0. BATH SPA UNIVERSITY Pensions Taxation – Awareness Briefing
1 JULY 2014
Kevin Painter
Principal

1. Confidentiality
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2. AGENDA 1
Pensions in context
Pension Tax, historical perspective 2 3
Annual Allowance
Lifetime Allowance 4 5
Why this matters 6
How to stay ahead of the game

3. Pensions in context

4. SCHEME SPECIFICS 4 FEATURE TEACHERS’ PENSION SCHEME
LOCAL GOVERNMENT PENSION SCHEME
Accrual
1/80 pension and 3/80 cash
1/60 pension and cash via commutation, joiners from 1 January 2007
Proposed: 1/57 CARE from transitional protection for members 50+
1/80 pension and 3/80 cash pre 31 March 2008
1/60 post 1 April 2008 and cash via commutation
1/49 CARE from 2014
Normal Retirement Age
60 (65 for post 2007 joiners)
(State Pension Age from 2015) 65
(State Pension Age from 2014)
Pensionable Salary
Higher of:
-The pensionable salary received in the last 12 months before retirement. This is subject to a salary restriction that limits any increases in pensionable salary to the greater of 10% or £5,700.
-Highest revalued salary averaged across any 3 consecutive years in any of the previous 10 years
Each year’s pensionable salary is revalued to the measurement date.
This is usually the pay earned during the final year of scheme membership, or one of the previous two years, if this is higher.
Employee Contribution
6.4% % (from April 2014)
5.5% % from 1 April 2014
Pension Input Period
1 April to 31 March 4 4

5. BATH SPA UNIVERSITY PENSION SCHEMES
How Does a Final Salary Pension Scheme Work?
At Normal retirement Date members will receive a pension based on:
Final Pensionable Salary;
Service with the University; and
Accrual rate:
Teachers Pension Scheme (TPS): 1/80th plus 3/80th cash for each year
Avon Pension Fund, Local Government Pension Scheme (LGPS): 1/80th plus 3/80th cash for each year, 60ths from 2008
Example TPS
Final Pensionable Salary : £40,000
30 years service
Divide Final Pensionable Salary by 80
£40,000 ÷ 80 = £500
Multiply the answer by Pensionable Service
Annual pension from the Scheme
Multiply pension by 3
£ x 30 = £15,000
£15,000 p.a £15,000 x 3 = £45,000
Tax free lump sum from the Scheme
£45,000 5

6. Pension Tax, Historical Perspective

7. IN THE BEGINNING……
Prior to 2006, the most significant overhaul of pensions occurred in 1970
All taxable remuneration could count for pension purposes under “approved” schemes
Maximum pension at retirement was 2/3rds of Final Remuneration after 10 years service
Could exchange or commute part of pension for a tax free cash lump sum to a maximum of 1½ times Final Remuneration after 20 years service
Maximum permitted member contribution of 15% of taxable earnings
Could retire from age 50

8. SIMPLIFICATION?...
The former Labour Government’s ‘Simplification’ proposals in 2003
To apply to all “registered” pension schemes
Flexibility over the form of benefits
Original “A Day” was to be April 2005 (actually introduced April 2006)
Annual Allowance (AA) introduced at £215,000
Lifetime Allowance (LTA) started off at £1.5m
Up to ¼ of the Lifetime Allowance can be taken as cash
Some forms of ‘protection’ were available in 2006

9. 2010 – POST CRASH AND CHANGE IN GOVERNMENT…..
Annual Allowance was reduced from £255,000 to £50,000 from April 2011
Lifetime Allowance reduced from £1.8m to £1.5m from April 2012
Government have reduced the AA further to £40,000 and the LTA to £1.25m from April 2014
New forms of ‘protection’ are available

10. 2015 – WHAT’S NEXT?......
The Labour Party has stated that they would look to provide only basic income tax relief on all pension savings for high earners (earning > £150,000?)
The Liberal Democrat Party has indicated that it would seek to lower the Lifetime Allowance further to £1m (leaving the Annual Allowance unchanged at £40,000 a year)
Many commentators speculate that the tax relief on member pension contributions could be restricted in the future for those paying higher rates of income tax

11. Annual Allowance

12. CHANGES TO THE ANNUAL ALLOWANCE
Excess – penal taxation applies
Double taxation tax charge applies
£255,000
£215,000
Total HMRC value of annual pension savings
£50,000
£40,000
2006
2010
2011
2014

13. SOME DETAIL ON THE ANNUAL ALLOWANCE
Defined Benefit
x 3 cash
Accrued benefit
x 16 if pension
+ CPI
Accrued benefit
Start of year
End of year

14. POSSIBLE MITIGATION
A pension value in excess of the AA would normally incur a tax charge at the employee’s marginal rate - benefits within the AA continue to receive full marginal rate tax relief
“Carry forward” mechanism where any unused AA in the previous 3 years can be taken into account to help manage “spikes” in the value of pension saving
“Scheme Pays”, where the Government allows members with pension tax bills in excess of £2,000 to get their pension scheme to pay the tax in exchange for a reduced benefit within the scheme

15. Lifetime Allowance

16. Excess – penal taxation applies
CHANGES TO THE LIFETIME ALLOWANCE
Lifetime Allowance
Excess – penal taxation applies
25% Lifetime Allowance charge on excess
Pension (taxed)
£1.8m
£1.5m
£1.5m
£1.25m
Total HMRC value of retirement benefits
Pension (taxed)
25% tax free cash - max £312,500 from 2014
2006
2010
2012
2014

17. LIFETIME ALLOWANCE PROTECTION AVAILABLE IN 2014
Individual Protection 2014 (IP14)
If the HMRC value of your pension savings as at 5 April 2014 is greater than £1.25m, you can obtain an individual Lifetime Allowance equal to the value of your 5 April pension savings (but subject to a cap of £1.5m)
Maximum tax free cash will be restricted to 25% of your individual Lifetime Allowance
You can continue to accrue pension savings after 5 April 2014
The requirement to register is by 5 April Registration is not yet open (anticipated from July or August 2014)
To register you will need to obtain details of all accumulated pension savings as at 5 April 2014

18. Why this matters

19. Benefits up to the Allowances for the HEI Sector
OLD VS. NEW REGIMES
Benefits up to the Allowances for the HEI Sector
Annual increases
Pre April 2011
(using 10:1 factor)
Post April 2014
(using 16:1 factor)
Pension
£19,615 p.a.
£2,105 p.a.
Cash
£58,845
£6,315
At retirement
Pre April 2012
(based on £1.8m LTA)
Post April 2014
(based on £1.25m LTA)
Pension
£78,261 p.a.
£54,348 p.a.
Cash
£234,783
£163,043 19

20. WHAT DOES IT MEAN FOR MEMBERS? Example 1, TPS member
Member with 30 years of service by 1 April 2014
Aged 54 at 1 April 2014
Final Pensionable Salary increase from £40,000 p.a. to £47,500 p.a. in 2014/15
Pension Input Period commencing
Accrued pension at beginning of year
Accrued pension at beginning of year (inflated by consumer prices index)
Accrued pension at end of year
HMRC value of increase using a factor of 19:1 ( 16:1 pension, 1:1 cash)
Excess over Annual Allowance of £40,000
1 April 2014
£15,000
£15,400
£18,400
£57,000
£17,000
Consumer Prices Index (CPI):
2014/15: 2.7%

21. WHAT DOES IT MEAN FOR MEMBERS? Example 1 continued…
However:
Member can take advantage of unused Annual Allowance carry forward from the previous 3 tax years
Pension Input Period commencing
Accrued pension at beginning of year (inflated by consumer prices index)
Accrued pension at end of year
HMRC value of increase in pension1
Unused AA
1 April 2011
£12,500
£13,000
£9,400
£40,600
1 April 2012
£13,700
£13,900
£4,900
£45,100
1 April 2013
£14,200
£15,000
£14,300
£35,700
Cumulative Carry Forward Annual Allowance:
£121,400
1 April 2014
£15,400
£18,400
£57,000
£104,400
Therefore there is no Annual Allowance tax charge in the 2014/15 tax year in this example
1. The “HMRC value of increase in pension” for Annual Allowance purposes means the increase in the value of pension based on a capitalisation factor of 19 (using a factor of 16 for pension and 3 for the cash lump sum). When calculating the increase in the value of the pension over each year, allowance can be made for consumer price inflation to be applied to the previous year’s pension.

22. WHAT DOES IT MEAN FOR MEMBERS? Example 2, TPS member
Member aged 54, with 30 years of service by 1 April 2014
Actual salary increased from £40,000 p.a. to £55,000 p.a. in 2013/14 and to £70,000 p.a. in 2014/15
TPS Final Pensionable Salary
Pension Input Period (PIP) commencing
Salary in last 12 months
Restricted salary
Best 3 in last 10 years
Estimated Final Pensionable Salary
01 April 2011
38,500
38,700
01 April 2012
40,000
39,700
01 April 2013
55,000*
45,500
01 April 2014
70,000**
51,200
56,000
01 April 2015
72,800
57,000
67,300
01 April 2016
75,700
73,400
* Promotion from … to …
** Promotion from … to …
These pensionable salaries have been estimated based on our understanding of the Teachers Pensions regulations. The restriction in definition of the Final Pensionable Salary in the TPS effectively ‘delays’ any promotional increases hence any AA tax charges. We have assumed that, other than promotional increases, pay increases are at RPI + 1%.

23. WHAT DOES IT MEAN FOR MEMBERS? Example 2 continued…
Pension Input Period commencing
Accrued pension at beginning of year (inflated by consumer prices index)
Accrued pension at end of year
HMRC value of increase in pension1
Unused AA – (excess pension savings)
Tax Charge
1 April 2011
£12,900
£13,500
£12,500
£37,500
Nil
1 April 2012
£14,200
£14,500
£5,100
£44,900
1 April 2013
£14,800
£17,100
£42,600
£7,400
Cumulative Carry Forward Annual Allowance:
£89,800
1 April 2014
£17,500
£21,700
£80,000
£49,800*
Nil**
1 April 2015
£22,200
£26,900
£89,200
£500*
1 April 2016
£27,500
£30,300
£52,700
(£12,200)*
£4,900
* Cumulative - includes any carry forward from previous 3 years
** There is sufficient carry forward from previous years in 14/15 and 15/16
An Annual Allowance tax charge would be payable in 2016/17
The restriction in the TPS Final Pensionable Salary definition has delayed Annual Allowance tax charges by 2 years after the promotional increase
1. The “HMRC value of increase in pension” for Annual Allowance purposes means the increase in the value of pension based on a capitalisation factor of 19 (using a factor of 16 for pension and 3 for the cash lump sum). When calculating the increase in the value of the pension over each year, allowance can be made for consumer price inflation to be applied to the previous year’s pension.

24. Date when tax payable from scheme becomes due
What does it mean members? Responsibilities and deadlines – example 2012 – 13 tax year
Members to notify HMRC on self assessment tax returns that they want to use Scheme Pays and to have completed self-assessment form
HMRC matches up scheme tax payments with elections by members for Scheme Pays on tax returns
Latest date for members to make irrevocable election to proceed with Scheme Pays
6 Oct Jan July December February 2015 onwards
Date when tax payable from scheme becomes due
Best practice for Schemes to have sent pension savings statements to those who have exceeded the AA in that scheme

25. What does it mean for members? HMRC self assessment process
Increase in value of benefits in tax year after allowing for any available carry forward for the three previous tax years in respect of registered pension scheme
Completed if Scheme Pays option exercised
Enter the amount of Annual Allowance excess tax charge paid or payable by the scheme administrator, who you will have told how much tax has been paid. Where more than one pension scheme has paid such a tax charge, enter the total
If Scheme Pays is being considered, enter the Pension Scheme tax reference number here

26. How to stay ahead of the game26

27. SPECIFIC IMPLICATIONS FOR THE HEI SECTOR
Sector wide schemes
Can move from one employer to another and keep continuous Pensionable Service.
Significant final salary gearing with longer service.
Be aware of CPI indexation
The 2014 AA changes have affected:
Promotional increases.
High earners.
New hires : attraction and retention issues.
Tax year
Relevant CPI increase date
CPI increase
Comment
2008 – 09
Sept 2007
1.8%
First notional AA carry forward assessment
2009 – 10
Sept 2008
5.2%
Attractive AA carry forward potential
2010 – 11
Sept 2009
1.1%
Very low CPI and limited carry forward
2011 – 12
Sept 2010
3.1%
First year of AA assessment under new £50,000 AA regime
2012 – 13
Sept 2011
High CPI and low pay increases so high potential for AA carry forward
2013 – 14
Sept 2012
2.2%
Low CPI and some potential to exceed AA
2014 – 15
Sept 2013
2.7%
First year under new £40,000 AA regime. Fairly low CPI exacerbated problem
2015 – 16
Sept 2014
? Could be low
Potential for very significant AA charges 27

28. SPECIFIC IMPLICATIONS FOR THE HEI SECTOR (2)
The 2014 AA changes will affect:
Promotional increases.
High earners.
New hires in attraction and retention issues.
TPS:
FAQs and on line modeller:
Annual Allowance and Carry Forward calculations
Scheme Pays election form
LGPS
Pension tax guide
HMRC
AA guidance, which includes links to various examples:
Carrying forward unused AA from the previous 3 tax years.
The calculation of the AA charge is shown in the link below: 28

29. FIVE MUST DO ACTIONS EMPLOYEE ACTION Be aware of the changes
UNDERSTAND
Calculate potential impact to you
CALCULATE
Understand choices and consider your best outcome
CHOOSE
Implement your decision, e.g.:
Individual Protection application
Scheme Pays deadlines
TAKE ACTION
Review your financial position
REVIEW OFTEN

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