1. Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Services Authority Dave Simson 13 December 2011 Finance Bill 2011: Pension Tax Relief Changes

2. 2 What I’ll cover.... Trip down memory lane What’s changed: Annual Allowance Payment Options What’s in and what’s out To be confirmed Life Time Allowance Fixed Protection Responsibilities and practicalities

3. 3 A trip down memory lane Employee contribution restrictions Benefits limited on cessation Earnings cap in place Pre April 2006 Tax ‘Simplification’ Removal of previous restrictions Introduction of Annual and Lifetime Allowance Thresholds – not limits Post April 2006

4. 4 Tax Free Thresholds Annual Allowance (AA) Increase in capital value of benefits Yearly Factor of 10 £255k @ 31 March 2011 Lifetime Allowance (LTA) Total capital value of benefits On retirement (generally) Factor of 20 Currently £1.8m Tax charge above thresholds

5. 5 April 2009 Budget Labour Government Intention to restrict tax relief on pension contributions for high earners from April 2011 Complicated method proposed

6. 6 But following the election New Coalition Government formed Old proposal scrapped – too complicated New proposal: amend existing annual and lifetime allowances amend factor for annual allowance amend tax charge rate 14 October – results of consultation/way forward

7. 7 annual allowance

8. 8 2011 tax regime - summary Effective from - year to 31 March 2012 for LGPS Reduced to £50,000 Allowance for the revaluation of previous years’ benefits in line with CPI Flat factor of 16 used to value increase in DB accrual Carry forward 3 years of unused allowance Annual Allowance frozen until 2015/16 Full tax-relief up to the Annual Allowance (marginal rate charge above)

9. 9 PIPs and PIAs Accrued pension at end of previous PIP: Based on Final Pensionable Salary and Pensionable Service at that date Inflation (CPI) increase Accrued pension at the end of the current PIP: Based on new Final Pensionable Salary and Pensionable Service at that date StartEnd Increase in pension ‘growth’ x 16 + lump sum growth = “Pension Input Amount (PIA)” “Pension Input Period” (PIP)

10. 10 Example 1 – Above CPI pay increase (Maybe one day....) Assumptions: 20 years’ pensionable service at March 2011 Pensionable salary of £150,000 CPI 2.5% Actual pay increase 4% (1.5% above CPI)

11. 11 Calculation of the value of benefits 1 April 2011 Pay = £150,000 Service 17 years pre March 08 3 years post March 08 Benefit calculation Pension = ((17 x £150,000/80 +(3 x £150,000/60)) Lump sum= 17 x £150,000 x 3/80 Pension £39,375 Lump sum£95,625 31 March 2012 Pay £156,000 Service 17 years pre March 2008 4 years post March 08 Benefit calculation Pension = ((17 x £156,000/80) +(4 x £156,000/60)) Lump sum = 17 x £156,000 x3/80 Pension £43,550 Lump sum£99,450 Step 1 – Start of PIP Step 2 – End of PIP

12. 12 Calculation of pension growth Pension at start of PIP£39,375(£40,359) Pension at end of PIP£43,550 Growth in excess of 2.5% £3,191(A) Lump sum at start of PIP£95,625(£98,016) Lump sum at end of PIP£99,450 Growth in excess of 2.5% £1,434(B) Step 3 – Compare for growth Incl. CPI

13. 13 Calculation of pension growth Growth in pension£3,191(A) Growth in lump sum£1,434(B) Flat related factor 16(C) Growth (A x C) + B =£52,490 Excess subject to tax charge£2,490 Step 4 – Apply factor

14. 14 Calculation of tax rate to apply Gross income£156,000 Less contributions (7.5%)_£11,700 £144,300 Plus excess over £50,000 __£2,490 Total net income £146,790 As total income is below £150,000 (50% tax threshold) tax charge is 40% Step 5 – Calculate marginal tax rate

15. 15 Calculation of tax Total growth£52,490 Less annual allowance_£50,000 Excess £2,490 Apply tax rate – 40% £996* * Assumes no carry forward allowance available Step 6 – Apply tax rate to excess

16. 16 Example 2 – Includes Promotion Assumptions: 20 years’ pensionable service at March 2011 Pensionable salary of £110,000 p.a. Receives promotion to £180,000 p.a. CPI 2.5%

17. 17 Calculation of the value of benefits 1 April 2011 Pay = £110,000 Service 17 years pre March 08 3 years post March 08 Benefit calculation Pension =((17 x £110,000/80) +(3 x £110,000/60)) Lump sum= 17 x £110,000 x 3/80 Pension £28,875 Lump sum£70,125 31 March 2012 Pay = £180,000 Service 17 years pre March 08 4 years post March 08 Benefit calculation Pension = ((17x£180,000/80) +(4 x £180,000/60)) Lump sum = 17 x £180,000 x3/80 Pension £ 50,250 Lump sum£114,750 Step 1 – Start of PIP Step 2 – End of PIP

18. 18 Calculation of pension growth Pension at start of PIP £28,875(£29,597) Pension at end of PIP £50,250 Growth in excess of 2.5%£20,653(A) Lump sum at start of PIP £70,125(£71,878) Lump sum at end of PIP £114,750 Growth in excess of 2.5%£42,872(B) Step 3 – Compare for growth Incl. CPI

19. 19 Calculation of pension growth Growth in pension £20,653 (A) Growth in lump sum £42,872 (B) Flat related factor 16(C) Growth (A x C) + B = £373,320 Excess subject to tax charge£323,320 Step 4 – Apply factor

20. 20 Calculation of tax rate to apply Gross income£180,000 Less contributions (7.5%)_£13,500 £166,500 Plus excess over £50,000 £323,320 Total net income £489,820 As all excess is over £150,000 (50% tax threshold) tax charge is 50% Step 5 – Calculate marginal tax rate

21. 21 Calculation of tax Total growth£373,320 Less annual allowance_£50,000 Excess £323,320 Apply tax rate – 50% £161,660* * Assumes no carry forward allowance available Step 6 – Apply tax rate to excess

22. 22 But with carry forward... Assuming 4% pay increase and 2.5% inflation in previous 3 years Growth total in previous three years £33,042+ £34,771 + £36,585 = £104,398 Unused allowance (3 x £50,000) - £104,398= £45,602 Plus 2012 allowance = £50,000 Total allowance £95,602 Step 4b – Calculate carry forward

23. 23 Calculation of tax Total growth £373,320 Less effective annual allowance£95,602 Excess £277,718 Apply tax rate – 50% £138,859 (Compared to £161,660 if carry forward was not implemented) Step 6 – Apply tax rate to excess

24. 24 Annual allowance - who might it affect (LGPS)? Pensionable Salary at start of tax year 100,000110,000120,000130,000140,000150,000160,000170,000180,000 Pensionable Service at start of tax year 1032,92536,21839,51042,80346,09549,38852,68055,97259,265 1535,30038,83042,36045,89049,42052,95056,48060,01063,540 2037,67541,44345,21048,97852,74556,51360,28064,04867,815 2540,05044,05548,06052,06556,07060,07564,08068,08572,090 3042,42546,66850,91055,15359,39563,63867,88072,12376,365 3544,80049,28053,76058,24062,72067,20071,68076,16080,640 4047,17551,89256,61061,32766,04570,76275,48080,19784,915 Pay Award – 5% CPI – 3%

25. 25 Who might it affect (LGPS)? Pay Award – 0% CPI – 3% Pensionable Salary at start of tax year 250,000260,000270,000280,000290,000300,000310,000320,000330,000 Pensionable Service at start of tax year 1048,19850,12652,05453,98255,91057,83859,76561,69363,621 1539,29240,86342,43544,00745,57847,15048,72250,29351,865 2030,38531,60132,81634,03235,24736,46337,67838,89340,109 2521,47922,33823,19824,05724,91625,77526,63427,49328,353 3012,57313,07613,57914,08214,58515,08815,59016,09316,596 353,6673,8133,9604,1074,2534,4004,5474,6934,840 40000000000

26. 26 Payment Options Charges < £2,000 to be met by member Charges > £2,000 Member can elect for scheme to pay Still waiting for GAD tables and guidance

27. 27 What’s in and what’s out No longer exempt Benefits in the year of retirement including enhancements (But unreduced benefits OK) Enhanced protection cases Exempt: Deferred members Benefits in the year of death Serious ill-health retirement Likely for normal ill-health retirements too

28. 28 To be confirmed Aggregation of LGPS benefits Original proposal too severe Current option too generous and inconsistent With Local Government Association (LGA) to liaise with HMRC Ill Health Retirement Awaiting revised regulations to confirm which ill heath retirements will be exempt.

29. 29 lifetime allowance

30. 30 2011 tax regime - summary Reduced to £1.5m from April 2012 LTA valuation factor maintained at 20 LTA tax-charges unchanged Lump sum is taxable at 55% Pension is taxable at 25%

31. 31

32. 32 Protection Current protections Primary and Enhanced are protected! But... members that have enhanced protection that had a pension pot of less than £1M at A Day, may find their protected LTA is less than £1.5M (new LTA) now and therefore enhanced protection would be of no benefit to them

33. 33 Something for the weekend sir?

34. 34 Fixed Protection Apply before 6 April 2012 Protected LTA of £1.8m But, by April 2012: No benefit accrual BEYOND CPI and No AVCs/money purchase contributions. Possible concerns over auto-enrolment Not permitted if you have enhanced or primary protection

35. 35 Important decision for member: Retain benefit accrual, lose fixed protection and have LTA of £1.5M Retain fixed protection, lose benefit accrual and have LTA of £1.8M Must relinquish enhanced protection! Wrong decision could cost over £75K Benefit calculations could be obtained from pensions section or consultants; But they are unable to give financial advice!

36. 36 practicalities & responsibilities

37. 37 Practicalities & Responsibilities Info FromInfo ToWhat2011/122012/13 + EmployerPension Scheme Pay, benefits, length of service 6 July 20126 July 2013 Pension Scheme Scheme Member if > Annual Allowance Pension input amount and carry forward 6 Oct 20126 Oct 2013 Scheme Member HMRCSelf Assessment Return 31 Jan 2013 (to be amended up to 31 January 2014) 31 Jan 2014 Scheme Member Pension Scheme to make irrevocable decision on scheme pays 31 December 2013 31 July 2014

38. 38 Thank You Any questions?

39. 39 Disclaimer This presentation is for information only. It has been compiled by Hymans Robertson LLP, and is based upon their understanding of legislation and events as at March 2011. Legislation may be subject to future change. The presentation is designed to be a general summary of the new tax legislation. It does not take into account your personal circumstances and does not constitute financial advice. Where the subject of this presentation involves legal or tax issues you may wish to take specialist advice. Hymans Robertson is unable to provide you with advice; if you are unsure as to what action to take we strongly recommend that you seek independent financial advice. For a list of Independent Financial Advisers in your area you can contact IFA Promotions on 0800 085 3250 or visit www.unbiased.co.uk. Please be aware that you may be charged a fee for any advice.