Information for members about the Lifetime Allowance charge

Transcription

1 Information for members about the Lifetime Allowance charge Introduction The value of your pension benefits that exceed the Lifetime Allowance (LTA) are subject to a LTA charge at the time benefits are taken (crystallise). There are two circumstances where a LTA charge arises following a benefit crystallisation event (BCE): where the amount crystallising at that BCE exceeds your available LTA. A LTA charge arises on the amount that crystallises beyond the available LTA; or where a BCE occurs and you no remaining LTA available at all (as all of the LTA has been used up by earlier events). A LTA charge arises on the whole amount crystallised at that event. A pension taken from the NHS Pension Scheme may also be subject to income tax, in addition to any LTA charge. Amount of the LTA charge If you have any benefits above the LTA, these will be subject to a LTA charge. The rate of tax charged will depend on whether you take that excess as a pension or a lump sum. The LTA charge is: 55% if you are taking the excess as a lump sum, and 25% where you take it as a taxable pension income. Recouping the LTA charge The LTA charge is a form of income tax for which, during your lifetime, both you and the scheme administrator are jointly liable. NHS Pensions pays a LTA charge directly to HMRC and recovers the cost by permanently reducing your NHS pension benefits. Reductions are permanent. This is because the calculation of the recovery of the LTA charge reflects the overall life expectancy in the NHS Pension Scheme. A surviving adult pension will not be reduced if the value of the pension is less than 50% if the value of the proportion of your pension that is deemed to be below the LTA. In all other cases a surviving adult pension may be reduced. A surviving child pension is never reduced. Below are two examples, based on the 2015/16 tax year, showing NHS pension benefits that exceed the LTA and therefore a LTA charge is applicable. The examples assume the member has no valid HMRC protection. Lifetime Allowance Charge factsheet (V7)

2 Example 1 Dr Black is a 1995 Section member who at age 62 has 40 years pensionable service and pensionable pay of 190,000. These provide him with a pension of 95,000 and a lump sum of 285,000. Dr Black has not previously used up any of the LTA Section benefits are valued, for LTA purposes, as follows: Capital value of pension: 95,000 x 20 = 1,900,000 Pension commencement lump sum: = 285,000 Total capital value: = 2,185, /16 LTA = 1,250,000 Excess over the LTA: ( 2,185,000-1,250,000) = 935,000 LTA charge on pension: (25% x 935,000) = 233,750 payable to HMRC The LTA charge is recovered by reducing the pension by the amount of the LTA charge divided by an actuarial factor of (233,750 / 19.78) = 11, This will result in a 1995 Section pension of 83,182.51( 95,000-11,817.49) and a lump sum of 285,000. The pension of 83, will be subject to income tax in the normal way. The lump sum is tax free. Example 2 Mrs North is a 2008 Section member about to retire. She has previously taken benefits that used up 60% of the LTA. Mrs North therefore has 40% of the LTA available to use before any liability for a LTA charge arises. At retirement she has a pension of 45,000 a year and a lump sum of 150,000 after giving up some of her pension. Capital value of pension: 45,000 x 20 = 900,000 Pension commencement lump sum: = 150,000 Total capital value: = 1,050,000 This is 84% of the 2015/16 LTA of 1,250,000. This exceeds the amount of the available LTA remaining. To calculate the LTA charge it is first necessary to check that the retirement lump sum does not exceed the maximum permitted tax free lump sum under HMRC s Lump Sum Rules. The maximum tax free lump sum (known as the Pension Commencement Lump Sum (PCLS)) is the lower of: 2

3 25% of the available LTA; or 25% of the capital value of the benefits to be paid The available LTA is 1,250,000-60% of the LTA ( 750,000) = 500,000 Maximum tax free lump sum available: 500,000 x 25% = 125,000 Capital value of benefits to be paid: 1,050,000 x 25% = 262,500 This gives a maximum PCLS of 125,000. or As the lump sum to be paid exceeds the maximum permitted PCLS amount by 25,000 ( 150, ,000), this amount becomes a Lifetime Allowance Excess Lump Sum and there is a LTA charge of 55%: LTA charge: 25,000 x 55% = 13,750 Lump sum payable: 150,000-13,750 = 136,250 The capital value of the pension is then assessed against the remaining LTA and any excess is subject to a LTA charge at the rate of 25%. LTA available: 1,250, , ,000 (PCLS) = 375,000 Capital value pension: ( 45,000 x 20) = 900,000 Amount liable for a LTA charge at 25%: 900, ,000 = 525,000 LTA charge: 525,000 x 25 % = 131,250 The pension is reduced by the amount of the LTA charge divided by a factor of ( 131,250 / 17.82) = 7, each year. This will result in a 2008 pension of 37, ( 45,000-7,365.32) a year and lump sum of 136,250. The pension of 37, is subject to income tax in the normal way. Only 125,000 of the lump sum is tax free. Factors have been provided by the Scheme s Actuary to calculate the recovery from a pension. These can be found in Appendix A below. HMRC LTA protections Since April 2006 HMRC has introduced a number of LTA protections to enable benefits of more than the standard LTA to be taken which will result in either no LTA charge payable or a reduced charge. Lump sum on death Provided the lump sum on death is paid to the recipient within two years of the scheme administrator being notified of a member s death it will be tax free as long as it is within the 3

4 member s LTA. A notification will be sent to the personal representative confirming the amount of LTA used up by the lump sum on death and the recipient of that payment. A lump sum paid within two years but which is in excess of the LTA will be liable to a LTA charge on the excess amount at the rate of 55%. It is the responsibility of the personal representative to inform HMRC and arrange for any LTA charge to be paid. For members who die after reaching age 75, the lump sum on death will be subject to a special lump sum death benefit charge of 45%. This tax is deducted from the lump sum before payment. From 6 April 2016 the rate will be the recipient s marginal rate of tax. Important HMRC s two year period starts when the scheme administrator is informed of the member s death Section member if the lump sum on death is not paid within HMRC s two year period, the payment becomes unauthorised and is subject to a tax charge of 40% (which could, in certain circumstances, increase to 55%) Section or 2015 Scheme member if the lump sum on death is not paid within HMRC s two year period, the payment becomes unauthorised. NHS Pension Scheme Regulations do not permit an unauthorised payment to be paid. This will result in no lump sum on death being paid. Information regarding the two year rule and LTA protections can be found in HMRC s Pensions Tax Manual at: Dependant benefits A pension paid to an adult dependant (for a widow, widower, civil partner or qualifying nominated partner) following the death of a member does not form part of either the member s or the recipient s LTA. A pension paid in respect of a dependent child does not count against the LTA. 4

5 Appendix A - Factors to calculate the reduction to NHS pension to recoup the Lifetime Allowance charge Age last birthday 1995/2008 Scheme 1995 Section 2008 Section 2015 Scheme