Changes to the Annual Allowance Lifetime Allowance Craig

Changes to the Annual Allowance & Lifetime Allowance Craig Martin Pension Manager

Annual allowance: Definition ü Annual Allowance is the amount your pensions savings can increase in any one year before you become liable to a tax charge ü If you exceed in one year, can offset against unused allowances from previous three years ü Any excess is charged at normal rate of tax Date Annual Allowance 2006/07 215 k 2007/08 225 k 2008/09 235 k 2009/10 245 k 2010/11 255 k 2011/12 50 k 2012/13 50 k 2013/14 50 k 2014/15 40 k ü £ 50, 000 limit, reducing to £ 40, 000 from 1 April 2014 17

Annual Allowance How does it work? Inflation (CPI) increase Pension/lump sum at 31 March 2013 Based on Final Pensionable Salary and Pensionable Service at that date Start Pension ‘growth’ x 16 + lump sum ‘growth’ + AVCs = Annual “growth” “Pension Input Period” (PIP) Pension/lump sum at 31 March 2014 Based on new Final Pensionable Salary and Pensionable Service at that date End 3

Example calculation of Annual Allowance… Assumption: Pensionable pay is £ 60 k for 2012/13 and £ 63 k in 2013/14 15 years scheme membership and CPI is 3. 1% Opening balance 2012/13 Pre 08 pension p. a. Post 08 pension p. a. 10/80 x £ 60 k 5/60 x £ 60 k Total annual pension Multiply annual pension by 16 Add lump sum 10 x 3/80 x £ 60 k £ 7, 500 5, 000 Pre 08 pension p. a. Post 08 pension p. a. 12, 500 Total annual pension 200, 000 22, 500 222, 500 Increase by inflation Opening value Closing balance 2013/14 £ 10/80 x £ 63 k 6/60 x £ 63 k 14, 175 Multiply annual pension by 16 Add lump sum 7, 875 6, 300 10 x 3/80 x £ 63 k Add AVCs paid in year 226, 800 23, 625 1, 000 X 1. 031 229, 397. 50 Closing value 251, 425 The increase in the member’s benefits for 2013/14 is £ 251, 425 - £ 229, 397. 50 = £ 22, 027. 50 As this is less than £ 50 k annual allowance, no tax charge due 19

Example calculation of carry forward Assumes increase in pension of £ 60 k for 2013/14, exceeding the £ 50 k limit by £ 10 k Year Increase in pension value Annual Allowance Unused relief Carry forward 2010/11 £ 50, 000 £ 0 2011/12 £ 40, 000 £ 50, 000 £ 10, 000 2012/13 £ 22, 027. 50 £ 50, 000 £ 27, 972. 50 £ 37, 972. 50 2013/14 £ 60, 000. 00 £ 50, 000 £ 27, 972. 50 ü Member exceeded Annual Allowance in 2013/14 by £ 10 k ü The member can now use the £ 37, 972. 50 unused relief to offset the £ 10, 000 ü Leaves excess amount of £ 27, 972. 50 for 2014/15 onwards 20

What happens if I exceed the annual allowance? ü If annual allowance charge is <£ 2, 000 ü you will have to pay charge directly to HMRC ü Taxed at normal rate of tax, e. g. 40% ü If the annual allowance charge is >£ 2, 000 ü can elect for the amount to paid by the Pension Fund (if the whole charge relates to EAPF) ü Pension Fund will actuarially reduce the value of your LGPS benefits accordingly 21

Considerations for you ü Pension Fund will inform you if you exceed the annual allowance in a year ü Changes to LGPS and Annual Allowance threshold: ü Accrual rate of the LGPS increasing to 1/49 th ü Annual allowance threshold reducing to £ 40 k ü Impact depends on individual circumstances including: ü pay growth and ü length of service and ü AVCs ü Potential options? 22

Lifetime Allowance: Definition ü Lifetime Allowance is the total value of all your LGPS and any other pension benefits that you may have accrued, and any excess over and above threshold is taxed Date Lifetime Allowance 2006/07 1. 5 m 2007/08 1. 6 m 2008/09 1. 65 m 2009/10 1. 75 m 2010/11 1. 8 m 2011/12 1. 8 m 2012/13 1. 5 m 2013/14 1. 5 m 2014/15 1. 25 m 23

Lifetime allowance: How does it work? ü Assessed when pension benefits come into payment ü 20 x Annual Pension; plus ü Any Lump Sum payable; plus ü Value of AVC Fund (if applicable) ü Compare with current Lifetime Allowance ü Anything above the LTA limits will be taxed at special rates 24

Example calculation of LTA Assumes pension of £ 50, 000 and a lump sum of £ 112, 500 at retirement (Factor of 20 x pension) + lump sum (20 x £ 50, 000) + £ 112, 500 = £ 1, 112, 500 / £ 1, 250, 000 x 100 = 90% of LTA ü Pension benefits are less than both current and new LTA threshold ü No lifetime allowance tax due upon retirement 25

New LTA protections: Fixed protection and Individual protection ü Background and existing LTA protections ü Fixed protection 2014 ü Have to apply before 5 April 2014 ü Protected LTA of £ 1. 5 million regardless of current level of benefits ü Not permitted if you have primary protection ü No further benefits can accrue from April 2014 (only CPI increase) ü Individual protection 2014 ü You can apply if the value of your benefits are over £ 1. 25 million on 5 April 2014 ü You do not have primary protection ü You can continue to accrue benefits and protect benefits up to £ 1. 5 million ü Legislation will not be in place until August 2014 but backdated to April 2014 ü Individuals will have until 5 April 2017 to apply 26

What should I do? Protection Deadline for registration Notes Fixed Protection 5 April 2014 Protects benefits up to £ 1. 5 m but no further accrual allowed Individual Protection 5 April 2017 Only apply if benefits are over £ 1. 25 m on 5 April 2014 and you do not have Primary Protection You can register for both forms of protections if you qualify What should I do? Pension Fund will contact you if you qualify for FP 14 or IP 14 to discuss your options The Pension Fund can provide further information relating to your EAPF benefits but will not be able to give you individual advice HMRC has published a Q&A entitled Pension Restriction on tax relief and you can access this from www. hmrc. gov. uk/pensionschemes 27

Any questions? www. eapf. org. uk