Finance Bill 2011 Pension Tax Relief Changes Dave

Finance Bill 2011: Pension Tax Relief Changes Dave Simson 13 December 2011 Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority

What I’ll cover. . Trip down memory lane What’s changed: Annual Allowance Payment Options What’s in and what’s out To be confirmed Life Time Allowance Fixed Protection Responsibilities and practicalities 2

A trip down memory lane Pre April 2006 Employee contribution restrictions Benefits limited on cessation Earnings cap in place A Post April 2006 Tax ‘Simplification’ D a y Removal of previous restrictions Introduction of Annual and Lifetime Allowance Thresholds – not limits 3

Tax Free Thresholds Annual Allowance (AA) Increase in capital value of benefits Yearly Factor of 10 £ 255 k @ 31 March 2011 Lifetime Allowance (LTA) Tax charge above thresholds Total capital value of benefits On retirement (generally) Factor of 20 Currently £ 1. 8 m 4

April 2009 Budget Labour Government Intention to restrict tax relief on pension contributions for high earners from April 2011 Complicated method proposed 5

But following the election New Coalition Government formed Old proposal scrapped – too complicated New proposal: amend existing annual and lifetime allowances amend factor for annual allowance amend tax charge rate 14 October – results of consultation/way forward 6

annual allowance 7

2011 tax regime - summary Effective from - year to 31 March 2012 for LGPS Reduced to £ 50, 000 Allowance for the revaluation of previous years’ benefits in line with CPI Flat factor of 16 used to value increase in DB accrual Carry forward 3 years of unused allowance Annual Allowance frozen until 2015/16 Full tax-relief up to the Annual Allowance (marginal rate charge above) 8

PIPs and PIAs Inflation (CPI) increase Accrued pension at end of previous PIP: Based on Final Pensionable Salary and Pensionable Service at that date Start Increase in pension ‘growth’ x 16 + lump sum growth = “Pension Input Amount (PIA)” “Pension Input Period” (PIP) Accrued pension at the end of the current PIP: Based on new Final Pensionable Salary and Pensionable Service at that date End 9

Example 1 – Above CPI pay increase (Maybe one day. . ) Assumptions: 20 years’ pensionable service at March 2011 Pensionable salary of £ 150, 000 CPI 2. 5% Actual pay increase 4% (1. 5% above CPI) 10

Calculation of the value of benefits Step 1 – Start of PIP Step 2 – End of PIP 1 April 2011 31 March 2012 Pay = £ 150, 000 Pay £ 156, 000 Service 17 years pre March 08 17 years pre March 2008 3 years post March 08 4 years post March 08 Benefit calculation Pension = ((17 x £ 150, 000/80 +(3 x £ 150, 000/60)) Lump sum = 17 x £ 150, 000 x 3/80 Benefit calculation Pension = ((17 x £ 156, 000/80) +(4 x £ 156, 000/60)) Lump sum = 17 x £ 156, 000 x 3/80 Pension £ 39, 375 Pension £ 43, 550 Lump sum £ 95, 625 Lump sum £ 99, 450 11

Calculation of pension growth Step 3 – Compare for growth Pension at start of PIP £ 39, 375 Pension at end of PIP £ 43, 550 Growth in excess of 2. 5% £ 3, 191 Lump sum at start of PIP £ 95, 625 Lump sum at end of PIP £ 99, 450 Growth in excess of 2. 5% £ 1, 434 Incl. CPI (£ 40, 359) (A) (£ 98, 016) (B) 12

Calculation of pension growth Step 4 – Apply factor Growth in pension £ 3, 191 (A) Growth in lump sum £ 1, 434 (B) Flat related factor 16 (C) Growth (A x C) + B = Excess subject to tax charge £ 52, 490 £ 2, 490 13

Calculation of tax rate to apply Step 5 – Calculate marginal tax rate Gross income £ 156, 000 Less contributions (7. 5%) _£ 11, 700 £ 144, 300 Plus excess over £ 50, 000 Total net income __£ 2, 490 £ 146, 790 As total income is below £ 150, 000 (50% tax threshold) tax charge is 40% 14

Calculation of tax Step 6 – Apply tax rate to excess Total growth £ 52, 490 Less annual allowance _£ 50, 000 Excess £ 2, 490 Apply tax rate – 40% £ 996* * Assumes no carry forward allowance available 15

Example 2 – Includes Promotion Assumptions: 20 years’ pensionable service at March 2011 Pensionable salary of £ 110, 000 p. a. Receives promotion to £ 180, 000 p. a. CPI 2. 5% 16

Calculation of the value of benefits Step 1 – Start of PIP Step 2 – End of PIP 1 April 2011 31 March 2012 Pay = £ 110, 000 Pay = £ 180, 000 Service 17 years pre March 08 3 years post March 08 4 years post March 08 Benefit calculation Pension =((17 x £ 110, 000/80) +(3 x £ 110, 000/60)) Lump sum = 17 x £ 110, 000 x 3/80 Benefit calculation Pension = ((17 x£ 180, 000/80) +(4 x £ 180, 000/60)) Lump sum = 17 x £ 180, 000 x 3/80 Pension £ 28, 875 Pension £ 50, 250 Lump sum £ 70, 125 Lump sum £ 114, 750 17

Calculation of pension growth Step 3 – Compare for growth Pension at start of PIP £ 28, 875 Pension at end of PIP £ 50, 250 Growth in excess of 2. 5% Incl. CPI (£ 29, 597) £ 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) 18

Calculation of pension growth Step 4 – Apply factor Growth in pension £ 20, 653 (A) Growth in lump sum £ 42, 872 (B) Flat related factor 16 (C) Growth (A x C) + B = £ 373, 320 Excess subject to tax charge £ 323, 320 19

Calculation of tax rate to apply Step 5 – Calculate marginal tax rate Gross income £ 180, 000 Less contributions (7. 5%) _£ 13, 500 £ 166, 500 Plus excess over £ 50, 000 £ 323, 320 Total net income £ 489, 820 As all excess is over £ 150, 000 (50% tax threshold) tax charge is 50% 20

Calculation of tax Step 6 – Apply tax rate to excess Total growth £ 373, 320 Less annual allowance _£ 50, 000 Excess £ 323, 320 Apply tax rate – 50% £ 161, 660* * Assumes no carry forward allowance available 21

But with carry forward. . . Step 4 b – Calculate carry forward Assuming 4% pay increase and 2. 5% inflation in previous 3 years Growth total in previous three years £ 33, 042+ £ 34, 771 + £ 36, 585 = £ 104, 398 Unused allowance (3 x £ 50, 000) - £ 104, 398 Plus 2012 allowance Total allowance = £ 45, 602 = £ 50, 000 £ 95, 602 22

Calculation of tax Step 6 – Apply tax rate to excess Total growth £ 373, 320 Less effective annual allowance £ 95, 602 Excess Apply tax rate – 50% £ 277, 718 £ 138, 859 (Compared to £ 161, 660 if carry forward was not implemented) 23

Annual allowance - who might it affect (LGPS)? Pay Award – 5% CPI – 3% 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 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 Pensionable Service at start of tax year 24

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 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 Pensionable Service at start of tax year 25

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 26

What’s in and what’s out No longer exempt Benefits in the year of retirement including enhancements (But unreduced benefits OK) Enhanced protection cases Exempt: Deferred members Benefits in the year of death Serious ill-health retirement Likely for normal ill-health retirements too 27

To be confirmed Aggregation of LGPS benefits Original proposal too severe Current option too generous and inconsistent With Local Government Association (LGA) to liaise with HMRC Ill Health Retirement Awaiting revised regulations to confirm which ill heath retirements will be exempt. 28

lifetime allowance 29

2011 tax regime - summary Reduced to £ 1. 5 m from April 2012 LTA valuation factor maintained at 20 LTA tax-charges unchanged Lump sum is taxable at 55% Pension is taxable at 25% 30

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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 £ 1 M at A Day, may find their protected LTA is less than £ 1. 5 M (new LTA) now and therefore enhanced protection would be of no benefit to them 32

Something for the weekend sir? 33

Fixed Protection Apply before 6 April 2012 Protected LTA of £ 1. 8 m But, by April 2012: No benefit accrual BEYOND CPI and No AVCs/money purchase contributions. Possible concerns over auto-enrolment Not permitted if you have enhanced or primary protection 34

Important decision for member: Retain benefit accrual, lose fixed protection and have LTA of £ 1. 5 M Retain fixed protection, lose benefit accrual and have LTA of £ 1. 8 M Must relinquish enhanced protection! Wrong decision could cost over £ 75 K Benefit calculations could be obtained from pensions section or consultants; But they are unable to give financial advice! 35

practicalities & responsibilities 36

Practicalities & Responsibilities Info From Info To What 2011/12 2012/13 + Employer Pension Scheme Pay, benefits, length of service 6 July 2012 6 July 2013 Pension 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 31 Jan 2014 be amended up to 31 January 2014) Scheme Member Pension Scheme to make irrevocable decision on scheme pays 31 December 2013 31 July 2014 37

Thank You Any questions? 38

Disclaimer This 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. 39