Pension Tax Relief November 2011

27
Pension Tax Relief November 2011 Presentation By: Gillian MacKenzie www.sppa.gov.uk

description

Pension Tax Relief November 2011. Presentation By: Gillian MacKenzie. www.sppa.gov.uk. Aims of Presentation. Overview of Pensions Tax Relief Annual Allowance Lifetime Allowance Outline of SPPA Work to Date Next Steps. Pension Tax Relief. Background - PowerPoint PPT Presentation

Transcript of Pension Tax Relief November 2011

Page 1: Pension Tax Relief November 2011

Pension Tax Relief

November 2011

Presentation By: Gillian MacKenzie

www.sppa.gov.uk

Page 2: Pension Tax Relief November 2011

Aims of Presentation

• Overview of Pensions Tax Relief–Annual Allowance–Lifetime Allowance

• Outline of SPPA Work to Date

• Next Steps

Page 3: Pension Tax Relief November 2011

Pension Tax ReliefBackground

• UK Government Announcement 14 October 2010

• Finance Act 2011 received Royal Assent 19 July 2011

• Annual Allowance reduced from £255,000 to £50,000 from April 2011

for all pension savings

• Lifetime Allowance reduced from £1.8m to £1.5m from April 2012

Page 4: Pension Tax Relief November 2011

Annual Allowance

• Introduced from April 2011

• Reduced to £50,000 (from £255,000)

• Factor of 16 to value increase in Defined Benefit accrual

• 3 year carry forward of unused allowance

• Pension Input Period (PIP)

Page 5: Pension Tax Relief November 2011

Exemptions

• Deferred members

• Benefits in year of death

• Terminal ill-health

• Severe ill-health retirement

Page 6: Pension Tax Relief November 2011

Who will it affect?

• Primarily high earners

• Commonly those earning £150,000 +

• Can affect members much lower down salary scales • Could affect members who purchase Additional Pension

Page 7: Pension Tax Relief November 2011

P e n s i o n a b l e s a l a r y a t s t a r t o f t a x y e a r

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

10

15

20

25

30

35 Pen

sio

nab

le s

ervi

ce

at s

tart

of

tax

year

40

Pension growth likely to be above reduced annual allowance

Pension growth may be above reduced annual allowance

Pension growth unlikely to be above reduced annual allowance

Page 8: Pension Tax Relief November 2011

SPPA Annual Process

• Receive Annual Returns from employers by 6 July

• Issue personal statements to members affected by Annual Allowance by 5 October

• Member carries out HMRC Self Assessment by 31 January

• Receive “Scheme Pays” requests by 31 July

• Pay tax liability to HMRC by 31 December

Page 9: Pension Tax Relief November 2011

Self Assessment

• Member to notify HMRC

• If tax is due, will be payable at the members personal rate.

Options to pay Tax Charges are

– Member pays HMRC direct

– Scheme pays

Page 10: Pension Tax Relief November 2011

Scheme Pays

• Member can elect for “Scheme Pays” if total tax charge is > £2,000 by 31 July of following year

• Benefits are reduced using PSOD model and member notified

• SPPA pay tax liability to HMRC by 31 Dec of following year

• HMRC undertakes compliance checks to match elections with scheme payments

Page 11: Pension Tax Relief November 2011

Pension Input Period (PIP)

Accrued Pension at end of previous PIP:

Based on Final Salary and Pensionable

Service at that date (include CPI)

Accrued Pension at end of current PIP:

Based on new Final Salary and Pensionable Service at that date

Increase in pension growth x 16 = “Pension Input Amount”

Start End

“Pension Input Period”

Page 12: Pension Tax Relief November 2011

Example

80th Accrual Scheme + Lump Sum Member

Pensionable service of 25 years at March 2011

Salary of £25,000

Promotion to £40,000

CPI @ 3.1%

Page 13: Pension Tax Relief November 2011

Period 2011-2012

Start of PIP Pension (£25,000 x 25/80) + 3.1% = £8,054.69Lump Sum £8,055 x 3 = £24,164.07

End of PIP Pension £40,000 x 26/80 = £13,000Lump Sum £13,000 x 3 = £39,000

Growth in Pension (£13,000 – £8,055) x 16 = £79,124.96Lump Sum £39,000 - £24,164 = £14,835.93Total = £93,960.89AA exceeded (£50,000) by £43,960.89

AA Charge Liability = £43,960.89

As this member has exceeded the AA we can look back at their previous 3 years to determine if there is any unused Annual Allowance that can be carried forward. A deemed AA limit of £50k has also been applied to the previous 3 years for this purpose.

Page 14: Pension Tax Relief November 2011

Previous Year 1 (smoothing) 2010-2011

Pensionable service of 24 years at March 2010

Salary of £18,000

Promotion to £25,000

CPI @ 1.1%

Page 15: Pension Tax Relief November 2011

Period 2010-2011

Start of PIP Pension (£18,000 x 24/80) + 1.1%Lump Sum £5,459.40 x 3

End of PIP Pension £25,000 x 25/80Lump Sum £7,812.50 x 3

Growth in Pension (£7,812.50 – £5,459.40) x 16Lump Sum £23,437.50 - £16,378.20Total

Unused AA (£50,000 - £44,708.90)

= £ 5,459.40= £16,378.20

= £ 7,812.50= £23,437.50

= £37,649.60= £ 7,059.30= £44,708.90

= £ 5,291.10

Page 16: Pension Tax Relief November 2011

Previous Year 2 (smoothing) 2009/2010

Pensionable service of 23 years at March 2009

Salary of £15,750

Increment to £18,000

CPI @ 5.2%

Page 17: Pension Tax Relief November 2011

Period 2009/2010

Start of PIP Pension (£15,750 x 23/80) + 5.2%Lump Sum £4,763.59 x 3

End of PIP Pension £18,000 x 24/80Lump Sum £5,400 x 3

Growth in Pension (£5,400 – £4,763.59) x 16Lump Sum £16,200 - £14,290.77Total

Unused AA (£50,000 - £12,091.79)

= £ 4,763.59= £14,290.77

= £ 5,400= £16,200

= £10,182.56= £ 1,909.23= £12,091.79

= £37,908.21

Page 18: Pension Tax Relief November 2011

Previous Year 3 (smoothing) 2008/2009

Pensionable service of 22 years at March 2008

Salary of £15,000

Increment to £15,750

CPI @ 1.8%

Page 19: Pension Tax Relief November 2011

Period 2008/2009

Start of PIP Pension (£15,000 x 22/80) + 1.8%

Lump Sum £4,199.25 x 3

End of PIP Pension £15,750 x 23/80

Lump Sum £4,528 x 3

Growth in Pension (£4,528.13 – £4,19925) x 16Lump Sum £13,584.39 - £12,597.75Total

Unused AA (£50,000 - £6,248.72)

= £ 4,199.25= £12,597.75

= £ 4,528.13= £13,584.39

= £ 5,262.08= £ 986.64= £ 6,248.72

= £43,751.28

Page 20: Pension Tax Relief November 2011

Applying the Three Year Carry Forward RuleThere is a strict order in which available Annual Allowance must be used-up:

• AA for the current tax year should be used first;• Unused AA from the three earlier years is then used – beginning with the available AA from the earliest tax year first – as shown below:

(£43,960.89) AA Charge Liability 2011/12 £43,751.28 Unused AA 2008/09(£ 209.61) £37,908.21 Unused AA 2009/10 £37,698.60 £ 5,291.10 Unused AA 2010/11 £42,989.70 Unused and Available AA 2012/13

The ‘smoothing effect’ of the 3 year carry forward is clearly in evidence, i.e. the potential AA charge of £43,960.89 in 2011/12 has been negated as a result of the carry forward facility.

The member does not now have a tax liability for 2011/12 and has £42,989.70 unused and available Annual Allowance to carry forward to 2012/13.

Page 21: Pension Tax Relief November 2011

Life Time Allowance

• LTA reduced to £1.5million from April 2012

• Factor of 20 used in calculation

• Fixed Protection

Page 22: Pension Tax Relief November 2011

Who will be affected by reduced LTA ?• Pension of £65,217 + Lump Sum

• Pension of £75k + No Lump Sum

F in a l s a la r y c a u s in g t h e lif e t im e a llo w a n c e t o b e b r e a c h e d

3 4 7 , 8 3 0

2 6 0 , 8 8 0

2 0 8 , 7 0 01 7 3 , 9 2 0

1 4 9 , 0 7 0 1 3 0 , 4 4 0

0

1 0 0 ,0 0 0

2 0 0 ,0 0 0

3 0 0 ,0 0 0

4 0 0 ,0 0 0

1 5 2 0 2 5 3 0 3 5 4 0

Y e a rs o f s e rv ic e

fin

al

sa

lary

A s s u m e s n o m o ne y-p u rc h a s e A V C s o r o th e r p e n s io ns

Page 23: Pension Tax Relief November 2011

Calculation of Benefits for LTA

Salary = £150,000

Service = 25 yrs

Pension = £150,000 x 25/80 = £46,875

Lump sum =£46,875 x 3 = £140,625

(£46,875 x 20) + £140,625 = £1,078,125

This is < LTA £1,500,000

Page 24: Pension Tax Relief November 2011

Fixed Protection for LTA

• Anyone can apply for fixed protection but they are only likely to need it if they expect their benefits from all schemes to exceed £1.5m.

• Must apply to HMRC by 5 April 2012

• Conditions• cannot start a new arrangement other than to accept a

transfer of existing pension rights • cannot have benefit accrual • will be subject to restrictions on where and how you can

transfer benefits

Page 25: Pension Tax Relief November 2011

SPPA Work to Date

• Communication

• Personal notification letters to 1431 members who may be affected by the AA• 779 Practitioners• 641 NHS Officers• 11 STSS Members

• Identified and issued 296 letters to members who may be at risk of exceeding new LTA limit

• 36 Practitioners• 255 NHS Officers• 5 STSS Members

Page 26: Pension Tax Relief November 2011

SPPA Work to Date cont

• Issued details of potentially affected members to Health Board HR Directors for workforce planning purposes

• Agreed process of dealing with Practitioners, as earnings can only be at the “estimated stage” by legislative dates

• Agreed development of Pension Admin system with supplier

• Currently identifying Ill Health cases and other awards who may be at risk of exceeding AA

• Rolled out training to key SPPA staff

Page 27: Pension Tax Relief November 2011

NEXT STEPS

Scottish Public Pensions Agency

7 Tweedside Park

Galashiels

TD1 3TE

www.sppa.gov.uk

Communication Staff:

- Intranet updates- Staff awareness

Employers: - Circulars - SPG,TWG & MAGS meetings - Seminars - Internet

• Develop and test Pension Admin System process• Training for all SPPA staff (by March 2012)