1. 1 Limiting tax relief on pension savings IFA to client presentation This presentation is intended for IFAs to use with their clients and brand accordingly. However, James Hay cannot take upon itself the role of an individual adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. James Hay expressly excludes all liability in respect of errors or omissions in this information. James Hay or the affiliates of IFG Group, their directors or employees, may at any time hold a position or a direct or indirect interest in securities, financial instruments and issuing institutions that may be mentioned in this document, where applicable. -Please remove this text box prior to use

2. 2 Index 1. Introduction 2. High Income Individuals 3. Special Annual Allowance 4. Examples

3. 3 1. Introduction

4. 4 Tackling the budget deficit  From 6 April 2011 tax relief on pension savings will be restricted  Original proposals targeted at high income individuals  Coalition Government favours different approach via reduced annual allowance  Forestalling danger 1. Introduction

5. 5 Finance Act 2009 and Finance Act 2010  Contain anti-forestalling provisions applicable to the 2009/10 and 2010/11 tax years  The ‘special annual allowance’ and the ‘special annual allowance charge’ 1. Introduction

6. 6 Who is caught by these provisions?  Individuals with relevant income in a tax year of at least £130000 –Current and two previous tax years taken into account –Referred to as high income individuals  Who increase their normal pattern of pension savings –Legislation explains what is meant by normal pattern –Such an increase is tested against the special annual allowance 1. Introduction

7. 7 2. High Income Individual

8. 8 Two types of high income individual:  Type 1 – Relevant income of at least £150,000  Type 2 – Relevant income of at least £130,000 but less than £150,000 2. High Income Individuals

9. 9 Relevant income includes:  All earned income e.g. –Earnings from employment & self employment –Taxable element of redundancy payments –Pensions in payment  All unearned income e.g. –Interest –Dividends –Rental income 2. High Income Individuals

10. 10 Adjustments to relevant income (additions):  Individual pension contributions under net pay arrangements –Such arrangements apply to occupational and statutory pension schemes only  Salary sacrifice schemes entered into on or after 22 April 2009 for Type 1 and 9 December 2009 for Type 2 –The reduction in income as a result of such a scheme is ignored when calculating relevant income 2. High Income Individuals

11. 11 Adjustments to relevant income (deductions):  Individual pension contributions –Subject to a maximum of £20,000 gross  Gift aid –Grossed up amount of the gift  Certain deductions allowed as per section 24 of the Income Tax Act 2007 e.g. –Trade and property losses 2. High Income Individuals

12. 12 Example 1: Tax Year 2009/10 An individual’s income for the year is made up of £20,000 salary, gross dividend income of £119,000. On 1 May 2009 he sacrificed a bonus of £9,000 in favour of an employer contribution to his SIPP. His net annual contribution to the SIPP totalled £8,000. He has no other taxable income for the year and the SIPP is his only pension arrangement. Is he a high income individual? 2. High Income Individuals

13. 13 Example 1 (cont.): Salary £20,000 Gross dividend income£119,000 Gross individual contribution (£10,000) Total£129,000 2. High Income Individuals

14. 14 Example 1 (cont.):  Check for Type 1 –Adding back in the 1 May 2009 bonus sacrifice brings his income to £138,000 for the 2009/10 tax year –Assuming his relevant income in the two previous tax years was less than £150,000 he is not a Type 1  Check for Type 2 –No need to add bonus sacrifice back in as it occurred before 9 December 2009 –Assuming his relevant income in the two previous tax years was less than £130,000 he is not a Type 2 2. High Income Individuals

15. 15 3. Special Annual Allowance

16. 16 For High Income Individuals only  A test  Designed to catch increases in the normal pattern of pension savings –On or after 22 April 2009 for Type 1 –On or after 9 December 2009 for Type 2  The ‘special annual allowance charge’ recoups tax relief generated by such increases  Individual is liable for the special annual allowance charge 3. Special Annual Allowance

17. 17 The Test (A) Total adjusted pension input amount V (B) Special annual allowance  (A) > (B)  Excess suffers the special annual allowance charge of 20%. Excess reduced by any amount subject to the annual allowance charge  From 6 April 2010 a ‘variable rate’ will apply designed to ensure that tax relief on excess is restricted to 20% 3. Special Annual Allowance

18. 18 (A) Total adjusted pension input amount  Calculate the pension input amount for the tax year and not for the pension input period ending in the tax year  In limited circumstances pension input amount is nil where all benefits are taken in the tax year  The pension input amount calculated is reduced by: –Protected pension input amounts –Any relevant refunded amounts –Pre 22 April 2009 pension input amounts for 2009/10 (Type 1) –Pre 9 December 2009 pension input amounts for 2009/10 (Type 2) 3. Special Annual Allowance

19. 19 (A) Total adjusted pension input amount (cont.)  Following the steps outlined in previous slide  Amount over and above normal ongoing pension savings  This is the total adjusted pension input amount 3. Special Annual Allowance

20. 20 (A) Protected pension input amounts for existing arrangements  Defined Benefit (Type 1) –Pension input amount for the tax year ignoring any improvement in the accrual basis on or after 22 April 2009 (unless it applies to at least 50 active members in scheme)  Money Purchase (Type 1) –Contributions (at least quarterly) in the tax year ignoring any post 21 April 2009 increase unless it was agreed prior to this date  Relevant (added years/additional voluntary) contributions (Type 1) –Contributions (at least quarterly) paid in accordance with a pre 22 April 2009 agreement  For Type 2 replace 21/22 April with 8/9 December in the above  Existing arrangement = benefit accruing/funding since before 22 April/9 December 2009 3. Special Annual Allowance

21. 21 (A) Protected pension input amounts  Defined Benefit (OPS or public service pension scheme) –Where accrual started on or after 22 April/9 December 2009 based on a written agreement between the individual and the employer made no later than 22 April/9 December 2009 –Provided no material change in rules of the pension scheme after accrual has started (50 member exemption)  Money Purchase (OPS, public service pension scheme, GPPS) –Where funding started on or after 22 April/9 December 2009 based on a written agreement between the individual and the employer made no later than 22 April/9 December 2009 –Funding frequency at least quarterly and no increase in funding otherwise than as per agreement  Single contribution on or after 22 April/9 December 2009 based on a written agreement between individual and employer made no later than 22 April/9 December 2009 3.Special Annual Allowance

22. 22 (A) Protected pension input amounts  Type 1 - new and re-activated pension arrangements post 21 April 2009  Type 2 - new and re-activated pension arrangements post 8 December 2009  Applicable to OPS, GPPS (relating to an employment in both cases) and Public Service Schemes  At least 20 employees accruing benefits on the same basis  No improvement in pension accrual (50 member exemption) 3. Special Annual Allowance

23. 23 (A) Protected pension input amounts for new arrangements  Defined Benefit (OPS or public service pension scheme) –New arrangement set up within 3 months of the old –No material difference between the old and new scheme rules –New arrangement was set up for a reason e.g. pension reorganisation  Money Purchase (OPS, public service pension scheme, GPPS) –New arrangement set up within 3 months of the old –Contribution frequency at least quarterly and at same rate as per the old arrangement –New arrangement was set up for a reason e.g. pension reorganisation  Money Purchase (no connection to employment) –New arrangement set up within 3 months of the old –Contribution frequency at least quarterly and at same rate as per the old arrangement –Only arrangement set up to accept re-directed contributions 3. Special Annual Allowance

24. 24 (A) Examples of protected pension input amounts  HMRC guidance on determining protected pension input amounts –Published 10 July 2009 –Contains examples  http://www.hmrc.gov.uk/budget2009/anti-forestalling-qa.pdf http://www.hmrc.gov.uk/budget2009/anti-forestalling-qa.pdf  Note that this guidance was published before the 2009 pre budget report 3. Special Annual Allowance

25. 25 (A) Relevant refunded amounts  Individual contributions, excluding: –Employer contributions –Protected pension input amounts –Pre 22 April 2009 pension input amounts (Type 1) –Pre 9 December 2009 pension input amounts (Type 2)  Personal pension schemes, Retirement annuity contracts and non-added years AVC arrangements  Refund suffers a 50% tax charge and both are paid in the following tax year 3. Special Annual Allowance

26. 26 (A) Pre 22 April/9 December 2009 pension input amounts  Defined Benefit –Such proportion of the pension input amount as relates to the period 6 April 2009 to 22 April/9 December 2009  Money Purchase –Contributions paid in the period 6 April 2009 to 22 April/9 December 2009 less frequently than quarterly 3. Special Annual Allowance

27. 27 (B) Special annual allowance  Maximum in the range £20,000 to £30,000 (depends on circumstances)  Reduced by: –Protected pension input amounts –Pre 22 April 2009 contributions paid less frequently than quarterly under money purchase arrangements (Type 1) –Pre 9 December 2009 contributions paid less frequently than quarterly under money purchase arrangements (Type 2)  Never less than zero 3. Special Annual Allowance

28. 28 (B) Conditions for increase in the special annual allowance 3. Special Annual Allowance  Money purchase arrangement  Contributions made in tax years 2006/07, 2007/08, 2008/09 –Less frequently than quarterly –Average over the 3 tax years greater than £20,000 –Nil is used for the tax year if no such contributions were paid  The special annual allowance is the average (subject to a maximum of £30,000)

29. 29 Example 2: James is a high income individual and his history of pension contributions is as follows: 2006/07 £800 net per month to a personal pension 2007/08 £800 net per month to a personal pension Employer single of £55,000 to a personal pension 2008/09 £5,000 net paid half yearly to a personal pension Single member contribution of £30,000 to secure added years in a final salary scheme Calculate the special annual allowance applicable to James. 3. Special Annual Allowance

30. 30 Example 2 (cont.): The special annual allowance applicable to James for the 2009/10 and 2010/11 tax years (before any deductions) is: £55,000 + (2 x £6,250) = £22,500 3 The £800 net/£1,000 gross monthly contributions are ignored as they were not infrequent i.e. less frequently than quarterly. The £30,000 single member contribution is ignored because, although infrequent, it was paid to a defined benefit arrangement and not a money purchase arrangement. 3. Special Annual Allowance

31. 31 4. Examples

32. 32 Example 3: Tax Year 2009/10 Tim is a high income individual (Type 1) and has no prior history of making infrequent contributions. He is accruing benefits under a non-contributory final salary scheme and is also making contributions to a personal pension arrangement. The details are as follows: Final Salary Scheme Value of savings @ 6/4/2009 = 15/60 x 180,000 x 10 = £450,000 Value of savings @ 6/4/2010 = 16/60 x 210,000 x 10 = £560,000 PP arrangement Individual contribution of £5,000 net paid 6/4/2009 and 6/10/2009 One-off employer contribution of £10,000 paid 15/04/2009 4. Examples

33. 33 Example 3 (cont.): (A) Total adjusted pension input amount for 2009/10 Total pension input amount Final Salary Scheme£ PP arrangement£ Protected pension input amount Final Salary Scheme£ Pre 22/4/2009 pension input amount PP arrangement£ (A) Total adjusted pension input amount£ 4. Examples 110,000 22,500 -110,000 -16,250 6,250

34. 34 Example 3 (cont.): (B) Special annual allowance for 2009/10 Maximum special annual allowance£ Protected pension input amount Final Salary Scheme£ Pre 22/4/2009 pension input amount PP arrangement£ (B) Special annual allowance£ 4. Examples 20,000 -110,000 -16,250 Nil

35. 35 Example 3 (cont.): Tax Year 2009/10 Assuming Tim did not apply for a relevant refund and there is no annual allowance charge applicable for the tax year, then (A) is greater than (B). This excess is subject to a special annual allowance charge. (A) = £6,250 and (B) = 0 Tim is liable for a special annual allowance charge of £1,250 (0.2 x £6,250) in respect of the 2009/10 tax year. 4. Examples

36. 36 Example 4: Tax Year 2010/11 Assume Tim has the same pension savings as per the 2009/10 tax year : Final Salary Scheme Value of savings @ 6/4/2010 = 16/60 x 210,000 x 10 = £560,000 Value of savings @ 6/4/2011 = 17/60 x 236,470 x 10 = £670,000 PP arrangement Individual contribution of £5,000 net paid 6/4/2010 and 6/10/2010 One-off employer contribution of £10,000 paid 15/04/2010 4. Examples

37. 37 Example 4 (cont.): (A) Total adjusted pension input amount for 2010/11 Total pension input amount Final Salary Scheme £ 110,000 PP arrangement £ 22,500 Protected pension input amount Final Salary Scheme £ -110,000 (A) Total adjusted pension input amount £ 22,500 4. Examples

38. 38 Example 4 (cont.): (B) Special annual allowance for 2010/11 Maximum special annual allowance£ Protected pension input amount Final Salary Scheme£ (B) Special annual allowance£ 4. Examples 20,000 -110,000 Nil

39. 39 Example 4 (cont.): Tax Year 2010/11 Assuming Tim did not apply for a relevant refund and there is no annual allowance charge applicable for the tax year, then (A) is greater than (B). This excess is subject to a special annual allowance charge. (A) = £22,500 and (B) = 0 Tim is liable for a special annual allowance charge based on tax being applied at a variable rate on £22,500. The variable rate will result in the £22,500 only attracting tax relief at 20%. 4. Examples

40. 40 Example 5: Tax Year 2009/10 Gail has relevant income of £100,000 in the 2009/10 tax year, and the corresponding income figures for the two previous tax years are £96,000 and £130,000. Therefore Gail is a high income individual (Type 2). Her pension details are as follows: PP scheme Individual contribution of £2,000 gross paid monthly in this and the previous 3 tax years Half-yearly employer contribution of £12,500 paid in the 3 previous tax years. Contributions for the same amount were paid 1 Sep 2009 and 1 Mar 2010. 4. Examples

41. 41 Example 5 (cont.): (A) Total adjusted pension input amount for 2009/10 Total pension input amount£ Protected pension input amount£ Pre 9/12/2009 pension input amount£ (A) Total adjusted pension input amount£ 4. Examples 49,000 -24,000 -12,500 12,500

42. 42 Example 5 (cont.): (B) Special annual allowance for 2009/10 Maximum special annual allowance£ Protected pension input amount£ Pre 9/12/2009 pension input amount£ (B) Special annual allowance£ 4. Examples 25,000 -24,000 -12,500 Nil

43. 43 Example 5 (cont.): Tax Year 2009/10 Gail is not entitled to apply for a relevant refund and there is no annual allowance charge applicable for the tax year, then (A) is greater than (B). This excess is subject to a special annual allowance charge. (A) = £12,500 and (B) = 0 Gail is liable for a special annual allowance charge of £2,500 (0.2 x £12,500) in respect of the 2009/10 tax year. 4. Examples

44. 44 Example 5 (supplemented): What if Gail were a Type 1 instead of a Type 2 high income individual with the identical contribution history – how would the result in Example 4 differ? The difference would be as follows: (A) = £25,000 and (B) = £1,000 Therefore, the special annual allowance charge would be £4,800 (0.2 x £24,000) in respect of the 2009/10 tax year. Do you agree? 4. Examples

45. 45 Example 6: Tax Year 2010/11 Gail has relevant income of £105,000 in the 2010/11 tax year, and the corresponding income figures for the two previous tax years are £100,000 and £96,000. Therefore Gail is not a high income individual as the income that made her a high income individual in the previous tax year (£130,000 in 2007/08) is not used in the current tax year. Therefore Gail need not worry about the special annual allowance and associated charge. 4. Examples

46. 46 Summary

47. 47 What has been covered in this presentation?  Background to the anti-forestalling provisions  Identifying who is affected by these provisions –Individuals with relevant income of at least £130,000 in the tax year or in either of the two previous tax years  Where applicable, how tax relief is recouped under these provisions –Special annual allowance and the associated charge  Examples to aid understanding Summary DISCLAIMER The information included in this presentation has been obtained from sources considered reliable. Although reasonable care has been taken to ensure that such information is neither uncertain nor incorrect at the time of publication, it should not be considered as totally accurate or complete. Under no circumstances does the information or the analyses it may contain guarantee future earnings on or returns from investments. Before taking any investment decision, the recipient should have an appropriate understanding of the possible risks entailed in the contracting of the service(s) and/or product(s) contained in the presentation, bearing in mind his/her personal and financial circumstances. If such risks are not appropriately understood, or if any doubts exist, the recipient should abstain from contracting such product(s) and/or service(s).