BATH SPA UNIVERSITY
Pensions Taxation – Awareness Briefing
1 JULY 2014
Kevin Painter
Principal
0113 394 7684
Kevin.Painter@mercer.com
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Copyright @ 2014 Mercer
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AGENDA
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Pensions in context
2
Pension Tax, historical perspective
3
Annual Allowance
4
Lifetime Allowance
5
Why this matters
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How to stay ahead of the game
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Pensions in context
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SCHEME SPECIFICS
FEATURE
TEACHERS’ PENSION SCHEME
LOCAL GOVERNMENT PENSION
SCHEME
Accrual
1/80 pension and 3/80 cash
1/80 pension and 3/80 cash pre 31 March 2008
1/60 pension and cash via commutation, joiners from
1 January 2007
1/60 post 1 April 2008 and cash via commutation
1/49 CARE from 2014
Proposed: 1/57 CARE from 2015 - transitional
protection for members 50+
Normal Retirement Age
Pensionable Salary
60 (65 for post 2007 joiners)
65
(State Pension Age from 2015)
(State Pension Age from 2014)
Higher of:
-The pensionable salary received in the last 12
months before retirement. This is subject to a salary
restriction that limits any increases in pensionable
salary to the greater of 10% or £5,700.
This is usually the pay earned during the final year of
scheme membership, or one of the previous two
years, if this is higher.
-Highest revalued salary averaged across any 3
consecutive years in any of the previous 10 years
Each year’s pensionable salary is revalued to the
measurement date.
Employee Contribution
6.4% - 12.4% (from April 2014)
5.5% - 12.5% from 1 April 2014
Pension Input Period
1 April to 31 March
1 April to 31 March
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BATH SPA UNIVERSITY PENSION SCHEMES
How Does a Final Salary Pension Scheme Work?
•At Normal retirement Date members will receive a pension based on:
•
Final Pensionable Salary;
•
Service with the University; and
•
Accrual rate:
• Teachers Pension Scheme (TPS): 1/80th plus 3/80th cash for each year
• Avon Pension Fund, Local Government Pension Scheme (LGPS): 1/80th plus 3/80th
cash for each year, 60ths from 2008
Example TPS
Final Pensionable Salary : £40,000
30 years service
Divide Final Pensionable Salary by 80
£40,000 ÷ 80 = £500
Multiply the answer by Pensionable
Service
Annual pension from the Scheme
Multiply pension by 3
£500.00 x 30 = £15,000
Tax free lump sum from the Scheme
£45,000
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£15,000 p.a.
£15,000 x 3 = £45,000
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Pension Tax, Historical Perspective
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IN THE BEGINNING……
• Prior to 2006, the most significant overhaul of pensions
occurred in 1970
• All taxable remuneration could count for pension
purposes under “approved” schemes
• Maximum pension at retirement was 2/3rds of Final
Remuneration after 10 years service
• Could exchange or commute part of pension for a tax
free cash lump sum to a maximum of 1½ times Final
Remuneration after 20 years service
• Maximum permitted member contribution of 15% of
taxable earnings
• Could retire from age 50
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SIMPLIFICATION?...
• The former Labour Government’s ‘Simplification’
proposals in 2003
• To apply to all “registered” pension schemes
• Flexibility over the form of benefits
• Original “A Day” was to be April 2005 (actually
introduced April 2006)
• Annual Allowance (AA) introduced at £215,000
• Lifetime Allowance (LTA) started off at £1.5m
• Up to ¼ of the Lifetime Allowance can be taken as cash
• Some forms of ‘protection’ were available in 2006
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2010 – POST CRASH AND CHANGE IN GOVERNMENT…..
• Annual Allowance was reduced from £255,000 to
£50,000 from April 2011
• Lifetime Allowance reduced from £1.8m to £1.5m from
April 2012
• Government have reduced the AA further to £40,000
and the LTA to £1.25m from April 2014
• New forms of ‘protection’ are available
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2015 – WHAT’S NEXT?......
• The Labour Party has stated that they would look to
provide only basic income tax relief on all pension
savings for high earners (earning > £150,000?)
• The Liberal Democrat Party has indicated that it would
seek to lower the Lifetime Allowance further to £1m
(leaving the Annual Allowance unchanged at £40,000 a
year)
• Many commentators speculate that the tax relief on
member pension contributions could be restricted in the
future for those paying higher rates of income tax
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Annual Allowance
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CHANGES TO THE ANNUAL ALLOWANCE
Annual Allowance
Double
taxation tax
charge applies
Excess – penal taxation applies
£255,000
£215,000
Total HMRC value
of annual pension
savings
£50,000
£40,000
2006
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2010
2011
2014
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SOME DETAIL ON THE ANNUAL ALLOWANCE
Defined Benefit
x 3 cash
x 16 if pension
+ CPI
Accrued
benefit
Accrued
benefit
Start of year
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End of year
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POSSIBLE MITIGATION
A pension value in excess of the AA would normally incur a tax charge at the
employee’s marginal rate - benefits within the AA continue to receive full
marginal rate tax relief
“Carry forward” mechanism where any unused AA in the previous 3 years
can be taken into account to help manage “spikes” in the value of pension
saving
“Scheme Pays”, where the Government allows members with pension tax
bills in excess of £2,000 to get their pension scheme to pay the tax in
exchange for a reduced benefit within the scheme
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Lifetime Allowance
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CHANGES TO THE LIFETIME ALLOWANCE
Lifetime Allowance
Excess – penal taxation applies
25% Lifetime
Allowance charge on
excess
Pension (taxed)
£1.8m
£1.5m
£1.5m
£1.25m
Total HMRC
value of
retirement
benefits
Pension (taxed)
25% tax free cash - max
£312,500 from 2014
2006
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2010
2012
2014
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LIFETIME ALLOWANCE PROTECTION AVAILABLE IN 2014
Individual Protection 2014 (IP14)
 If the HMRC value of your pension savings as at 5 April 2014 is greater than £1.25m,
you can obtain an individual Lifetime Allowance equal to the value of your 5 April
2014 pension savings (but subject to a cap of £1.5m)
 Maximum tax free cash will be restricted to 25% of your individual Lifetime Allowance
 You can continue to accrue pension savings after 5 April 2014
 The requirement to register is by 5 April 2017. Registration is not yet open
(anticipated from July or August 2014)
 To register you will need to obtain details of all accumulated pension savings as at 5
April 2014
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Why this matters
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OLD VS. NEW REGIMES
Benefits up to the Allowances for the HEI Sector
Annual increases
Pre April 2011
Post April 2014
Pension
(using 10:1 factor)
£19,615 p.a.
(using 16:1 factor)
£2,105 p.a.
Cash
£58,845
£6,315
At retirement
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Pre April 2012
Post April 2014
(based on £1.8m LTA)
(based on £1.25m LTA)
Pension
£78,261 p.a.
£54,348 p.a.
Cash
£234,783
£163,043
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WHAT DOES IT MEAN FOR MEMBERS?
Example 1, TPS member
• Member with 30 years of service by 1 April 2014
• Aged 54 at 1 April 2014
• Final Pensionable Salary increase from £40,000 p.a. to £47,500 p.a. in 2014/15
Pension Input
Period
commencing
Accrued pension
at beginning of
year
Accrued pension
at beginning of
year (inflated by
consumer prices
index)
Accrued pension
at end of year
HMRC value
of increase
using a factor
of 19:1 ( 16:1
pension, 1:1
cash)
Excess over
Annual Allowance
of £40,000
1 April 2014
£15,000
£15,400
£18,400
£57,000
£17,000
Consumer Prices Index (CPI):
• 2014/15:
2.7%
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WHAT DOES IT MEAN FOR MEMBERS?
Example 1 continued…
• However:
– Member can take advantage of unused Annual Allowance carry forward from the
previous 3 tax years
Pension Input
Period
commencing
Accrued pension at
beginning of year
(inflated by consumer
prices index)
Accrued
pension at end
of year
1 April 2011
£12,500
£13,000
1 April 2012
£13,700
£13,900
1 April 2013
£14,200
£15,000
Cumulative Carry Forward Annual Allowance:
1 April 2014
£15,400
£18,400
HMRC value of
increase in pension1
£9,400
£4,900
£14,300
£57,000
Unused AA
£40,600
£45,100
£35,700
£121,400
£104,400
Therefore there is no Annual Allowance tax charge in the 2014/15 tax year in
this example
1. The “HMRC value of increase in pension” for Annual Allowance purposes means the increase in the value of pension based on a capitalisation factor of 19 (using a
factor of 16 for pension and 3 for the cash lump sum). When calculating the increase in the value of the pension over each year, allowance can be made for
consumer price inflation to be applied to the previous year’s pension.
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WHAT DOES IT MEAN FOR MEMBERS?
Example 2, TPS member
• Member aged 54, with 30 years of service by 1 April 2014
• Actual salary increased from £40,000 p.a. to £55,000 p.a. in 2013/14 and to
£70,000 p.a. in 2014/15
TPS Final Pensionable Salary
Pension Input Period
(PIP) commencing
Salary in last 12
months
Restricted salary
Best 3 in last 10
years
Estimated Final
Pensionable Salary
01 April 2011
01 April 2012
01 April 2013
01 April 2014
01 April 2015
01 April 2016
38,500
40,000
55,000*
70,000**
72,800
75,700
38,500
40,000
45,500
51,200
57,000
73,400
38,700
39,700
45,500
56,000
67,300
73,400
38,700
40,000
45,500
56,000
67,300
73,400
* Promotion from … to …
** Promotion from … to …
These pensionable salaries have been estimated based on our understanding of the Teachers Pensions regulations. The
restriction in definition of the Final Pensionable Salary in the TPS effectively ‘delays’ any promotional increases hence any AA
tax charges. We have assumed that, other than promotional increases, pay increases are at RPI + 1%.
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WHAT DOES IT MEAN FOR MEMBERS?
Example 2 continued…
Pension Input
Period
commencing
Accrued pension at
beginning of year
(inflated by
consumer prices
index)
Accrued
pension at
end of year
1 April 2011
£12,900
£13,500
1 April 2012
£14,200
£14,500
1 April 2013
£14,800
£17,100
Cumulative Carry Forward Annual Allowance:
1 April 2014
£17,500
£21,700
1 April 2015
£22,200
£26,900
1 April 2016
£27,500
£30,300
HMRC value of
increase in
pension1
Unused AA –
(excess pension
savings)
Tax Charge
£12,500
£5,100
£42,600
£37,500
£44,900
£7,400
£89,800
Nil
Nil
Nil
£80,000
£89,200
£52,700
£49,800*
£500*
(£12,200)*
Nil**
Nil**
£4,900
* Cumulative - includes any carry forward from previous 3 years
** There is sufficient carry forward from previous years in 14/15 and 15/16
• An Annual Allowance tax charge would be payable in 2016/17
• The restriction in the TPS Final Pensionable Salary definition has delayed Annual Allowance tax
charges by 2 years after the promotional increase
1. The “HMRC value of increase in pension” for Annual Allowance purposes means the increase in the value of pension based on a capitalisation factor of 19 (using a factor of
16 for pension and 3 for the cash lump sum). When calculating the increase in the value of the pension over each year, allowance can be made for consumer price inflation
to be applied to the previous year’s pension.
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WHAT DOES IT MEAN MEMBERS?
Responsibilities and deadlines – example 2012 – 13 tax year
Members to notify HMRC
on self assessment tax
returns that they want to
use Scheme Pays and to
have completed selfassessment form
6 Oct 2013
Best practice for
Schemes to have
sent pension
savings
statements to
those who have
exceeded the AA
in that scheme
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31 Jan 2014
HMRC matches
up scheme tax
payments with
elections by
members for
Scheme Pays on
tax returns
Latest date for
members to make
irrevocable
election to
proceed with
Scheme Pays
31 July 2014
31 December 2014
14 February 2015 onwards
Date when tax
payable from
scheme becomes
due
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WHAT DOES IT MEAN FOR MEMBERS?
HMRC self assessment process
Increase in value of benefits in
tax year after allowing for any
available carry forward for the
three previous tax years in
respect of registered pension
scheme
Completed if Scheme Pays
option exercised
Enter the amount of Annual
Allowance excess tax charge
paid or payable by the scheme
administrator, who you will have
told how much tax has been
paid. Where more than one
pension scheme has paid
such a tax charge, enter the
total
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If Scheme Pays is being
considered, enter the Pension
Scheme tax reference number
here
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How to stay ahead of the game
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SPECIFIC IMPLICATIONS FOR THE HEI SECTOR
• Sector wide schemes
–
–
•
Can move from one employer to another and keep continuous Pensionable Service.
Significant final salary gearing with longer service.
The 2014 AA changes have affected:
–
–
–
Promotional increases.
High earners.
New hires : attraction and retention issues.
• Be aware of CPI indexation
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Tax year
Relevant CPI
increase date
CPI increase
Comment
2008 – 09
Sept 2007
1.8%
First notional AA carry forward assessment
2009 – 10
Sept 2008
5.2%
Attractive AA carry forward potential
2010 – 11
Sept 2009
1.1%
Very low CPI and limited carry forward
2011 – 12
Sept 2010
3.1%
First year of AA assessment under new
£50,000 AA regime
2012 – 13
Sept 2011
5.2%
High CPI and low pay increases so high
potential for AA carry forward
2013 – 14
Sept 2012
2.2%
Low CPI and some potential to exceed AA
2014 – 15
Sept 2013
2.7%
First year under new £40,000 AA regime. Fairly
low CPI exacerbated problem
2015 – 16
Sept 2014
? Could be low
Potential for very significant AA charges
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SPECIFIC IMPLICATIONS FOR THE HEI SECTOR (2)
•
The 2014 AA changes will affect:
–
–
–
Promotional increases.
High earners.
New hires in attraction and retention issues.
• TPS:
– FAQs and on line modeller:
https://www.teacherspensions.co.uk/members/resources/calculators/annual-allowance.aspx
– Annual Allowance and Carry Forward calculations
– Scheme Pays election form
•
LGPS
• Pension tax guide
http://www.avonpensionfund.org.uk/active/employeeguide/MG10-20140317.pdf
•
HMRC
– AA guidance, which includes links to various examples:
http://www.hmrc.gov.uk/pensionschemes/annual-allowance/index.htm
– Carrying forward unused AA from the previous 3 tax years.
http://www.hmrc.gov.uk/pensionschemes/annual-allowance/carry-forward.htm
– The calculation of the AA charge is shown in the link below:
http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM06108110.htm
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FIVE MUST DO ACTIONS
EMPLOYEE
Be aware of the changes
Calculate potential impact to you
Understand choices and consider your best
outcome
Implement your decision, e.g.:
ACTION
UNDERSTAND
CALCULATE
CHOOSE
TAKE ACTION
• Individual Protection application
• Scheme Pays deadlines
Review your financial position
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REVIEW OFTEN
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