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Taxation
Changes to tax relief for high earners (May 2009)
Changes to the tax rules (updated July 2009)
The Lifetime Allowance (LTA)
Annual Allowance
Options available at A-Day (updated Feb 07)
Things to do now
Pension Calculator
Existing Pensioners (updated Feb 07)
What help is available
Glossary of terms
Changes to tax relief for high earners (May 2009)
The UK Budget 2009 introduced changes to the tax relief available to high earners, including a special annual allowance of £20,000 . This is an important change which may impact on decisions you take about your pension saving in tax years 2009-10 and 2010-11. Full details of the change can be found on the HMRC website : www.hmrc.gov.uk Further information is also available in the attached document. Budget 2009 Tax Changes
Changes to the tax rules (updated July 2009)
Many of the changes to the tax rules which relax existing restrictions on pension schemes were ‘permissive’ and did not necessarily result in improvements to pensions; improvements only happen if the rules of the pension scheme change. In April 2006 SPPA only amended their schemes to: -
- Allow members to commute pensions where the total value of all pension sources is less than 1% of the lifetime allowance at the time of retirement.
- Introducing a maximum age of 23 years for dependant children pensions to be paid.
- Increasing the minimum retirement age for new entrants from 1 April 2006 to 55 years and for all other members from 2010.
All other scheme rules remained unchanged at that time; however in April 2007 the STSS is introduced additional changes. (Members of the STSS should view the Summary of Changes on the STSS page of Pensions Reform area).
Then in April 2008 the NHS also introduced additional changes. (Members of the NHS should review the NHS Pension Reforms page for further information)
How much is the LTA?
Treasury announced that the basic value of the LTA for the first five tax years will be as follows: -
Year |
LTA (£m) |
|---|---|
2006/07 |
1.5 |
2007/08 |
1.6 |
2008/09 |
1.65 |
2009/10 |
1.75 |
2010/11 |
1.8 |
The LTA has since been confirmed to remain set at £1.8 million until the 2015/2016 period.
How can you value your pension against the LTA?
Firstly you need to follow some simple rules when valuing your pension against the LTA. It is important that you remember the LTA value is the total value of all your pension savings – whether in occupational or personal pension schemes.
Money purchase pensions such as personal pensions or Additional Voluntary contributions (AVC) have a fund value associated with them; the value of these pensions is the fund value.
Our occupational pension schemes which pay out a set amount of pension upon retirement are valued by multiplying the pension by 20 with the value of the lump sum added. This rule also applies to preserved pensions from previous employments and to any pension being built up in other employments.
Any pensions which were already in payment at A-Day will be valued by multiplying the annual amount by 25.
Examples: -
Tom earns £25,500 and has 25 years service so he has built up a pension of £7900 plus a lump sum of £23,700. Tom also has an AVC with Standard Life valued at £10,000.
Tom’s pension benefits are valued, for LTA tax purposes, as follows: -
Pension: £7900 x 20 |
= £158,000 |
Lump Sum |
= £23,700 |
AVC Fund |
= £10,000 |
Total |
= £191,700 |
What happens if my pension is worth more than the Lifetime Allowance?
If your pension is worth more than the LTA when you draw your benefits, extra tax will be due on the excess above the LTA. The charge is 25% if the excess funds are used to provide pension or 55% if the excess funds are taken as a cash lump sum.
How do I find out if the Lifetime Allowance (LTA) is an issue for me?
To value your pension benefits, look at all your potential pension savings and use our calculator to work out your estimated pension benefits with our schemes.
The calculator will work out an estimated value of your pension benefits with the schemes administered within SPPA and help you determine whether or not you are likely to be affected by the LTA from April 2006 onwards.
The Annual Allowance (AAL)
The Annual Allowance is the limit on how much tax-free pension savings you can make in any one year. If your pension saving in any year is over the Annual Allowance you may have to pay extra income tax.
Like the LTA the AAL is preset for the next five years as shown in table below: -
Year |
AAL £ |
|---|---|
2006/07 |
215,000 |
2007/08 |
225,000 |
2008/09 |
235,000 |
2009/10 |
245,000 |
2010/11 |
255,000 |
Contributions made to pension savings above these amounts will be subject to Annual Allowance Charge of 40% on the excess above the AAL.
Options Available at A-Day (updated Feb 07))
What were options available at A-Day?
HMRC allowed you to register for transitional protection. There were two different types and you could have register for either or both.
Primary Protection was available to scheme members whose total fund value at A-Day was greater than the Lifetime Allowance set for 2006/2007 of £1.5 million. It protected your benefits by allowing for personal increase to the LTA, as calculated at A-Day (6/4/06).
Further benefits could then be accrued but a recovery charge would be applied to any excess over the members LTA protected benefits. You had until 5 April 2009 to register for Primary Protection.
Example of Primary Protection
A member with total benefits valued at A-Day of £1.8 million and successfully received primary protection. The member then has a protected LTA value of 120% of the LTA level (i.e. £1.8 million ÷ £1.5 million = 120%) (120% for this member is now the primary protection factor)
Therefore when the member retires, tax approved benefits may be taken at a level of up to 120% of the LTA which applies in that tax period.
Indicating that if the member chose to retire in August 2010, they would have individual LTA protected benefits of £2.16 million (i.e. 120% of £1.8 million, the LTA for 2010/2011).
In order to apply for primary protection members needed to be able to provide HMRC with estimated figures of their pension value at A-Day in order to obtain Primary Protection % and a copy the certificate would need to be submitted to SPPA for confirmation that protection has been approved and the level of protection % the member is entitled.
Enhanced Protection was available to any scheme member, whether their pension fund was over £1.5 million or not. This form of protection was developed to allow members who thought their pension fund would grow at a greater rate than the increase in LTA. Normally where a member applied and received enhanced protection from HMRC they would unable to continue paying contributions to a registered pension scheme, this did not however apply to the NHS or STSS schemes but apply to any AVC’s etc the member may have had at that time.
Where a member was considering applying for enhanced protection and they also paid contributions into another pension arrangement(s) they should have ceased payment into these other schemes, as any payment made after 6 April 2006 would lose the member the right to receive this form of protection and as a result your pension could be subject to excess tax charges.
Enhanced protection can also be lost if your total benefits, including added years contributions, grow too much. To establish if this has happened to your fund, a test is carried out at retirement called Relevant Benefit Accrual, which is described in detail further on.
For information, Enhanced protection removes the LTA charge completely but is subject to some very important conditions:
- Benefits at A-Day were subject to a test against current pre A-Day Revenue limits.
- Members were unable to continue to pay contributions to a defined contribution scheme, including money purchase additional voluntary contributions schemes.
- Members could continue to pay contributions to a defined benefit scheme, such as the NHS or STSS schemes, and therefore continue to build up scheme membership.
- These further permitted increases in benefits are subject to a ceiling limit known as “Relevant Benefit Accrual” (RBA).
Pension Share Order
Where you are in receipt of a pension share order before 6th April 2006 you should have registered with HMRC for protection of this additional amount. You had until 5th April 2009 to apply. Where you became subject to a pension share order on or after A-Day then you will need to contact HMRC or your financial advisor to confirm its affect on your LTA position.
Relevant Benefit Accrual
This is the test that is applied to those who have registered for Enhanced protection to ensure that their benefits have not grown above the prescribed limits set by HMRC. These limits have been set at either the greater of 5% or the growth in the retail price index (RPI) for each year after A-Day.
Relevant benefit accrual works by applying two tests on member’s benefits, these tests compare the member’s capital value at A-Day to that at the date of retirement. The capital value at retirement must be lower than at least one of the tests, how to work out the amounts is described in the following examples: -
Example 1
At A-Day member X has 35 years scheme membership and a pensionable pay of £155,100 per annum. This will provide member X with a pension of approximately £67,000 and a lump sum of £201,000 this produces a total fund value at A-Day of £1,541,000 this is in excess of LTA limit at A-day of £41,000, therefore this member applies and receives both Enhanced and Primary protection from HMRC. (Primary protection factor for this member is 102.73%)
Member X then wishes to retire 5 years later on 5th April 2011. Member X now has 40 years service and the pensionable pay has increased by approximately 3% per year to approximately £179,800. This therefore gives member X the following potential retirement benefits of a pension £89,900 and lump sum of £269,700 this therefore produces a total fund value at retirement for member X of £2,067,700
At this time the two tests are carried out to identify if the member has in fact retained or lost Enhanced protection.
Test 1
Capital Value at 05/04/2006 (£1,541,000) increased by the greater of 5% or RPI each year (for examples purposes assume that 5% is the greater) therefore in 2011 the capital value would be increased to £1,966,749
Test 2
Annual pension membership service for member at 05/04/2006 using pensionable pay at retirement plus the relevant lump sum.
i.e. (£179,800 x 35/80) = (£78,662.50 x 20) + (£235,987.50) = £1,809,237.50
Member X at retirement has a total capital value of £2,067,700 this exceeds both test values, therefore Enhanced protection is lost. However member X still has Primary protection, the benefits are tested against the primary protection capital value for member X at 2011 is £1,849,140 with a primary protection factor of 102.73% (this is the 2010/11 standard LTA plus the primary protection factor) which will remain protected for the member.
How to work out the primary protection factor for this member is as follows: -
Total fund value at A-Day ÷ Standard lifetime allowance at time * 100 ÷ 1 = %age primary protection factor.
1,541,000 ÷ 1,500,000 * 100 ÷ 1 = 102.73%
in 2010/2011 the standard lifetime allowance is set at 1,800,000 therefore 102.73% of this works out to give the member protection of £1,849,140.
Member X excess money liable for LTA Charge is capital fund value at retirement minus value with primary protection factor applied: -
2,067,700 – 1,849,140 = £218,560 this is the amount unprotected and LTA charges will be applied at either 55% lump sum or 25% is converted back into pension.
All members have until 5 April 2009 to register their total pre A-Day benefits with HMRC.
Members should be aware that they could have applied for both forms of protection, if appropriate.
However in order to have registered for protection with HMRC you had to provide them with a valuation of your NHS/STSS benefits as at A-Day (05/04/06). Benefit statements up to 31/3/2006 had been issued by SPPA to employers which should have provided the required information.
In the case of a Practitioner this was not as easy and it will be of benefit to a practitioner if they had received an estimate of benefits within the 2 years prior to A-Day which could have then been used to work out the members estimated total fund value at A-Day.
It was the members decision to apply for protection and where protection is not in place the member could be subject to the Lifetime Allowance Charge (LTAC).
Our guidance was that if a member is in any doubt about their financial situation or pension benefits they should seek independent financial advice.
Where you thought you might be near or breaching the LTA limits you should have carried out the following measures: -
1. Added up all your pension savings together, to come to a total fund value at 6 April 2006.
2. Use our pension calculator (Excel 352Kb) to work out your estimated pension, lump sum and estimated total pension scheme value.
3. Where you thought you might be in a risk area you should have contacted your local HMRC office or loggedonto their web site www.hmrc.gov.uk/pensionschemes
Existing Pensioners (updated July 2009)
Changes which took effect from 6 April 2006 (known as A-Day) as a result of Tax Simplification replaced all previous tax-free limits on pension savings, by introducing an individual’s Lifetime Allowance (LTA) of £1.5 million, for the tax year 06/07.
As a rule, if you drew your pension prior to 6 April 2006 and had no other pensions to realise after that date, the LTA would not affect you. However, should you have a pension in payment prior to 6 April 2006 with further pensions to realise after that date (be they occupational, personal or other) the Tax Simplification rules could possibly affect any future pension income.
To work out if you were over the LTA you would need to add together your current pension payments and any other benefits you may have at that point. If your total benefits received from all pension schemes breach the LTA you may be subject to additional tax charge. However, it is likely that you will only be affected if your aggregate pensions and benefits, from all sources, exceed £60,000.
The calculation to determine whether you breach the LTA limit is as follows:
Annual Pension in payment x 25
Example:
Annual Pension of £22,000 x 25 = £550,000.00
£550,000 is obviously within the LTA limits of £1.5 million (2006/2007 period) therefore no action needed taken. If however you have other pensions in payment these will all need to be added together to identify your total fund value.
Where your benefits were in excess of the levels introduced by ‘HM Revenue and Customs’ from A-Day you were advised to contact either an Independent Financial Advisor or ‘HM Revenue and Customs’ directly.
What help is available?
Useful contact information
If you have enquires about your scheme pension you should contact us either by email, letter or by calling us, contact information is on main website pages.
Find an Independent Financial Advisor
Ask your union if you are a member or try: -
www.fsa.gov.uk/consumer/02_HOW/Advice/information.html
For more information on pensions and tax changes: -
www.hmrc.gov.uk/pensionschemes
Glossary of terms
Pension Term |
Meaning |
|---|---|
A-Day |
6 April 2006 although for SPPA Schemes it was 1 April 2006. |
Annual Allowance Limits (AAL) |
The amount up to which a member’s contributions can benefit from tax relief each tax year without incurring an annual allowance charge. These have been set for the first 5 years as follows:- 2006/07 - £215k 2007/08 - £225k 2008/09 - £235k 2009/10 - £245k 2010/11 - £255k It has been confirmed that the level set for 2010/11 will remain until 2015/16. |
Annual Allowance Charge (AAC) |
A tax charge that is made on an individual when contributions in excess of the AAL are made by, or for, that individual in a tax year. The tax charge is initially 40% of the excess contributions. |
Benefit Crystallisation Event (BCE) |
An event (typically retirement) which triggers entitlement to immediate payment of: -
If an member reaches age 75 with a prospective entitlement to a defined benefits pension/lump sum this is also a BCE. Following each event a check must be made against members Personal Lifetime Allowance (PLA) to see if a Lifetime Allowance (LTA) charge is to be deducted. |
Chargeable Amount |
This is the amount which a members crystallized amount exceeds the LTA plus any tax due paid by the scheme, without the individuals benefits being correspondingly reduced, the amount of that tax. |
Commutation |
Giving up some or all of a pension in exchange for a cash lump sum. |
Crystallized Amount |
The capitalized value of benefits crystallized. If a benefit is payable the crystallized amount is the market value of assets and cash value of other sums held. If a scheme pension is payable, the crystallized amount is calculated by applying a ‘relevant factor’ of 20 (unless a higher factor is agreed between the scheme and HMRC) to the scheme pension. The crystallized amount of a lump sum benefit is the cash amount payable. |
Enhanced Protection |
An option to help protect pension rights built up prior to 6 April 2006 from the LTA. Protection must be registered with the HMRC. Application period to apply is now closed. |
Lifetime Allowance (LTA) |
The amount up to which an individuals aggregated pension saving can benefit from tax relief, without incurring a LTA Charge (LTAC). |
Lifetime Allowance Charge (LTAC) |
A tax charge made on funds that exceed your LTA. The charge is 55% if the excess funds are taken as a cash lump sum and 25% if the excess funds are used to provide pension income benefits. |
Personal Lifetime Allowance (PLA) |
Your Personal Lifetime Allowance will be either the normal LTA or a higher amount granted to you by the HMRC, for example under Primary Protection. |
Primary Protection |
This is an option to protect pension rights built up prior to A-Day from the LTAC. The option is open to members who fund exceeds £1.5m at A-Day. Protection again must be registered with the HMRC, however, the application period to apply is now closed. |
Protected Rights |
Funds which have built up either directly or indirectly, as a result of being contracted-out of the State Earnings Related Pension Scheme (SERPS). |
Standard Lifetime Allowance (SLA) |
This has been set for first 5 tax years as follows: - 2006/07 – £1.50m 2007/08 – £1.60m 2008/09 – £1.65m 2009/10 – £1.75m 2010/11 – £1.80m It has been confirmed that the level set for 2010/11 will remain until 2015/16. |
Vesting event |
Where payment from pension fund is made in either pension or lump sum. |