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Lifetime Allowance and Protection
BP UK Pensions & Benefits
February/March 2014
Today’s session
FOR BP INTERNAL USE ONLY
• What is the Lifetime Allowance and what does the latest
reduction mean to you?
• How to value your total pension benefits
• Your options
• A couple of examples
• Timescales
• Your actions
• Time for questions
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What is the lifetime allowance (LTA)?
FOR BP INTERNAL USE ONLY
• The LTA is the value of the maximum total pension (from ALL
schemes) an individual can receive in payment without paying
• Pension savings from all registered arrangements count towards the
LTA (excludes State pension)
• Benefits normally tested against the LTA when they become payable
• Initial tax charge of 25% on exceeding the LTA on benefits from BP
Pension Fund (BPPF) (equivalent to an extra 15% tax on top of the
normal 40% tax rate you would expect to pay on your pension in
retirement)
• Scheme administrator pays tax charge and reduces benefits
accordingly
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The reduced LTA
FOR BP INTERNAL USE ONLY
• Current LTA reduces from £1.5m to £1.25m from 6 April 2014
• If your current pension is above or close to £62,500 pa then you will
be impacted by the latest reduction in the LTA
• To calculate whether you may be impacted:
− Final salary pension
− Current pension built up x 20 = value
− Take into account any salary increase at 1 April for BP pension
benefits
− Defined contribution pension
− Current value of fund
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The reduced LTA & protections available
FOR BP INTERNAL USE ONLY
• No impact if you take benefits before 6 April 2014, providing
benefits are below £1.5m
• Existing protections are not impacted
• Two new protections are available
− Fixed (FP14)
− Individual Protection (IP14):
FP14
IP14
Who can apply?
No minimum LTA value
Minimum LTA value £1.25m on 5
April 2014
Impact on LTA
Fixed at £1.5m. ‘Excess’ benefits
subject to LTA Tax Charge
Individual LTA of value on 5 April
2014 up to 1.5m. ‘Excess’ benefits
subject to LTA Tax Charge
Restrictions
No new benefits can be built up
after 5 April 2014, otherwise
FP14 is lost
None
Application deadline
5 April 2014
5 April 2017*
*IP14 cannot be applied for before August 2014
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Valuing your benefits when you take them
FOR BP INTERNAL USE ONLY
• Defined benefit arrangements
− BP DB Scheme
• Other money purchase pension
benefits
− BP money purchase AVC
fund
− BP Defined Contribution
(DC) 2010 Pension Plan
− Defined benefit pension
arrangements outside BP
− Personal pensions
Annual pension at
retirement*
x
Valuation
factor of 20
− Any pension arrangements
outside BP used to buy an
annuity
PLUS
Any cash sum taken
Fund value at retirement
* After allowing for any early retirement reduction
factor
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Valuing your benefits for IP14
FOR BP INTERNAL USE ONLY
• Defined benefit arrangements
− BP DB Scheme
− Defined benefit pension
arrangements outside BP
Annual pension on 5 April
20141,2
x
Valuation
factor of 20
• Other pension arrangements
− BP Defined Contribution
(DC) 2010 Pension Plan
− Personal pensions
− Any pension arrangements
outside BP used to buy an
annuity
PLUS
The value of any
separate lump sum built
up to 5 April 2014
Fund value on 5 April 2014
1. Based on service to 5 April 2014, ignoring any reduction that would apply if benefits are taken before NRD. Where
benefits are not in payment
2. Money purchase AVC fund converted to pension amount based on conversion terms available from normal pension age
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Individual protection in practice
FOR BP INTERNAL USE ONLY
Pension savings as
at 5 April 2014
LTA without individual
protection
LTA with individual
protection
£1.3 million
£1.25 million
£1.3 million
£1.5 million
£1.25 million
£1.5 million
£1.7 million
£1.25 million
£1.5 million
• If the standard LTA overtakes your personal LTA due to future
increases made by the Government, you revert to the higher LTA
• Legislation expected to be finalised in summer 2014
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Your options if ……………….
FOR BP INTERNAL USE ONLY
• If you apply for Individual Protection 2014
− You may continue to build up future pension benefits and your
current membership will remain unchanged
− You are entitled to opt out at any point in the future – you may
then qualify for payment of the cash accrual allowance, providing
the value of your BPPF benefits exceeds £1.25m
• If you are currently a member of the BPPF but are receiving salary
linkage only – either as a result of BP’s transitional arrangements
since 2012 or for Annual Allowance reasons – please contact a
member of the UK Pensions & Benefits team to discuss your
options in more detail
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Your options if you apply for Fixed Protection 2014
FOR BP INTERNAL USE ONLY
• If you apply for Fixed Protection 2014
− You cannot build up any future pension benefits, so
− You must opt out of your current BP pension arrangement
• If you are a member of the BPPF:
− You will become a deferred pensioner in the BPPF
− Your deferred pension will increase annually in line with RPI up to
a maximum of 5%pa
− Life cover of 4x salary will be provided through BP’s insured
arrangements (you will have a one-off opportunity to increase this
through the registered scheme on 5 April 2014)
− You will receive income protection of 50% of basic salary, with
the opportunity to increase this annually through your benefits,
your way
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Your options if you apply for Fixed Protection 2014 (2)
FOR BP INTERNAL USE ONLY
• If your BPPF benefits are at least £1.25m in value, you will receive a
cash accrual allowance (currently 35%¹·²), based on your basic
salary, which is subject to tax and NI in the usual way
• If your BPPF benefits are below £1.25m in value, you will be entitled
to the 15% flexible benefits allowance
• If you are a member of the DC2010 Pension Plan, you must
− Stop paying contributions through your benefits, your way
− Advise Aegon that you have applied for Fixed Protection 2014, so
that you continue to receive fee discounts applicable to active
employees
− Advise UK P&B
− You will continue to receive the 15% flexible benefits allowance
1. The amount of cash accrual allowance is not guaranteed and may change
2. Payable until the notional value of your BPPF benefit reaches 2/3rds, when it will reduce to 15%
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Worked example A
FOR BP INTERNAL USE ONLY
•
Alan is a member of the BPPF
− age: 53
− accrued pension: £65,000
− basic salary: £130,000.
•
Scenario1: Alan takes individual protection and takes early retirement with consent, aged 55
− he receives an individual LTA of £1,300,000 (65,000 x 20)
− his accrued benefits are now £72,000
− as he is VERA eligible, only his post-2006 benefits are reduced and he receives an early
retirement pension of £65,000
− The HMRC value of his benefits is £1,300,000
− As this is below his individual LTA allowance, Alan does not need to pay any tax
•
Scenario 2: Alan does not take individual protection and takes early retirement, aged 55
− his benefits exceed the LTA of £1,250,000
− he has to pay £12,500 in tax on the excess (25% * £50,000)
− His pension is reduced by £500 to meet this tax charge
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Worked example A
FOR BP INTERNAL USE ONLY
•
Had Alan elected to take fixed protection 2014 he would have opted out the pension scheme
on 5 April 2014 with a deferred pension of £65,000
•
At age 55 Alan’s deferred pension has increased in line with inflation to £68,000
•
As he is VERA eligible only, his post-2006 benefits are reduced and he receives an early
retirement pension of £62,000
•
The HMRC value of his benefits is £1,240,000
•
As this is below his LTA allowance, Alan does not need to pay any tax
•
Alan also received a gross cash accrual allowance of 35% of his basic salary
•
He invested this cash accrual allowance and at his retirement date the invested value is
£50,000
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Summary – worked example A
FOR BP INTERNAL USE ONLY
No protection
Individual
protection 2014
Fixed
Protection
2014
Pension after
LTA charge*
£64,500 p.a.
£65,000 p.a.
£62,000 p.a.
Cash accrual
allowance*
No
No
£50,000
Pension before
LTA charge
£65,000
£65,000
£62,000
LTA
£1,250,000
£1,300,000
£1,500,000
£12,500
Nil
Nil
LTA charge
[((£65k * 20) – £1,250k)*
25%]
Reduction in
£500
Nil
pension to meet
LTA figures
charge
* Pension
quoted are gross, cash accrual allowance figures are net of tax
Nil
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Worked example B
FOR BP INTERNAL USE ONLY
• Barbara is 57, has an accrued pension of £70,000 and basic salary of
£150,000.
• She decides to take fixed protection and receives a gross cash
accrual allowance of 35% of her basic salary at 5 April 2014.
• She retires at her normal pension age of 60 and her pension has
increased in line with inflation to £75,000.
• The HMRC value of her benefits is £1,500,000. As this is below the
LTA for fixed protection, she does not have to pay a tax bill.
• Barbara saved her cash accrual allowance. At her retirement date
the value of this savings account is £85,000
15
Worked example B
FOR BP INTERNAL USE ONLY
• Had Barbara elected to continue benefit accrual and not take fixed
protection, she would have retired with a pension of £85,000 at age
60
• The HMRC value of this benefit is £1,700,000
• The LTA of £1,250,000 would have applied to her and she would
have had to pay £112,500 in tax on the excess (25% * £450,000)
• Barbara elects to pay this tax charge via reduction to pension of
£5,000, resulting in a pension from the BP Pension Fund, net of
Lifetime Allowance Charge of £80,000 p.a.
• If Barbara had elected to take individual protection 2014 then her LTA
would have been £1,400,000, resulting in a lower tax charge of
£75,000 and a pension from the BP Pension Fund, net of LTA charge
of £81,700
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Summary - worked example B
FOR BP INTERNAL USE ONLY
No protection
Individual
protection 2014
Fixed
Protection
2014
Pension after
LTA charge*
£80,000 p.a.
£81,700 p.a.
£75,000 p.a.
Cash accrual
allowance*
No
No
£85,000
Pension before
LTA charge
£85,000
£85,000
£75,000
LTA
£1,250,000
£1,400,000
£1,500,000
Nil
LTA charge
Reduction in
pension to meet
LTA charge
£112,500
£75,000
[((£85k * 20) – £1,250k)*
25%]
[((£85k * 20) – £1,400k)*
25%]
£5,000
£3,300
Nil
* Pension figures quoted are gross, cash accrual allowance figures are net of tax
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The individual protection decision
FOR BP INTERNAL USE ONLY
• Key decision is if you wish to continue to build up future
pension benefits
• It is strongly recommended that you consider electing for
Individual Protection 2014 if your LTA is greater than £1.25m
on 5 April 2014.
• Even if you have Fixed Protection 2012, you may wish to
consider electing for Individual Protection 2014 in case you
lose your Fixed Protection 2012 in the future.
• Financial advice recommended – ensure you take
appropriate action
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The fixed protection decision
FOR BP INTERNAL USE ONLY
• Very complex decision depending on:
− Retirement date
− Value of employer pension contributions
− Value of cash alternative
− Future increase in LTA
− Tax-free cash implications
− Tax position pre- and post-retirement
• Financial advice recommended – ensure you take
appropriate action
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Reminder - post 5 April 2014
FOR BP INTERNAL USE ONLY
No protection
Individual
protection 2014
Fixed
protection 2014
Continued pension
accrual after 5 April
2014?
Yes
Yes
No
Increase in accrued
BP benefit prior to
retirement age
Link to salary
growth retained
Link to salary
growth retained
In line with
annual increases
in the RPI
LTA
£1.25m
£1.25 - £1.5m
£1.5m
Cash accrual
allowance
No
No
Yes*
Who qualifies?
All
Only individuals
whose benefits LTA
value assessed >
1.25m on 5 April
2014
All
* See previous slides for qualification criteria
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Lifetime allowance calculator
FOR BP INTERNAL USE ONLY
• Calculator developed to help you decide
• Above LTA?
• Apply for Individual or Fixed Protection or both?
• Comparison LTA tax vs cash alternative
• Use the calculator to help inform your decision:
https://ukpensiontax.bp.com
• Get independent financial advice: www.unbiased.co.uk
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LTA calculator screenshots
FOR BP INTERNAL USE ONLY
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LTA calculator screenshots
FOR BP INTERNAL USE ONLY
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LTA calculator screenshots
FOR BP INTERNAL USE ONLY
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FOR BP INTERNAL USE ONLY
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LTA calculator screenshots
FOR BP INTERNAL USE ONLY
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Timescales and actions
FOR BP INTERNAL USE ONLY
• Fixed Protection 2014 - if member of BPPF
− Notify HMRC of election by 5 April 2014
− Notify UK P&B that you wish to opt out – there will be a
special form for you on PensionLine to download,
complete and return by 31 March 2014
− You will receive new Ts&Cs which you will need to sign
and return
• REMEMBER
− You must complete the opt out form if you want to stop
building up future pension in BP – just telling us you have
applied for Fixed Protection is not enough
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Timescales and actions (2)
FOR BP INTERNAL USE ONLY
• Fixed Protection 2014 - if member of DC2010 Pension
Plan
− Notify HMRC of election by 5 April 2014
− Cease contributions through your benefits, your way by 1
April 2014
− Advise Aegon that you have applied
− Advise UK P&B so that we can amend your record and
monitor to help check you don’t inadvertently lose your
protection
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Timescales and actions (3)
FOR BP INTERNAL USE ONLY
• Individual Protection 2014
− Obtain value of pension arrangement(s) as at 5 April 2014
− Notify HMRC between summer 2014 and 2017
− Decide when/if you wish to opt out of BP pension
arrangement
− No further action at this stage unless you decide to opt out
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Your actions
FOR BP INTERNAL USE ONLY
Decision
Individual
Fixed
•
•
•
•
•
• No need to opt
out or notify UK
P&B
• Apply to HMRC
before April
2017
• Apply to HMRC
by 5 April 2014
• DB - complete
opt out form
• DC – cease
contributions
and advise UK
P&B
Protection?
Individual?
Fixed?
Both?
Opt out of BP
pension now or
in the future?
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Additional notes
FOR BP INTERNAL USE ONLY
Notes
• If you have Fixed Protection 2012, then your LTA is £1.8m
and you do not need to apply for Fixed Protection 2014
• If you have applied – or intend applying for an LTA
enhancement factor as a result of overseas service, you also
need to apply for Individual and/or Fixed Protection.
Otherwise the enhancement factor will be applied to the
current LTA at the point you retire.
• Please provide copies of your Individual Protection 2014
and/or Fixed Protection 2014 certificates to UK P&B as soon
as possible, to ensure retirement benefit calculations are
correct
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Useful links
FOR BP INTERNAL USE ONLY
• Queries to UK P&B : pensioncomms@bp.com
• PensionLine: https://pensionline.bp.com
• Aegon: http://pension.aegon.co.uk/bp
• HMRC pension savings and Lifetime Allowance protection:
• http://www.hmrc.gov.uk/pensionschemes/pension-savings-la.htm
• Independent financial advice: www.unbiased.co.uk
• LTA calculator: https://ukpensiontax.bp.com
• Your benefits, your way: www.bp.com/yourbenefits
•
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Risk warning
FOR BP INTERNAL USE ONLY
•
This presentation is for information only. It does not take into account your personal
circumstances and does not constitute financial advice. Neither anyone in the BP
Group nor the Trustee of the BP Pension Fund can 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 financial advisers in your area you can visit
www.unbiased.co.uk. Please be aware that you may be charged a fee for any advice.
•
The information in this presentation is based on our understanding of current tax rules
and other legislation, which is subject to future change. Please note that where
reference is made to tax or legal matters, UK Pensions & Benefits is not qualified to
provide tax or legal opinions. BP UK Pensions & Beneifts accepts no liability for errors
or omissions.
•
Please note the value of investments, and income from them, may fall as well as rise.
This includes but is not limited equities, government or corporate bonds, derivatives and
property, whether held directly or in a pooled or collective investment vehicle. Further,
investments in developing or emerging markets may be more volatile and less
marketable than in mature markets. Exchange rates may also affect the value of
investments. As a result, an investor may not get back the full amount of the original
investment. Past performance is not necessarily a guide to future performance
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Thank you
FOR BP INTERNAL USE ONLY
• Any questions?
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