dave simson 13 december 2011
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Finance Bill 2011: Pension Tax Relief Changes. Dave Simson 13 December 2011. 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. - PowerPoint PPT PresentationTRANSCRIPT
Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority
Dave Simson 13 December 2011
Finance Bill 2011: Pension Tax Relief Changes
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What I’ll cover....
Trip down memory laneWhat’s changed:
Annual AllowancePayment OptionsWhat’s in and what’s out
To be confirmedLife Time Allowance
Fixed Protection
Responsibilities and practicalities
3
A trip down memory lane
Employee contribution restrictionsBenefits limited on cessationEarnings cap in place
Pre April 2006
Tax ‘Simplification’Removal of previous restrictionsIntroduction of Annual and Lifetime AllowanceThresholds – not limits
Post April 2006
A Day
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Tax Free Thresholds
Annual Allowance (AA)Increase in capital value of benefits YearlyFactor of 10£255k @ 31 March 2011
Lifetime Allowance (LTA)Total capital value of benefits On retirement (generally)Factor of 20Currently £1.8m
Tax charge above
thresholds
5
April 2009 Budget
Labour Government
Intention to restrict tax relief on pension contributions for high earners from April 2011
Complicated method proposed
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But following the election
New Coalition Government formedOld proposal scrapped – too complicatedNew proposal:
amend existing annual and lifetime allowances amend factor for annual allowanceamend tax charge rate
14 October – results of consultation/way forward
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annualallowance
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2011 tax regime - summary
Effective from - year to 31 March 2012 for LGPS
Reduced to £50,000Allowance for the revaluation of previous years’ benefits in line with CPIFlat factor of 16 used to value increase in DB accrualCarry forward 3 years of unused allowanceAnnual Allowance frozen until 2015/16Full tax-relief up to the Annual Allowance (marginal rate charge above)
9
PIPs and PIAs
Accrued pension at end of previous PIP:
Based on Final Pensionable Salary
and Pensionable Service at that date
Inflation (CPI) increaseAccrued pension at
the end of the current PIP:
Based on new Final Pensionable Salary
and Pensionable Service at that date
Start End
Increase in pension ‘growth’
x 16 + lump sum growth = “Pension
Input Amount (PIA)”
“Pension Input Period” (PIP)
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Example 1 – Above CPI pay increase(Maybe one day....)
Assumptions:20 years’ pensionable service at March 2011Pensionable salary of £150,000CPI 2.5%Actual pay increase 4% (1.5% above CPI)
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Calculation of the value of benefits
1 April 2011Pay = £150,000Service
17 years pre March 083 years post March 08
Benefit calculationPension = ((17 x £150,000/80
+(3 x £150,000/60))Lump sum = 17 x £150,000 x 3/80
Pension £39,375Lump sum £95,625
31 March 2012Pay £156,000Service
17 years pre March 20084 years post March 08
Benefit calculationPension = ((17 x £156,000/80)
+(4 x £156,000/60))Lump sum = 17 x £156,000 x3/80
Pension £43,550Lump sum £99,450
Step 1 – Start of PIP Step 2 – End of PIP
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Calculation of pension growth
Pension at start of PIP £39,375 (£40,359)Pension at end of PIP £43,550
Growth in excess of 2.5% £3,191 (A)Lump sum at start of PIP £95,625 (£98,016)Lump sum at end of PIP £99,450
Growth in excess of 2.5% £1,434 (B)
Step 3 – Compare for growth
Incl. CPI
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Calculation of pension growth
Growth in pension £3,191 (A)Growth in lump sum £1,434 (B)Flat related factor 16 (C)
Growth (A x C) + B = £52,490Excess subject to tax charge £2,490
Step 4 – Apply factor
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Calculation of tax rate to apply
Gross income £156,000Less contributions (7.5%) _£11,700
£144,300Plus excess over £50,000 __£2,490Total net income £146,790As total income is below £150,000 (50% tax threshold) tax charge is 40%
Step 5 – Calculate marginal tax rate
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Calculation of tax
Total growth £52,490Less annual allowance _£50,000Excess £2,490
Apply tax rate – 40% £996*
* Assumes no carry forward allowance available
Step 6 – Apply tax rate to excess
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Example 2 – Includes Promotion
Assumptions:20 years’ pensionable service at March 2011Pensionable salary of £110,000 p.a.Receives promotion to £180,000 p.a.CPI 2.5%
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Calculation of the value of benefits
1 April 2011Pay = £110,000Service
17 years pre March 083 years post March 08
Benefit calculationPension =((17 x £110,000/80)
+(3 x £110,000/60))Lump sum = 17 x £110,000 x 3/80
Pension £28,875Lump sum £70,125
31 March 2012Pay = £180,000Service
17 years pre March 084 years post March 08
Benefit calculationPension = ((17x£180,000/80)
+(4 x £180,000/60))Lump sum = 17 x £180,000 x3/80
Pension £ 50,250Lump sum £114,750
Step 1 – Start of PIP Step 2 – End of PIP
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Calculation of pension growth
Pension at start of PIP £28,875 (£29,597)Pension at end of PIP £50,250
Growth in excess of 2.5% £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)
Step 3 – Compare for growthIncl. CPI
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Calculation of pension growth
Growth in pension £20,653 (A)Growth in lump sum £42,872 (B)Flat related factor 16 (C)
Growth (A x C) + B = £373,320Excess subject to tax charge £323,320
Step 4 – Apply factor
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Calculation of tax rate to apply
Gross income £180,000Less contributions (7.5%) _£13,500
£166,500Plus excess over £50,000 £323,320Total net income £489,820As all excess is over £150,000 (50% tax threshold) tax charge is 50%
Step 5 – Calculate marginal tax rate
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Calculation of tax
Total growth £373,320Less annual allowance _£50,000Excess £323,320
Apply tax rate – 50% £161,660*
* Assumes no carry forward allowance available
Step 6 – Apply tax rate to excess
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But with carry forward...
Assuming 4% pay increase and 2.5% inflation in previous 3 yearsGrowth total in previous three years
£33,042+ £34,771 + £36,585 = £104,398 Unused allowance
(3 x £50,000) - £104,398 = £45,602 Plus 2012 allowance = £50,000Total allowance £95,602
Step 4b – Calculate carry forward
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Calculation of tax
Total growth £373,320Less effective annual allowance £95,602Excess £277,718
Apply tax rate – 50% £138,859(Compared to £161,660 if carry forward was not implemented)
Step 6 – Apply tax rate to excess
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Annual allowance - who might it affect (LGPS)?
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
Pensionabl
e Servic
e at start of tax year
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
Pay Award – 5%CPI – 3%
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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
Pensionabl
e Servic
e at start of tax year
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 0 0 0 0 0
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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
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What’s in and what’s out
No longer exemptBenefits in the year of retirement including enhancements(But unreduced benefits OK)Enhanced protection cases
Exempt:Deferred membersBenefits in the year of deathSerious ill-health retirementLikely for normal ill-health retirements too
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To be confirmed
Aggregation of LGPS benefitsOriginal proposal too severeCurrent option too generous and inconsistentWith Local Government Association (LGA) to liaise with HMRC
Ill Health RetirementAwaiting revised regulations to confirm which ill heath retirements will be exempt.
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lifetimeallowance
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2011 tax regime - summary
Reduced to £1.5m from April 2012
LTA valuation factor maintained at 20
LTA tax-charges unchangedLump sum is taxable at 55%Pension is taxable at 25%
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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 £1M at A Day, may find their protected LTA is less than £1.5M (new LTA) now and therefore enhanced protection would be of no benefit to them
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Something for the weekend sir?
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Fixed Protection
Apply before 6 April 2012Protected LTA of £1.8mBut, by April 2012:
No benefit accrual BEYOND CPI andNo AVCs/money purchase contributions.Possible concerns over auto-enrolment
Not permitted if you have enhanced or primary protection
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Important decision for member:
Retain benefit accrual, lose fixed protection and have LTA of £1.5MRetain fixed protection, lose benefit accrual and have LTA of £1.8MMust relinquish enhanced protection!Wrong decision could cost over £75K
Benefit calculations could be obtained from pensions section or consultants;
But they are unable to give financial advice!
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practicalities& responsibilities
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Practicalities & ResponsibilitiesInfo From Info To What 2011/12 2012/13 +
Employer Pension Scheme
Pay, benefits, length of service
6 July 2012 6 July 2013
Pension Scheme
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 be amended up to 31 January 2014)
31 Jan 2014
Scheme Member
Pension Scheme
to make irrevocable decision on scheme pays
31 December 2013
31 July 2014
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Thank You
Any questions?
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DisclaimerThis 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.