Changes to the Annual Allowance & Lifetime Allowance

1. Changes to the Annual Allowance & Lifetime Allowance Craig Martin Pension Manager

2. Annual allowance: Definition • Annual Allowance is the amount your pensions savings can increase in any one year before you become liable to a tax charge • If you exceed in one year, can offset against unused allowances from previous three years • Any excess is charged at normal rate of tax • £50,000 limit, reducing to £40,000 from 1 April 2014

3. Annual Allowance How does it work? Pension/lump sum at 31 March 2014 Based on new Final Pensionable Salary and Pensionable Service at that date Inflation (CPI) increase Pension ‘growth’ x 16 + lump sum ‘growth’ + AVCs = Annual “growth” Pension/lump sum at 31 March 2013 Based on Final Pensionable Salary and Pensionable Service at that date “Pension Input Period” (PIP) Start End

4. Example calculation of Annual Allowance… Assumption: Pensionable pay is £60k for 2012/13 and £63k in 2013/14 15 years scheme membership and CPI is 3.1%

5. Example calculation of carry forward Assumes increase in pension of £60k for 2013/14, exceeding the £50k limit by £10k • Member exceeded Annual Allowance in 2013/14 by £10k • The member can now use the £37,972.50 unused relief to offset the £10,000 • Leaves excess amount of £27,972.50 for 2014/15 onwards

6. What happens if I exceed the annual allowance? • If annual allowance charge is <£2,000 • you will have to pay charge directly to HMRC • Taxed at normal rate of tax, e.g. 40% • If the annual allowance charge is >£2,000 • can elect for the amount to paid by the Pension Fund (if the whole charge relates to EAPF) • Pension Fund will actuarially reduce the value of your LGPS benefits accordingly

7. Considerations for you • Pension Fund will inform you if you exceed the annual allowance in a year • Changes to LGPS and Annual Allowance threshold: • Accrual rate of the LGPS increasing to 1/49th • Annual allowance threshold reducing to £40k • Impact depends on individual circumstances including: • pay growth and • length of service and • AVCs • Potential options?

8. Lifetime Allowance: Definition • Lifetime Allowance is the total value of all your LGPS and any other pension benefits that you may have accrued, and any excess over and above the threshold is taxed

9. Lifetime allowance: How does it work? • Assessed when pension benefits come into payment • 20 x Annual Pension; plus • Any Lump Sum payable; plus • Value of AVC Fund (if applicable) • Compare with current Lifetime Allowance • Anything above the LTA limits will be taxed at special rates

10. Example calculation of LTA Assumes pension of £50,000 and a lump sum of £112,500 at retirement • (Factor of 20 x pension) + lump sum • (20 x £50,000) + £112,500 = £1,112,500 • £1,112,500 / £1,250,000 x 100 = 90% of LTA • Pension benefits are less than both current and new LTA threshold • No lifetime allowance tax due upon retirement

11. New LTA protections: Fixed protection and Individual protection • Background and existing LTA protections • Fixed protection 2014 • Have to apply before 5 April 2014 • Protected LTA of £1.5 million regardless of current level of benefits • Not permitted if you have primary protection • No further benefits can accrue from April 2014 (only CPI increase) • Individual protection 2014 • You can apply if the value of your benefits are over £1.25 million on 5 April 2014 • You do not have primary protection • You can continue to accrue benefits and protect benefits up to £1.5 million • Legislation will not be in place until August 2014 but backdated to April 2014 • Individuals will have until 5 April 2017 to apply

12. What should I do?

13. Any questions? www.eapf.org.uk