Adobe Systems Europe Ltd

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1 Adobe Systems Europe Ltd Group Personal Pension Plan Salary & Bonus Sacrifice Handbook 2012/2013 Salary Sacrifice A Salary Sacrifice is an arrangement by which you give up the right to receive part of your Salary (defined as base salary) in exchange for additional employer pension contributions. As the payment is taken from your gross Salary, it means that you will not be paying any income tax or national insurance contributions on it (assuming you do not exceed the tax free contribution limit, detailed later in the booklet). Adobe will also not pay national insurance on the sacrificed amount. In consideration of this Adobe will provide an additional employer contribution equal to 50% of the Employer National Insurance saving generated. Bonus Sacrifice Adobe is also giving employees the opportunity to pay part or all of any Bonus (defined under About Bonus Sacrifice section on page 5) due into their pension plan to maximise tax efficiencies. HMRC states that Bonuses can only be paid into pensions as a tax free contribution if done so before they are paid. Therefore, if you want to pay part of your Bonus into your pension, Adobe will pay the portion of your Bonus that you wish to sacrifice directly to Aviva to invest into your pension fund. Withholding your Bonus in this way is referred to as Bonus Sacrifice. As with Salary Sacrifice, as the payment is taken from your gross Salary, it means that you will not be paying any income tax or national insurance contributions on it (assuming you do not exceed the tax free contribution limit). Again, as Adobe will not pay National Insurance on the sacrificed amount, an additional employer contribution equal to 50% of the Employer National Insurance saving generated will be paid into your pension plan. The advantages of Salary & Bonus Sacrifice You will not pay tax or National Insurance contributions on the amount sacrificed, up to the allowances set by HM Revenue & Customs Adobe will enhance any amount sacrificed by 50% of the Employer National Insurance saving As the payment into the pension is deemed an employer contribution, and paid before any income tax is deducted, there is no need to claim any additional tax relief via your tax return 25% of your pension fund can be drawn as a tax free cash lump sum at your chosen retirement date 1

2 HMRC Limits There is a limit on the tax-free amount that can be paid into your pension, this is known as the Annual Allowance, and is currently 50,000. This limit includes all payments into your pension (employee, employer and any Adobe incentive) and any other pension arrangement you participate in. You can pay more than this but you may be liable for tax on this amount. There is also a lifetime limit on the value of your pension funds which can be drawn at your retirement, this is currently 1.5m (please note that individuals may have a higher lifetime allowance if protection has historically been granted). Carry Forward When announcing the Annual Allowance the Government also introduced a mechanism called carry forward which is intended to protect those who usually have pension contributions below the Annual Allowance but who may exceed it in a particular tax year. It operates by allowing unused Annual Allowance to be carried forward from the previous three tax years. The unused Annual Allowance is calculated assuming the Annual Allowance figure in those years was 50,000. Here is an example: 2010/ / /13 Annual Allowance (AA) 50,000 50,000 50,000 Contributions/Accrual 35,000 26,000 40,000 Unused AA 15,000 24,000 10,000 Cumulative 15,000 39,000 49,000 In the example above, unused Annual Allowance of 49,000 could be carried forward to 2012/13. Once pension contributions/ benefit accrual of at least 50,000 are made in 2012/13, then there would be scope for up to an additional 49,000 from the previous years to be made without any charge to tax. Pension Input Periods (PIPs) Pension input periods are arguably the most complicated and least understood aspect of the Annual Allowance. The Pension Input Period is usually the 12 month period over which contributions must be tested against the Annual Allowance. If you have more than one pension arrangement then a different PIP could apply to each. 2

3 Your Questions Answered 1. Can I sacrifice my Salary or Bonus into any pension arrangements I have? No, Adobe is only offering Salary and/or Bonus Sacrifice in conjunction with your Group Personal Pension Plan with Aviva (your Plan ), the sacrifice can only be made into this arrangement. 2. How are the payments made to the Plan? The payments you agree to make to the Plan are taken from your Salary each month (or your Bonus prior to it being paid), before tax or National Insurance Contributions are deducted and paid directly by Adobe to Aviva. 3. What tax relief will I receive on my contributions? In short, most people will receive tax relief at the highest rate of tax that they pay. So, if you pay tax at the basic rate of 20%, you ll receive tax relief at this rate. That means every 10 invested actually costs just 8. The savings are even greater if you re a 40% or 50% tax payer. Every 10 invested costs just 6.00 or 5.00 respectively. What s more, your contributions are taken from your Salary before payment of tax, so you receive the full benefit of the tax relief immediately. As well as the tax relief on your contributions to the plan, there are other tax benefits too. Your fund will not be charged to income tax or capital gains tax, and when you come to draw it at retirement up to a quarter may be taken as a tax-free lump sum. And there s more, if you die before receiving your benefits, the money paid to your dependants will normally be paid tax free. The amount will depend on the returns on your money invested. For these reasons, investing in a pension plan may be a good way to provide for a comfortable retirement. 4. What will my National Insurance Contribution saving be? Not paying National Insurance Contributions will save you a further 12% on your contribution if you earn between 5,564 and 42,484 or 2% if you earn over 42,484 (2012/13 tax year). Example Let s say you choose to pay 100 per month to your pension plan and are a 40% tax payer. What would happen if you decided to stop paying this amount and to take it as Salary instead? Firstly, you would pay 40 in tax at the higher rate. What s more, you are likely to pay National Insurance contributions at 2%. That s another 2. So you d end up with just 58 after tax and National Insurance contributions. If you re a 50% taxpayer, you would receive even less than this after your tax rate is deducted. Salary Sacrifice means the full 100 is paid into the pension plan, plus Adobe will add another 6.90 in respect of a share of their National Insurance saving. 3

4 5. Are there any disadvantages to paying by Salary (or Bonus) Sacrifice? Salary (or Bonus) Sacrifice is a very effective way of paying contributions into a pension plan, but there are some potential disadvantages. Most people won t be affected, but you should be aware of the drawbacks in case they affect you: Salary Sacrifice means taking a reduction in Salary, so you pay less in National Insurance Contributions (your contribution is deducted before tax or National Insurance is applied). Some state benefits are based on how much you ve paid in National Insurance Contributions. For example, Jobseeker s Allowance and the Basic State Pension. So long as your Salary is still at least 5,564 (2012/13), there should be no impact. State Second Pension is an additional pension payable by the State on top of the Basic State Pension. The amount you receive is based on your earnings between 5,564 and 40,040 (2012/13). If your earnings are between 5,304 and 14,700, State Second Pension is calculated as if you earned 14,700, so Salary Sacrifice should not affect you as long as you still earn more than 5,304. If your earnings are between 14,700 and 40,040, then sacrificing Salary could reduce your State Second Pension (because your Salary will be less). Statutory Maternity Pay (plus Statutory Paternity and adoption pay), can be affected as well, but you can avoid any impact by changing the contribution you are paying*. * The benefit is calculated by reference to your average earnings over a specific period, usually a period of 8 weeks up to and including the 15th week before your pregnancy. By changing your contributions during this period you can avoid any impact. About Salary Sacrifice 1. Who can participate in the Salary Sacrifice? All Adobe employees who are members of the Adobe Group Personal Pension Plan can participate in Salary sacrifice. 2. How is Salary defined? Salary is defined as regular base salary for pension contribution. This definition also applies in the salary sacrifice situation. 3. How do I participate in the Salary Sacrifice arrangement? When you enroll into the Pension plan, you are automatically enrolled into the Sacrifice Sacrifice arrangement unless you opt out. You can also enroll during an Open Period or when you experience a qualifying life event as defined by HMRC. 4. What is an Open Period? An Open Period is a period of time during which employees can decide whether or not to participate in the salary sacrifice arrangement. It is in the month of March for changes made effective April 1. The decision made during the Open Period remains effective for 12 months and can only be terminated or suspended in accordance with a qualifying life event, as defined by HMRC. 5. When can I enroll? UK employees can join the pension plan as soon as they join Adobe, and take advantage of salary sacrifice. 4

5 6. Can I stop or change my contributions at any time? Generally, you can only change or stop paying contributions once a year often referred to as the renewal date in March. However, we appreciate there may be lifestyle events when you may need to stop or review the contributions you are paying to the plan. In circumstances like these, you can change or stop making contributions at any time. Examples of these circumstances include: Death of a spouse or partner Getting married or divorced Having a baby or adopting a child Your spouse or partner losing their job Pregnancy About Bonus Sacrifice 7. Who can participate in the Bonus Sacrifice? All Adobe employees who are members of the Adobe Group Personal Pension Plan and who will receive a Bonus payment can take part. 8. What elements of remuneration can be used to Bonus Sacrifice? Variable payments may include Annual Incentive Plan (AIP), commission, and any bonus paid to employees aligned with Adobe performance. For the avoidance of doubt, these variable payments shall exclude bonuses including but not limited to the following: any equity based compensation, spot bonus, referral bonus and team bonus. 9. How do I participate in the Bonus Sacrifice? You should complete the Bonus Sacrifice Agreement form, stating how much of your Bonus you wish to sacrifice. This must be submitted to HR prior to the relevant payroll cut-off. Any submissions received after that date will not be processed. 10. How much Bonus can I sacrifice? You can currently invest up to 50,000 in your pension fund in an individual tax year, although this figure not only includes the Bonus Sacrifice, but also the total of all contributions paid by you and your employer into all pension plans during the tax year. This will also take into account the amount your employer will pay in through pension uplift, as mentioned earlier. 11. How often can I sacrifice my Bonus? You can sacrifice in any given month when a Bonus or commission is paid, subject to a limit of two Bonus Sacrifices in any tax year. 12. Can I change my mind once I have submitted the form? No. Under UK government legislation, employees must choose to exchange their Bonus Sacrifice payments before the payments are processed through payroll. Once you have submitted the form, payroll will begin to process the sacrifice. Once the payments have been processed, Income Tax and National Insurance Contributions will have been calculated and it is too late to reverse the process. 5

6 13. I already make regular payments into the Group Personal Pension Plan. Will these be affected by the Bonus Sacrifice scheme? No. This is a separate arrangement applicable only to Bonus and does not have any impact on your regular payments. 14. How do I decide if a Salary or Bonus Sacrifice is right for me? For higher earners with spare income or savings, the taxation case may be very compelling to take advantage of the higher contribution limits to increase the value in their tax-approved pension plan. Aside from tax relief for pension contributions, these are some of the factors you should consider when determining whether to make a Salary or Bonus Sacrifice. Things to consider Taxable earnings to calculate your total taxable earnings from employment, don t forget to include all Salary, allowances and Bonuses. Include all contributions - the contribution limit applies to pension contributions from all sources your Company, you through normal employee contributions, Bonus Sacrifice contributions, plus any to other active pension plans. Investment is locked-in remember pension planning is long-term - once contributions are invested in the GPP, you cannot take benefits until at least age 55, and a refund is not possible even if your financial circumstances change. 25% tax-free cash - when you are eligible to take benefits, you can withdraw up to 25% of the accumulated value in your pension fund in the form of a tax-free lump sum. More flexibility in retirement - new pension rules give you a lot more flexibility in how you structure the benefits for your retirement: take cash first and leave the pension until later; use your own fund to provide the pension, at a level you decide you need each year, right up to age 75. The pension is taxable as income at a rate based on your total earnings at that time. Beware of 55% tax charge - when you take benefits, you will be liable to pay a tax charge of 55% on any excess if the accumulated value of all your pension plans exceeds the new Lifetime Allowance at that time (this is 1.5m for 2012/13). This won t affect most people but make sure you take account of the value in your previous pensions if you are thinking of sacrificing a large amount. Follow the rules Salary Sacrifice contributions can generally only be changed once a year at the renewal date in March. Bonus Sacrifice is processed through your Company s monthly payroll and you need to submit the request to sacrifice be the relevant payroll cut-off. After that, it will be too late. Contact Please erc@adobe.com (x 6-help) for any questions. The information in this document is based on our understanding of the tax and legal position at the date shown at the top of this document, which may be subject to change. This document is for reference purposes only and does not constitute financial advice. 6