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Understanding Pension Tax Relief Changes: Key Areas and Responsibilities

This guide explores recent changes in pension tax relief, focusing on crucial elements such as the Annual Allowance (AA) and Lifetime Allowance (LTA). It presents examples of pension calculations pre- and post-allowance adjustments, emphasizing the implications for pension scheme members. Key discussions include how to manage excess contributions and the responsibilities of employers and pension administrators. Effective from April 2011, the AA was reduced to £50,000 and the LTA to £1.5 million from April 2012. Clear guidance is provided for navigating these regulations successfully.

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Understanding Pension Tax Relief Changes: Key Areas and Responsibilities

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  1. Pension Tax Relief Changes Martin Bradley

  2. Areas for Discussion • Annual Allowance • AA examples • Life Time Allowance • LTA Examples • Responsibilities • Questions

  3. Annual Allowance • Effective from April 2011 • Reduced to £50,000 • Factor of 16 to value increase in DB accrual • 3 yr carry forward of unused allowance

  4. PIPs and PIAs Increase in pension growth x 16 = “Pension Input Amount” Accrued Pension at end of previous PIP: Based on Final Salary and Pensionable Service at that date Accrued Pension at end of current PIP: Based on new Final Salary and Pensionable Service at that date End Start “ Pension Input Period”

  5. Exemptions are: • Deferred members • Benefits in year of death • Serious ill-health retirement • Unlikely for normal ill-health

  6. Example 1 • 20 years pensionable service at March 2011 • Salary of £110,000 • Promotion to £140,000 • CPI @ 2%

  7. Start of PIP Pension = (£110,000 x 20/80) + 2% = £28,050 Lump sum = £28,050 x 3 = £84,150 End of PIP Pension = £140,000 x 21/80 = £36,750 Lump sum = £36750 x 3 = £110,250 Growth in Pension = (£36,750 – £28,050) x 16 = £139,200 Lump Sum = £110,250 - £84,150 = £26,100 Total = £165,300 Allowance exceeded by £115,300

  8. Example 2 • Tier 2 ill health retirement • 31 yrs old with 11 yrs service • Pensionable pay of £50,000 at start of PIP • Pensionable pay of £51,000 at end of PIP • CPI @ 2%

  9. Start of PIP Pension = (£50,000 x 10/80) + 2% = £6,375 Lump sum = £6,375 x 3 = £19,125 End of PIP Service = 11 + (60 – 31) x 2/3 = 30.33 yrs Pension = £51,000 x 30.33/80 = £19,337.50 Lump sum = £19,337.50 x 3 = £58,012.50 Growth in pension = (£19337.50 - £6,375) x 16 = £207,400 Lump sum = £58,012.50 - £19,125 = £38,887.50 Total = £246,287.50 Allowance exceeded by £196,287.50

  10. Carry forward annual allowance from previous years assuming pay increased with inflation Year X = 1 unused AA = £38,125 Year X = 1 unused AA = £38,357.84 Year X = 3 unused AA = £38,586.12 Total = £115,068.96 Allowance still exceeded by £81,218.54

  11. Options to pay tax charges may include: - • Self assessment • Scheme pays and reduces member’s benefits • Deferred until retirement

  12. Changes to Lifetime Allowance • Reduced to £1.5m from April 6th 2012 • LTA valuation factor maintained at 20 • Transitional Protection to be put in place • Views to be sought on detail

  13. Calculation of benefits for LTA Salary = £150,000 Service = 25 yrs Pension = £150,000 x 25/80 = £46,875 Lump sum =£46,875 x 3 = £140,625 (£46,875 x 20) + £140,625 = £1,078,125 This is < LTA £1,500,000

  14. Responsibilities: - • Employers will be required to deliver pay and service information to HSC Pensions by July 6th • HSC Pensions will be required to issue statements to all members who have exceeded the AA by October 6th • Independent financial advice should be sought • HSC Pensions and HR staff cannot provide financial advice

  15. Questions?

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