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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 changes l.jpg

[ managing the impact ]

Pensions tax changes

18 November 2010


Pensions tax relief will be restricted post april 2011 l.jpg
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 l.jpg
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


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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”)


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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


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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


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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


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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


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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




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An example – promotion forward available)


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Possible solutions forward available)


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A variety of solutions are available forward 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


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Pension Planning forward available)

  • 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


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Implementing change forward available)

  • 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 l.jpg
Way forward forward available)

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


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Questions forward available)


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Pensions tax changes forward available)

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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