Dave Simson 13 December 2011

1. Finance Bill 2011: Pension Tax Relief Changes Dave Simson 13 December 2011

2. 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

3. A trip down memory lane Pre April 2006 Post April 2006 A Day • Employee contribution restrictions • Benefits limited on cessation • Earnings cap in place • Tax ‘Simplification’ • Removal of previous restrictions • Introduction of Annual and Lifetime Allowance • Thresholds – not limits

4. Tax Free Thresholds Tax charge above thresholds Annual Allowance (AA) • Increase in capital value of benefits • Yearly • Factor of 10 • £255k @ 31 March 2011 • Lifetime Allowance (LTA) • Total capital value of benefits • On retirement (generally) • Factor of 20 • Currently £1.8m

5. April 2009 Budget • Labour Government • Intention to restrict tax relief on pension contributions for high earners from April 2011 • Complicated method proposed

6. But following the election • New Coalition Government formed • Old proposal scrapped – too complicated • New proposal: • amend existing annual and lifetime allowances • amend factor for annual allowance • amend tax charge rate • 14 October – results of consultation/way forward

7. annual allowance

8. 2011 tax regime - summary • Effective from - year to 31 March 2012 for LGPS • Reduced to £50,000 • Allowance for the revaluation of previous years’ benefits in line with CPI • Flat factor of 16 used to value increase in DB accrual • Carry forward 3 years of unused allowance • Annual Allowance frozen until 2015/16 • Full tax-relief up to the Annual Allowance (marginal rate charge above)

9. PIPs and PIAs Accrued pension at the end of the current PIP: Based on new Final Pensionable Salary and Pensionable Service at that date Inflation (CPI) increase Increase in pension ‘growth’ x 16 + lump sum growth = “Pension Input Amount (PIA)” Accrued pension at end of previous PIP: Based on Final Pensionable Salary and Pensionable Service at that date Start End “Pension Input Period” (PIP)

10. Example 1 – Above CPI pay increase(Maybe one day....) • Assumptions: • 20 years’ pensionable service at March 2011 • Pensionable salary of £150,000 • CPI 2.5% • Actual pay increase 4% (1.5% above CPI)

11. Calculation of the value of benefits Step 1 – Start of PIP Step 2 – End of PIP • 1 April 2011 • Pay = £150,000 • Service • 17 years pre March 08 • 3 years post March 08 • Benefit calculation • Pension = ((17 x £150,000/80 +(3 x £150,000/60)) • Lump sum = 17 x £150,000 x 3/80 • Pension £39,375 • Lump sum £95,625 • 31 March 2012 • Pay £156,000 • Service • 17 years pre March 2008 • 4 years post March 08 • Benefit calculation • Pension = ((17 x £156,000/80) +(4 x £156,000/60)) • Lump sum = 17 x £156,000 x3/80 • Pension £43,550 • Lump sum £99,450

12. Calculation of pension growth Step 3 – Compare for 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) Incl. CPI

13. Calculation of pension growth Step 4 – Apply factor • Growth in pension £3,191 (A) • Growth in lump sum £1,434 (B) • Flat related factor 16 (C) • Growth (A x C) + B = £52,490 • Excess subject to tax charge £2,490

14. Calculation of tax rate to apply Step 5 – Calculate marginal tax rate • Gross income £156,000 • Less contributions (7.5%) _£11,700 £144,300 • Plus excess over £50,000 __£2,490 • Total net income £146,790 • As total income is below £150,000 (50% tax threshold) tax charge is 40%

15. Calculation of tax Step 6 – Apply tax rate to excess • Total growth £52,490 • Less annual allowance _£50,000 • Excess £2,490 • Apply tax rate – 40% £996* * Assumes no carry forward allowance available

16. Example 2 – Includes Promotion • Assumptions: • 20 years’ pensionable service at March 2011 • Pensionable salary of £110,000 p.a. • Receives promotion to £180,000 p.a. • CPI 2.5%

17. Calculation of the value of benefits Step 1 – Start of PIP Step 2 – End of PIP • 1 April 2011 • Pay = £110,000 • Service • 17 years pre March 08 • 3 years post March 08 • Benefit calculation • Pension =((17 x £110,000/80) +(3 x £110,000/60)) • Lump sum = 17 x £110,000 x 3/80 • Pension £28,875 • Lump sum £70,125 • 31 March 2012 • Pay = £180,000 • Service • 17 years pre March 08 • 4 years post March 08 • Benefit calculation • Pension = ((17x£180,000/80) +(4 x £180,000/60)) • Lump sum = 17 x £180,000 x3/80 • Pension £ 50,250 • Lump sum £114,750

18. Calculation of pension growth Step 3 – Compare for 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) Incl. CPI

19. Calculation of pension growth Step 4 – Apply factor • Growth in pension £20,653 (A) • Growth in lump sum £42,872 (B) • Flat related factor 16 (C) • Growth (A x C) + B = £373,320 • Excess subject to tax charge £323,320

20. Calculation of tax rate to apply Step 5 – Calculate marginal tax rate • Gross income £180,000 • Less contributions (7.5%) _£13,500 £166,500 • Plus excess over £50,000 £323,320 • Total net income £489,820 • As all excess is over £150,000 (50% tax threshold) tax charge is 50%

21. Calculation of tax Step 6 – Apply tax rate to excess • Total growth £373,320 • Less annual allowance _£50,000 • Excess £323,320 • Apply tax rate – 50% £161,660* * Assumes no carry forward allowance available

22. But with carry forward... Step 4b – Calculate carry forward • Assuming 4% pay increase and 2.5% inflation in previous 3 years • Growth 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 = £50,000 • Total allowance £95,602

23. Calculation of tax Step 6 – Apply tax rate to excess • Total growth £373,320 • Less effective annual allowance £95,602 • Excess £277,718 • Apply tax rate – 50% £138,859 • (Compared to £161,660 if carry forward was not implemented)

24. Annual allowance - who might it affect (LGPS)? • Pay Award – 5% • CPI – 3%

25. Who might it affect (LGPS)? • Pay Award – 0% • CPI – 3%

26. 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

27. What’s in and what’s out • No longer exempt • Benefits in the year of retirement including enhancements • (But unreduced benefits OK) • Enhanced protection cases • Exempt: • Deferred members • Benefits in the year of death • Serious ill-health retirement • Likely for normal ill-health retirements too

28. To be confirmed • Aggregation of LGPS benefits • Original proposal too severe • Current option too generous and inconsistent • With Local Government Association (LGA) to liaise with HMRC • Ill Health Retirement • Awaiting revised regulations to confirm which ill heath retirements will be exempt.

29. lifetime allowance

30. 2011 tax regime - summary • Reduced to £1.5m from April 2012 • LTA valuation factor maintained at 20 • LTA tax-charges unchanged • Lump sum is taxable at 55% • Pension is taxable at 25%

32. 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

33. Something for the weekend sir?

34. Fixed Protection • Apply before 6 April 2012 • Protected LTA of £1.8m • But, by April 2012: • No benefit accrual BEYOND CPI and • No AVCs/money purchase contributions. • Possible concerns over auto-enrolment • Not permitted if you have enhanced or primary protection

35. Important decision for member: • Retain benefit accrual, lose fixed protection and have LTA of £1.5M • Retain fixed protection, lose benefit accrual and have LTA of £1.8M • Must 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!

36. practicalities & responsibilities

37. Practicalities & Responsibilities

38. Thank You Any questions?

39. Disclaimer • This 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.