be expressed through Other Post-Employment Benefits (OPEB). The correct approach would be to start from the net income and account for contributions effectively. By adding employee contributions (which increase the amount put into the pension scheme by the employee) along with employer contributions (which add further to the pension savings on behalf of the employee), you're providing a comprehensive view of the adjustment income related to pensions. Including OPEB can also be crucial, as it encompasses additional, often related employee benefit costs that can affect overall financial planning and retirement funding. This formula captures the holistic picture of income contributed to pension schemes from both the employee and employer sides, allowing for an accurate understanding of total pension-related assets and obligations. Thus, this method not only aligns with typical pension adjustment procedures but also welcomes the complexities of pension contributions, ensuring that the calculations reflect the true economic reality of pension funding.