Download Calculation of pension growth

Finance Bill 2011:
Pension Tax Relief
Changes
Dave Simson
13 December 2011
Hymans Robertson LLP and Hymans Robertson Financial Services LLP are
authorised and regulated by the Financial Services Authority
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
2
A trip down memory lane
Pre April 2006
Employee contribution
restrictions
Benefits limited on
cessation
Earnings cap in place
Post April 2006
A
D
a
y
Tax ‘Simplification’
Removal of previous
restrictions
Introduction of Annual and
Lifetime Allowance
Thresholds – not limits
3
Tax Free Thresholds
Annual Allowance (AA)
Increase in capital value of benefits
Yearly
Factor of 10
£255k @ 31 March 2011
Lifetime Allowance (LTA)
Tax
charge
above
thresholds
Total capital value of benefits
On retirement (generally)
Factor of 20
Currently £1.8m
4
April 2009 Budget
Labour Government
Intention to restrict tax relief on pension
contributions for high earners from April 2011
Complicated method proposed
5
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
6
annual
allowance
7
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)
8
PIPs and PIAs
Inflation (CPI) increase
Accrued pension at
end of previous PIP:
Based on Final
Pensionable Salary
and Pensionable
Service at that date
Start
Increase in
pension
‘growth’
x 16 + lump
sum growth
= “Pension
Input Amount
(PIA)”
“Pension Input Period”
(PIP)
Accrued pension at
the end of the
current PIP:
Based on new Final
Pensionable Salary
and Pensionable
Service at that date
End
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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)
10
Calculation of the value of benefits
Step 1 – Start of PIP
Step 2 – End of PIP
1 April 2011
31 March 2012
Pay = £150,000
Pay £156,000
Service
Service
17 years pre March 08
17 years pre March 2008
3 years post March 08
4 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
Benefit calculation
Pension
= ((17 x £156,000/80)
+(4 x £156,000/60))
Lump sum = 17 x £156,000 x3/80
Pension
£39,375
Pension
£43,550
Lump sum
£95,625
Lump sum
£99,450
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Calculation of pension growth
Step 3 – Compare for growth
Pension at start of PIP
£39,375
Pension at end of PIP
£43,550
Growth in excess of 2.5%
£3,191
Lump sum at start of PIP
£95,625
Lump sum at end of PIP
£99,450
Growth in excess of 2.5%
£1,434
Incl. CPI
(£40,359)
(A)
(£98,016)
(B)
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Calculation of pension growth
Step 4 – Apply factor
Growth in pension
£3,191
(A)
Growth in lump sum
£1,434
(B)
16
(C)
Flat related factor
Growth (A x C) + B =
Excess subject to tax charge
£52,490
£2,490
13
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%
14
Calculation of tax
Step 6 – Apply tax rate to excess
Total growth
Less annual allowance
Excess
Apply tax rate – 40%
£52,490
_£50,000
£2,490
£996*
* Assumes no carry forward allowance available
15
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%
16
Calculation of the value of benefits
Step 1 – Start of PIP
Step 2 – End of PIP
1 April 2011
31 March 2012
Pay = £110,000
Pay = £180,000
Service
Service
17 years pre March 08
17 years pre March 08
3 years post March 08
4 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
Benefit calculation
Pension
= ((17x£180,000/80)
+(4 x £180,000/60))
Lump sum = 17 x £180,000 x3/80
Pension
£28,875
Pension
£ 50,250
Lump sum
£70,125
Lump sum
£114,750
17
Calculation of pension growth
Step 3 – Compare for growth
Pension at start of PIP
£28,875
Pension at end of PIP
£50,250
Incl. CPI
(£29,597)
£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%
Growth in excess of 2.5%
£42,872
(B)
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Calculation of pension growth
Step 4 – Apply factor
Growth in pension
£20,653
(A)
Growth in lump sum
£42,872
(B)
16
(C)
Flat related factor
Growth (A x C) + B =
£373,320
Excess subject to tax charge £323,320
19
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%
20
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
21
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
Plus 2012 allowance
Total allowance
= £45,602
= £50,000
£95,602
22
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)
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Annual allowance - who might it affect
(LGPS)?
Pay Award – 5%
CPI – 3%
Pensionable Service at start of tax year
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
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
24
Who might it affect (LGPS)?
Pay Award – 0%
CPI – 3%
Pensionable Service at start of tax year
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
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
25
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
26
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
27
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.
28
lifetime
allowance
29
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%
30
31
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
32
Something for the weekend sir?
33
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
34
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!
35
practicalities
& responsibilities
36
Practicalities & Responsibilities
Info 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
31 Jan 2014
be amended up to
31 January 2014)
Scheme
Member
Pension
Scheme
to make
irrevocable
decision on
scheme pays
31 December
2013
31 July 2014
37
Thank You
Any questions?
38
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.
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