Pensions Taxation – Lifetime
Allowance, Annual Allowance (AA)
and Tapered Annual Allowance (TAA)
Presented By
Gary O’Neill
Overview of Presentation
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What is Lifetime Allowance?
How it is calculated
Individual Protection 2014
Fixed and Individual Protection 2016
Tax Charge on Exceeding the Lifetime Allowance
What is Annual Allowance?
How it is calculated?
Combining Defined Benefits and Defined Contributions
Carry Forward
Tax Charge on Exceeding the Annual Allowance
Scheme Pays
Transitional Arrangements (2015/2016)
Tapered Annual Allowance (April 2016)
What is Lifetime Allowance
• It is a limit on the amount of pension benefit that can be drawn from
pension schemes via a lump sum or retirement income without triggering
an extra tax charge.
• It was introduced in April 2006 (with a limit of £1.5 million) in conjunction
with the Annual Allowance (limit of £215,000) and replaced the Pension
Earnings Cap (introduced in June 1989).
• It is a personal taxation issue (you are responsible for making
arrangements to pay or mitigate a Tax Charge).
• The current limit is £1.25 million (effective from April 2012) reducing to £1
million with effect from 6 April 2016.
• A Tax Charge would apply if the limit is exceeded on retirement.
How is Lifetime Allowance calculated?
• USS and the NHSPS are Defined Benefit (DB) Schemes. Growth is based
on an accrual of service (years and days) and pensionable salary (full time
equivalent for Final Salary members, actual salary for Career Revalued
Earnings Scheme members).
• USS will change to a hybrid Defined Benefit/Defined Contribution scheme
from 1 October 2016.
• Crystallisation Event is a calculation of your total pension funds (excluding
state benefits)at the point of retiring. Includes Defined Benefits, Defined
Contribution, Additional Voluntary Contribution and a pension in payment
(25 X pension).
• Defined Benefit (FS 80th) Example
• Pension X 20 + Lump Sum = Lifetime Allowance
• £45,000 X 20 + £135,000 (3 X pension) = £1,035,000
• Defined Contributions
• Fund value at Retirement £54,000 for example
Tax Charge on exceeding the Lifetime
Allowance
• If deducted from pension – 25% of the excess of Lifetime Allowance is paid
to the HMRC and the pension is reduced aligned with the payment. The
remaining pension is then subject to income tax at the normal rates.
• If deducted from Lump Sum – 55% of the excess of Lifetime Allowance is
paid to the HMRC. The remainder is paid as cash.
• 1 October 2016 USS Hybrid Arrangement – 55% of the excess of Lifetime
Allowance if deducted from the Defined Contribution section.
Individual Protection 2014 (IP2014)
• Lifetime Allowance was reduced from £1.5 million to £1.25 million from 6
April 2014.
• Can be applied for from the HRMC by 5 April 2017.
• Lifetime Allowance had to be over £1.25 million on 5 April 2014 to apply
for IP2014
• Protection equal to pensions savings on 5 April 2014 up to an overall
maximum of £1.5 million.
• The excess will be subject to a tax charge.
• Can be applied for if you have Enhanced Protection, Fixed Protection or
Fixed Protection 2014. IP2014 will remain dormant until you lose your
prior protection.
• Can continue to contribute to a pension scheme.
• Application link –
https://online.hmrc.gov.uk/shortforms/form/IP2014?dept-name=subdept-name=&location=36&origin=http://www.hmrc.gov.uk
Fixed Protection 2016 (FP2016) and Individual
Protection 2016 (IP2016)
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To protect against the reduction of Lifetime Allowance to £1 million from 6 April
2016.
Fixed Protection 2016 – Can protect up to £1.25 million of LTA but pension accrual
(scheme contributions) would stop. Can lose protection if you continue to
contribute to a Defined Contribution or Defined Benefits arrangement.
Individual Protection 2016 – Protects a personal LTA as at 5 April 2016 (up to £1.25
million) and can continue to contribute to a Defined Contribution or Definded
Benefits arrangement.
Online applications will not be available until July 2016.
An interim FP2016 and IP2016 application arrangement will be available if
accessing benefits between 6 April 2016 and July 2016
Recommended that members ask for quotations re. their LTA status as at 5 April
2016 to establish if an application for FP2016 or IP2016 is required and to
discontinue contributions (if FP2016).
Enhanced Opt Out (USS only) – 2.5% employee contribution allows a member to
maintain death and ill health cover. 2.1% employer contribution is deducted for
deficit repayment.
What is Annual Allowance?
• It is a limit on the growth of your pension for each tax year, while still
receiving tax relief.
• It was introduced in April 2006 (limit of £215,000) in conjunction with the
Lifetime Allowance (limit of £1.5 million) and replaced the Pension
Earnings Cap (introduced in June 1989).
• It is a personal taxation issue (you are responsible for making
arrangements to pay or mitigate a Tax Charge).
• Reduced to £1.5 million in April 2012 to generate more tax income for the
government.
• The limit for the 2014/2015 was £40,000 and the 2015/2016 tax year is
£80,000 (as part of the transitional arrangements for Pension Input Period
(PIP) alignment).
• A Tax Charge would apply if the limit is exceeded in a tax year.
Annual Allowance Rates from April 2006
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2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
2013/2014
2014/2015
2015/2016
• 2016/2017
£215,000
£225,000
£235,000
£245,000
£255,000
£50,000
£50,000
£50,000
£40,000
£80,000 (Transitional Arrangements), split tax year
and can only carry forward £40,000 into the
second period.
£40,000 Tapered Annual Allowance (Annual
Allowance limit reduces by £5,000 for every
£10,000 earned from £150,000 to £210,000)
How is Annual Allowance calculated
(Defined Benefit Schemes)?
• USS and the NHSPS are Defined Benefit (DB) Schemes. Growth is based on
an accrual of service (years and days) and pensionable salary (full time
equivalent for Final Salary members, actual salary for Career Revalued
Earnings Scheme members).
• Pension Input Periods (PIPs)
• A valuation of your overall pension fund is undertaken at the beginning of
the tax year and increased by the Consumer Price Index from the previous
September.
• A further valuation of your overall pension fund is undertaken at the end
of the tax year.
• The value at the beginning of the tax year is subtracted from the value at
the end of the tax year and the remainder is contributory to the Annual
Allowance.
DB AA calculation example
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Pensionable service = 21 years
Salary £85,000
Consumer Price Index 2.7%
21 / 80 X £85,000 = £22,312.5 (pension), £22,312.5 X 3 = £66,937.50 ( lump sum)
19 (HMRC Factor) X £22,312.50 + 2.7% = £435,383.81 (fund value at 31 March
2014)
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Pension Input Period 1 April 2014 – 31 March 2015
Pensionable service = 22 years
Salary £95,000
22 / 80 X £95,000 = £26,125 (pension), £26,125 X 3 = £78,375 (lump sum)
19 X £26,125 = £496,375 (fund value at 31 March 2016)
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Excess of the Annual Allowance
£496,375 - £435,383.80 = £60,991.20
Difference – Annual Allowance = Excess subject to a tax charge
Tax Charge applies to £20,991.20
How is Annual Allowance calculated (Defined
Contribution Schemes)?
• Defined Contribution (DC) Schemes are funded based investments. There
are usually a range of investment options (low risk, high risk, ethical etc)
and you would pay directly into these investments.
• There are optional Defined Contribution components to both USS and the
NHSPS (Prudential for USS members and Prudential and Standard Life for
NHSPS members) as well as open market external options.
• The amount paid into a DC arrangement reduces the Annual Allowance by
the same amount.
• Example
• £10,000 paid to the Prudential = a reduction in Annual Allowance of
£10,000
Combining DB and DC Annual Allowance
• The DB and DC (including external DB or DC arrangements) Annual
Allowance components are added together to establish the final Annual
Allowance figure.
• Formula:
• DB Annual Allowance + DC Annual Allowance = Total Annual Allowance
Annual Allowance – Carry Forward
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You can bring forward any unused Annual Allowance from the previous 3 tax years to
increase the amount of Annual Allowance to offset a tax charge provided you were a
member of a registered pension scheme during the carry forward period.
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Example of calculating Carry Forward
Annual Allowance is £35,000 for the Payment Input Period 1 April 2011 – 31 March 2012
Annual Allowance limit is £50,000, unused Annual Allowance = £15,000
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Annual Allowance is £40,000 for the Payment Input Period 1 April 2012 – 31 March 2013
Annual Allowance limit is £50,000, unused Annual Allowance = £10,000
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Annual Allowance is £38,000 for the Payment Input Period 1 April 2013 – 31 March 2014
Annual Allowance limit is £40,000, unused Annual Allowance = £2,000
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Total Carry Forward of unused Annual Allowance = £27,000
Total Annual Allowance for Payment Input Period 1 April 2014- 31 March 2015, £27,000 +
£40,000 = £67,000
Tax Charge on exceeding the AA limit
• The Pension Scheme undertakes an annual AA and Carry Forward check
and will produce a statement if the AA limit for the tax year is exceeded.
• If you have another pension scheme arrangement (DB, Private or Money
Purchase Additional Voluntary Contribution) you would need to compile
AA figures for all active elements of your pension if you wanted to
establish if you had exceeded the Annual Allowance.
• The amount of the Annual Allowance Charge can be in whole or in part at
45%, 40%, or 20% depending on your taxable income and the amount of
pension savings that are in excess of the Annual Allowance limit for the
year concerned.
• You would need to complete an Her Majesties and Customs Self
Assessment (HMRC) Tax Return if you exceed the Annual Allowance.
• You would need to register with the HMRC if you have not previously
completed a self assessment.
Calculating a Tax Charge
• Example:
• Tax Earnings = £130,000
• Amount exceeding the Annual Allowance = £50,000
• Total = £180,000
• 45% Tax Charge applies to amount of total exceeding £150,000
• £30,000 X 45% = £13,500
• 40% Tax Charge applies to the remaining £20,000 below £150,000
• £20,000 X 40% = £8,000
• Total Tax Charge is £21,500
How to pay the Tax Charge
• You would need to complete an Her Majesties and Customs Self
Assessment (HMRC) Tax Return if you exceed the Annual Allowance.
• You would need to register with the HMRC if you have not previously
completed a self assessment.
• It is not possible to pay the charge over the phone to the HMRC but you
could pay by:
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Online or telephone banking
CHAPS or Bacs
Debit or Credit card online
Bank or Building Society or at the Post Office.
The deadline for payment is 31 January for any tax owed for the previous
tax year (known as a balancing payment).
• A scheme pays option is available for Annual Allowance charges exceeding
£2,000
Scheme Pays Arrangements
• Conditions:
• Your benefits in a Payment Input Period are greater that the AA limit.
• You have no Carry Forward to utilise from previous years.
• Your overall Tax Charge is more than £2,000
• The scheme (USS or NHSPS) will only apply Scheme Pays to a Tax Charge in
relation to excess allowance built up in their schemes.
• You would have the option to pay part of the Tax Charge and the scheme
can pay the remainder, or, the scheme can pay in full.
How is Scheme Pays deducted from Retirement
Benefits?
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There are 2 methods of calculating the deduction from your benefits under Scheme
Pays both would be subject to increases based on the Consumer Prices Index (CPI).
You ask the pension scheme to pay your Tax Charge:
At the point of retirement; or
As you’re approaching retirement; or
If you’re age 65 or over
The reduction would be based on the commutation applicable at retirement. This is the
same rate that is used to commute pension to extra cash.
Example: If the scheme has paid £50,000 and the commutation factor is 17.00 the
reduction of pension would be as follows:
£50,000 / 17.00 = £2,941.17 reduction of pension per annum (increased annually with
CPI)
You ask the pension scheme to pay your Tax Charge:
When you’re under the age of 65; or
You’re not contemplating retirement
The reduction will be calculated using the current scheme transfer factors (applies to
USS only)
Applying for Scheme Pays
• You would indicate that you elect for the pension scheme to partly or fully
pay your Tax Charge within your HMRC self assessment tax return (no later
that 31 January) . You would need to state the amount being paid by:
• You and the scheme; or
• Fully paid by the scheme.
• You would then need to notify the scheme before and no later than the
following 31 July.
• On line Scheme Pays forms are available on the USS and NHSPS websites.
Transitional Arrangements to align Payment Input
Periods (PIP)
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USS and NHSPS Pension Input
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From 6 April 2016, all PIPs will align with the tax year (previously 1 April – 31
March)
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The PIPs that were open on 8 July 2015 ended on the 8 July 2015 and a new PIP
commenced from 9 July 2015 (to coincide with the Budget).
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Two-part year for PIP purposes:
Period 1 – 1 April 2015 – 8 July 2015 = £80,000 with any Carry Forward from
previous periods.
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Period 2 – 9 July 2015 - 5 April 2016 = £40,000 can be brought forward from
period 1 together with any unused Carry Forward from the previous 3 years PIPs
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Awaiting further details from USS and NHSPS.
Tapered Annual Allowance 2016/2017
• Tapered Annual Allowance (TAA) will be introduced from 6 April 2016.
• The Annual Allowance limit reduces by £1 for every £2 earned from an
adjusted income of £150,000 to £210,000
• An adjusted income at or above £210,000 will reduce an Annual Allowance
from £40,000 (the standard Annual Allowance) to £10,000
• Establishing if tapering applies is dependent on your:
• Threshold Income – if £110,000 or above
• Adjusted Income - if threshold income is £110,000 or above and adjusted
income is above £150,000
Calculating Threshold Income
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Includes taxable income from all sources:
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Employment Income
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Property Income
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Dividend Income (shares)
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Pensions in Payment
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Savings Income
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Any income sacrificed under a salary sacrifice arrangement entered into on or
after 9 July 2015 (anti-avoidance rules)
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Minus employee pension contributions paid from taxed earnings
Calculating Adjusted Income
• Includes taxable income from all sources:
• Employment Income
• Property Income
• Dividend Income (shares)
• Pensions in Payment
• Savings Income
• Any income sacrificed under a salary sacrifice arrangement entered into
on or after 9 July 2015 (anti-avoidance rules)
• Plus the value of your employer contribution to any defined benefit
arrangement (as per the Annual Allowance calculation) or defined
contribution arrangement
Example of Tapering
• Threshold income £135,000
• Defined Benefit growth is £45,000 – employee contributions of £10,000 =
£35,000
• Adjusted income, £135,000 + £35,000 = £170,000
• £20,000 over adjusted income of £150,000 / 2 = £10,000 reduction in
Annual Allowance of £40,000 (£30,000).
• If annual growth of pension benefits exceeds £30,000 then a tax charge
would apply.
Voluntary Salary Cap (USS only)
• Effective from 1 October 2016
• Allows a member to reduce their growth of benefit to counter the Taper
• Pension contributions can be capped at a minimum of £55,000 (resulting
in an Annual Allowance of approximately £14,000 p.a.)
• Member could continue to pay 2.5% on earnings above the cap to secure
full ill health and death cover.
• An employer contribution of 2.1% on earnings above the cap would apply
for deficit repayment.
Further Information and Financial Advice
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Links to the USS & NHSPS websites together with a link to further information on the existing Tax Relief Limits can be found at the
following link:
Http://www.ucl.ac.uk/hr/pensions/index-home.php
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Technical Information on Annual Allowance is available at the following HMRC link:
http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM06105000.htm
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Annual Allowance Calculator – http://www.hmrc.gov.uk/tools/pension-allowance/index.htm
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NHSPS Tapered Annual Allowance Factsheet – http://www.nhsbsa.nhs.uk/Documents/Pensions/201617_Tapered_Annual_Allowance_(12.2015)_V1.pdf
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USS Pensions Scheme Tax Allowance – http://www.uss.co.uk/news/Pages/Pensionschemetaxallowance.aspx
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Individual Protection 2014 – http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM11107000.htm
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HMRC Self Assessment: register for Self Assessment and get a tax return (SA1) link:
https://www.gov.uk/government/publications/self-assessment-register-for-self-assessment-and-get-a-tax-return-sa1
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If you do not exceed the Annual Allowance (with the inclusion of Carry Forward) or Lifetime Allowance, you may wish to consider taking
Independent Financial Advice regarding your options.
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USS Members cam visit the following link:
http://www.uss.co.uk/SchemeGuide/CareerRevaluedBenefitssection/maximisingyourpension/financialadvice/Pages/default.aspx
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NHSPS Members can visit the following link:
http://www.nhsbsa.nhs.uk/Pensions/4203.aspx
Independent Financial Advice @ Queen Mary,
University of London
• Over 17 years experience of advising Higher Education professionals
• Provide a ‘financial advice in the workplace programme’ for: Queen Mary
University of London; The University of Northampton; and specialist pensions
advice to staff members of University College London, Senate House, Heythrop
College and St Georges Medical College.
• Pre and post retirement advice for individuals in order to maximise pension
benefits and mitigate taxation
• Specialist advice on AA/LTA calculations, can arrange for AA/LTA calculations &
advise on strategies to mitigate
• Investment advice and management service which includes a review of existing
investments held and also recommendation of suitable future investments
• Individual meetings can be held at the work place or at your home
Independent Financial Advice – Why?
• Queen Mary, University of London, USS and NHS Pensions can:
– provide information about the scheme and your benefits
– clarify technical issues/queries
– direct you to where guidance / information is located
to enable you to make an informed decision about the options available /
choices facing you.
• but CANNOT give financial advice
• Complex matters, difficult decisions to make, its natural you will want help
in making a decision which is best for you
• You should seek advice as your net benefits, even after a potential tax
charge, may be greater than the net cost of the contribution paid by you.
• Identify / discuss your retirement objectives
Gary O’Neill
Austin Chapel Independent Financial Advisers LLP
St Laurence House
Gridiron Place
Upminister
Essex
RM14 2BE
01708 220816
gary.oneill@austinchapel.co.uk