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Pensions tax changes. 18 November 2010. Pensions tax relief will be restricted post April 2011. Labour Government proposed raising £3.5bn to £4bn by restricting pension tax relief Coalition Government proposing to raise similar amount, but using a very different approach.

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pensions tax relief will be restricted post april 2011
Pensions tax relief will be restricted post April 2011
  • Labour Government proposed raising £3.5bn to £4bn by restricting pension tax relief
  • Coalition Government proposing to raise similar amount, but using a very different approach
simple defined benefit example 20 pay rise
Simple defined benefit example – 20% pay rise

Salary

x

Service

x

Accrual

x

Inflation

=

Pension

£20,600£20,000

Beginning of year position

£100,000

x

12 years

x

1/60th

x

103%

=

£20,000

End of year position

£120,000

x

13 years

x

1/60th

=

£26,000

Increase over year

£26,000

-

£20,600

=

£5,400

Value of increase

£5,400

x

16

=

£86,400

Tax charge

£50,000£30,000£6,400

x

0%40%50%

=

£15,200

paying the tax
Paying the tax
  • Accrual for pensions input period ending in 2011/12 to be entered onto self-assessment tax return by 31 January 2013 (if submitted on-line)
  • Underpaid tax of up to £2,000 can be collected via PAYE over 2013/14
  • Underpaid tax of over £2,000 has to be paid by 31 January 2013
  • Government consulting on alternative ways for paying large tax bills(e.g. “scheme pays”)
lifetime allowance lta
Lifetime Allowance (“LTA”)
  • Lifetime Allowance being reduced to £1.5m from 6 April 2012
    • 25% tax if excess taken as pension – 55% tax if excess taken as cash
    • maximum tax free cash of £375,000 (i.e. 25% of LTA)
  • Government currently consulting on transitional protections
  • Expected issues
    • individuals with pension value already in excess of £1.5m
    • individuals with current pension pots that will grow to over £1.5m
special cases
Special cases
  • Death
    • full pension tax relief * on benefits granted due to death
  • Serious ill-health
    • full pension tax relief * on benefits granted due to serious ill-health
    • but what happens if the scheme is more generous than the Government definition of serious ill-health?
  • Redundancy
    • no special treatment on redundancy
    • risk of high tax charge if extra benefits granted on redundancy
    • limits scope to divert redundancy payment to pension scheme
  • Salary sacrifice – Not impacted

* Provided benefits are within registered pension scheme usual tax allowance limits

points of detail 1
Points of detail #1
  • Deferred benefits can be ignored
    • as long as no salary or service linkage and ‘reasonable’ revaluation
  • Pension Input Period
    • pension accrual measured over Pension Input Period ending in a tax year
  • Transitional protections
    • where Pension Input Period ending in the tax year 2011/12 has already started
    • for those impacted by the reduction in the Lifetime Allowance
points of detail 2
Points of detail #2
  • Removal of anti-forestalling
    • can use any remaining £50,000 allowances from previous years
  • Carry forward may only apply if in a pension plan in the earlier year
  • Monitoring fiscal risk on
    • all EFRBS; and
    • all Employee Benefit Trusts
  • Additional tax being introduced on
    • funded EFRBS; and
    • Employee Benefit Trusts
comment
Comment

For defined contribution

  • Restricts one year contributions to £50,000 (or up to £200,000 allowing for carry forward of allowances)
  • No impact for vast majority
  • Only likely to impact on individuals looking to make sizeable contributions
    • - business owners on business sale
    • - very high earners
    • - SSAS / SIPS

For defined benefit

  • No impact for plans with an “earnings cap”, except for:
    • large one-off accruals, e.g. promotions or high accrual rates
  • In plans without an “earnings cap”, individuals on salaries over circa £180k will be impacted, even if their accrued benefits only increase in line with inflation
a variety of solutions are available
A variety of solutions are available
  • Target £50,000 of pension accrual per annum
  • Improve value of each £1 pension
    • reduce retirement age
    • increases / spouse’s benefits / cash factor etc
  • EFRBS – NOTE tax risks

Pension planning

Cash

  • Cash instead of pension accrual over £50,000
  • Timing of pay rises for 2010/11
  • Bonus deferral / employee loans

Senior management, earning £150,000+

Equity planning

  • Employee share plans
  • Maximise use of capital gains tax rate (18% / 28%)
  • Employee Benefit Trust (EBT) - NOTE tax risks

Salary and benefits

  • Salary sacrifice
  • Tax efficient benefits
  • Broaden the savings platform

Wider employee

population

pension planning
Pension Planning
  • Cap annual accrual at £50,000 (plus unused prior year allowance)
  • Career Average Revalued Earnings
  • Salary cap
  • Spread salary increases
  • Reduce pension accrual, but increase attaching benefits
    • normal retirement age
    • death benefits
    • increases in payment
  • Stop / start if high scheme deferred revaluation
implementing change
Implementing change
  • Employment contracts
    • do they have specific terms?
    • can they be amended?
  • Statutory consultation
    • pension consultation minimum 60 days
  • Engagement and involvement of parent company
  • Power of amendment
  • Section 67 Pensions Act 1995
  • Role of scheme trustees
    • is their consent needed?
    • if so, will it be given?
way forward
Way forward

Employers

  • Identify individuals impacted:
    • current high accrual
    • salary rises still to feed into pension
    • future salary rises
    • those impacted by £1.5m Lifetime Allowance
  • Change pension accrual to avoid penal tax
    • but remember anti-forestalling
  • Offer alternative remuneration in lieu (or just cut costs)
  • Remember to keep the trustees on board

Trustees

  • Understand employer’s position
  • Clarify PIP
  • Information to members
pensions tax changes22
Pensions tax changes

Kevin LeGrand

Principal and Head of Technical Services

Buck Consultants Limited

160 Queen Victoria Street

London

EC4V 4AN

Tel: 020 7429 1000

Fax: 020 7429 1010

www.buckconsultants.co.uk

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