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Dave Simson 13 December 2011

Finance Bill 2011: Pension Tax Relief Changes

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What I’ll cover....

Trip down memory laneWhat’s changed:

Annual AllowancePayment OptionsWhat’s in and what’s out

To be confirmedLife Time Allowance

Fixed Protection

Responsibilities and practicalities

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A trip down memory lane

Employee contribution restrictionsBenefits limited on cessationEarnings cap in place

Pre April 2006

Tax ‘Simplification’Removal of previous restrictionsIntroduction of Annual and Lifetime AllowanceThresholds – not limits

Post April 2006

A Day

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Tax Free Thresholds

Annual Allowance (AA)Increase in capital value of benefits YearlyFactor of 10£255k @ 31 March 2011

Lifetime Allowance (LTA)Total capital value of benefits On retirement (generally)Factor of 20Currently £1.8m

Tax charge above

thresholds

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April 2009 Budget

Labour Government

Intention to restrict tax relief on pension contributions for high earners from April 2011

Complicated method proposed

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But following the election

New Coalition Government formedOld proposal scrapped – too complicatedNew proposal:

amend existing annual and lifetime allowances amend factor for annual allowanceamend tax charge rate

14 October – results of consultation/way forward

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annualallowance

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2011 tax regime - summary

Effective from - year to 31 March 2012 for LGPS

Reduced to £50,000Allowance for the revaluation of previous years’ benefits in line with CPIFlat factor of 16 used to value increase in DB accrualCarry forward 3 years of unused allowanceAnnual Allowance frozen until 2015/16Full tax-relief up to the Annual Allowance (marginal rate charge above)

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PIPs and PIAs

Accrued pension at end of previous PIP:

Based on Final Pensionable Salary

and Pensionable Service at that date

Inflation (CPI) increaseAccrued pension at

the end of the current PIP:

Based on new Final Pensionable Salary

and Pensionable Service at that date

Start End

Increase in pension ‘growth’

x 16 + lump sum growth = “Pension

Input Amount (PIA)”

“Pension Input Period” (PIP)

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Example 1 – Above CPI pay increase(Maybe one day....)

Assumptions:20 years’ pensionable service at March 2011Pensionable salary of £150,000CPI 2.5%Actual pay increase 4% (1.5% above CPI)

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Calculation of the value of benefits

1 April 2011Pay = £150,000Service

17 years pre March 083 years post March 08

Benefit calculationPension = ((17 x £150,000/80

+(3 x £150,000/60))Lump sum = 17 x £150,000 x 3/80

Pension £39,375Lump sum £95,625

31 March 2012Pay £156,000Service

17 years pre March 20084 years post March 08

Benefit calculationPension = ((17 x £156,000/80)

+(4 x £156,000/60))Lump sum = 17 x £156,000 x3/80

Pension £43,550Lump sum £99,450

Step 1 – Start of PIP Step 2 – End of PIP

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Calculation of pension growth

Pension at start of PIP £39,375 (£40,359)Pension at end of PIP £43,550

Growth in excess of 2.5% £3,191 (A)Lump sum at start of PIP £95,625 (£98,016)Lump sum at end of PIP £99,450

Growth in excess of 2.5% £1,434 (B)

Step 3 – Compare for growth

Incl. CPI

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Calculation of pension growth

Growth in pension £3,191 (A)Growth in lump sum £1,434 (B)Flat related factor 16 (C)

Growth (A x C) + B = £52,490Excess subject to tax charge £2,490

Step 4 – Apply factor

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Calculation of tax rate to apply

Gross income £156,000Less contributions (7.5%) _£11,700

£144,300Plus excess over £50,000 __£2,490Total net income £146,790As total income is below £150,000 (50% tax threshold) tax charge is 40%

Step 5 – Calculate marginal tax rate

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Calculation of tax

Total growth £52,490Less annual allowance _£50,000Excess £2,490

Apply tax rate – 40% £996*

* Assumes no carry forward allowance available

Step 6 – Apply tax rate to excess

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Example 2 – Includes Promotion

Assumptions:20 years’ pensionable service at March 2011Pensionable salary of £110,000 p.a.Receives promotion to £180,000 p.a.CPI 2.5%

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Calculation of the value of benefits

1 April 2011Pay = £110,000Service

17 years pre March 083 years post March 08

Benefit calculationPension =((17 x £110,000/80)

+(3 x £110,000/60))Lump sum = 17 x £110,000 x 3/80

Pension £28,875Lump sum £70,125

31 March 2012Pay = £180,000Service

17 years pre March 084 years post March 08

Benefit calculationPension = ((17x£180,000/80)

+(4 x £180,000/60))Lump sum = 17 x £180,000 x3/80

Pension £ 50,250Lump sum £114,750

Step 1 – Start of PIP Step 2 – End of PIP

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Calculation of pension growth

Pension at start of PIP £28,875 (£29,597)Pension at end of PIP £50,250

Growth in excess of 2.5% £20,653 (A)Lump sum at start of PIP £70,125 (£71,878)Lump sum at end of PIP £114,750

Growth in excess of 2.5% £42,872 (B)

Step 3 – Compare for growthIncl. CPI

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Calculation of pension growth

Growth in pension £20,653 (A)Growth in lump sum £42,872 (B)Flat related factor 16 (C)

Growth (A x C) + B = £373,320Excess subject to tax charge £323,320

Step 4 – Apply factor

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Calculation of tax rate to apply

Gross income £180,000Less contributions (7.5%) _£13,500

£166,500Plus excess over £50,000 £323,320Total net income £489,820As all excess is over £150,000 (50% tax threshold) tax charge is 50%

Step 5 – Calculate marginal tax rate

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Calculation of tax

Total growth £373,320Less annual allowance _£50,000Excess £323,320

Apply tax rate – 50% £161,660*

* Assumes no carry forward allowance available

Step 6 – Apply tax rate to excess

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But with carry forward...

Assuming 4% pay increase and 2.5% inflation in previous 3 yearsGrowth total in previous three years

£33,042+ £34,771 + £36,585 = £104,398 Unused allowance

(3 x £50,000) - £104,398 = £45,602 Plus 2012 allowance = £50,000Total allowance £95,602

Step 4b – Calculate carry forward

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Calculation of tax

Total growth £373,320Less effective annual allowance £95,602Excess £277,718

Apply tax rate – 50% £138,859(Compared to £161,660 if carry forward was not implemented)

Step 6 – Apply tax rate to excess

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Annual allowance - who might it affect (LGPS)?

    Pensionable Salary at start of tax year

    100,000 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000

Pensionabl

e Servic

e at start of tax year

10 32,925 36,218 39,510 42,803 46,095 49,388 52,680 55,972 59,265

15 35,300 38,830 42,360 45,890 49,420 52,950 56,480 60,010 63,540

20 37,675 41,443 45,210 48,978 52,745 56,513 60,280 64,048 67,815

25 40,050 44,055 48,060 52,065 56,070 60,075 64,080 68,085 72,090

30 42,425 46,668 50,910 55,153 59,395 63,638 67,880 72,123 76,365

35 44,800 49,280 53,760 58,240 62,720 67,200 71,680 76,160 80,640

40 47,175 51,892 56,610 61,327 66,045 70,762 75,480 80,197 84,915

Pay Award – 5%CPI – 3%

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Who might it affect (LGPS)?

Pay Award – 0%

CPI – 3%

    Pensionable Salary at start of tax year

    250,000 260,000 270,000 280,000 290,000 300,000 310,000 320,000 330,000

Pensionabl

e Servic

e at start of tax year

10 48,198 50,126 52,054 53,982 55,910 57,838 59,765 61,693 63,621

15 39,292 40,863 42,435 44,007 45,578 47,150 48,722 50,293 51,865

20 30,385 31,601 32,816 34,032 35,247 36,463 37,678 38,893 40,109

25 21,479 22,338 23,198 24,057 24,916 25,775 26,634 27,493 28,353

30 12,573 13,076 13,579 14,082 14,585 15,088 15,590 16,093 16,596

35 3,667 3,813 3,960 4,107 4,253 4,400 4,547 4,693 4,840

40 0 0 0 0 0 0 0 0 0

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Payment Options

Charges < £2,000 to be met by member

Charges > £2,000 Member can elect for scheme to pay

Still waiting for GAD tables and guidance

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What’s in and what’s out

No longer exemptBenefits in the year of retirement including enhancements(But unreduced benefits OK)Enhanced protection cases

Exempt:Deferred membersBenefits in the year of deathSerious ill-health retirementLikely for normal ill-health retirements too

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To be confirmed

Aggregation of LGPS benefitsOriginal proposal too severeCurrent option too generous and inconsistentWith Local Government Association (LGA) to liaise with HMRC

Ill Health RetirementAwaiting revised regulations to confirm which ill heath retirements will be exempt.

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lifetimeallowance

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2011 tax regime - summary

Reduced to £1.5m from April 2012

LTA valuation factor maintained at 20

LTA tax-charges unchangedLump sum is taxable at 55%Pension is taxable at 25%

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Protection

Current protections Primary and Enhanced are protected!

But... members that have enhanced protection that had a pension pot of less than £1M at A Day, may find their protected LTA is less than £1.5M (new LTA) now and therefore enhanced protection would be of no benefit to them

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Something for the weekend sir?

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Fixed Protection

Apply before 6 April 2012Protected LTA of £1.8mBut, by April 2012:

No benefit accrual BEYOND CPI andNo AVCs/money purchase contributions.Possible concerns over auto-enrolment

Not permitted if you have enhanced or primary protection

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Important decision for member:

Retain benefit accrual, lose fixed protection and have LTA of £1.5MRetain fixed protection, lose benefit accrual and have LTA of £1.8MMust relinquish enhanced protection!Wrong decision could cost over £75K

Benefit calculations could be obtained from pensions section or consultants;

But they are unable to give financial advice!

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practicalities& responsibilities

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Practicalities & ResponsibilitiesInfo From Info To What 2011/12 2012/13 +

Employer Pension Scheme

Pay, benefits, length of service

6 July 2012 6 July 2013

Pension Scheme

Scheme Member if > Annual Allowance

Pension input amount and carry forward

6 Oct 2012 6 Oct 2013

Scheme Member

HMRC Self Assessment Return

31 Jan 2013 (to be amended up to 31 January 2014)

31 Jan 2014

Scheme Member

Pension Scheme

to make irrevocable decision on scheme pays

31 December 2013

31 July 2014

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Thank You

Any questions?

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DisclaimerThis presentation is for information only.  It has been compiled by Hymans Robertson LLP, and is based upon their understanding of legislation and events as at March 2011.  Legislation may be subject to future change.

The presentation is designed to be a general summary of the new tax legislation.  It does not take into account your personal circumstances and does not constitute financial advice.  Where the subject of this presentation involves legal or tax issues you may wish to take specialist advice. Hymans Robertson is unable to provide you with advice; if you are unsure as to what action to take we strongly recommend that you seek independent financial advice.  For a list of Independent Financial Advisers in your area you can contact IFA Promotions on 0800 085 3250 or visit www.unbiased.co.uk.  Please be aware that you may be charged a fee for any advice.