Pension Input Amounts

Transcription

1 OCT 2015 [ PMI TECHNICAL e w s [ Pesio Iput Amouts Pesio Iput Amouts (PIA s) ad the complex rules that accompay them are oe of the least uderstood areas, particularly, but ot exclusively by members, of the curret pesio tax system. What follows is a brief survival guide to avigatig the myriad complexities ad compoets ivolved i geeratig Pesio Savig Statemets (PSS s) ad how that is goig to be affected, ow that Pesio Iput Periods (PIPs) are beig compulsorily aliged with tax years. What are the basic igrediets uderpiig a PSS? At the outset, a sigificat amout of iformatio ad data is required before geeratig a PSS. Puttig together a checklist of the mai requiremets is pretty much essetial: What s i a year? Pesio iput period Caterig for differeces i beefit type Data cosideratios It s all i the commuicatio Tax year, scheme year ad Pesio Iput Period (PIP) all have a part to play withi a PSS. The (ormally) 12-moth period i which pesio savigs made (plus value of accrual) the PIA - is assessed agaist the Aual Allowace (AA). The PIA i the PIP that eds i a tax year is assessed agaist that tax year s AA. If ew joiers have t bee otified of a PIP the a tax year default will apply uless members have selected their ow PIP (a optio oly for DC arragemets). It is ecessary to record PSS details by arragemet ad the type of accrual. Defied Cotributio (DC) is the most straightforward, Defied Beefit (DB) less so ad hybrid arragemets preset some uique issues to overcome. Earigs data ca be a essetial compoet i performig the calculatios that are ecessary to provide a PSS to a member. Commoly PIPs ad PSS s do t coicide with aual beefit statemet productio cycles, so it is sesible to highlight i beefit statemets whe PSS s will be made available. It is also worth otig that PSS s are frequetly made available o request; however, where a member s pesio savigs withi the scheme exceed the AA, issuig a PSS is madatory.

2 Carry Forward The chages to the AA aouced i the July 2015 Budget, ivolvig the taperig of relief for high earers ad the aligmet of PIPs with tax years, is very likely to focus the mids of those with earigs over 110,000 p.a. (assumig they re made aware of the Budget chages), which is explaied later i this article. The ability to carry forward uused AA from previous tax years was itroduced from whe the stadard AA was reduced from 255,000. The example, below, sets out how carry-forward works prior to the trasitioal provisios aouced for tax year It is this basis that is relevat for PSS s due by 5 October Tax Year AA Pesio Amout Cumulative savigs for c/f c/f ,000 30,000 20,000 20, ,000 25,000 25,000 45, ,000 30,000 20,000 65,000 PIA Available 40,000 Maximum cotributio withi for AA i ,000 ( 65, ,000) Lookig back for uused AA Use it or lose it How are beefits assessed? DB Schemes How are beefits assessed? Cash balace schemes How are beefits assessed? Moey purchase/defied cotributio schemes How are beefits assessed? Deferred pesioers i DB schemes Members may look back three years to establish whether there is ay uused AA (the differece betwee their actual savigs ad the stadard AA) see the table above, for a example. Members must exhaust the curret year s AA before carryig forward ay uused AA. Uused relief is draw from the oldest accessible tax year first (with the exceptio of the trasitioal year covered later). I the example above; if the value of pesio savigs i the tax year were 95,000 (ad o carry forward was available from the tax year), this would reduce the cumulative carry forward to il ad the maximum savigs i the tax year would the be the stadard 40,000 AA. The assessed value of the amout of pesio savigs accrued i a DB scheme is ormally 16 times the icrease i a member s accrued pesio over the PIP, with a allowace for Cosumer Price Idexatio (CPI) over the twelve moths to the previous 30 September (for example, September 2013 for a PIP edig i the tax year). The amout tested i a cash balace scheme is the differece betwee the value of a member s rights i the scheme at the ed of the previous iput period, compared with that at the ed of the curret iput period. As with DB schemes, the rights at the ed of previous iput period are icreased with the CPI idex over the 12 moths to 30 September, precedig the start of the tax year. Member ad Employer Cotributios to DC schemes are assessed at face value ad ivestmet gais or losses o previous ad curret tax year cotributios are igored. Where cotributios are paid et of basic-rate tax (for example to a Persoal Pesio, icludig Group Persoal Pesio, or Stakeholder Pesio) it is the gross value of cotributios that is tested. Where members have left pesioable service ad have a deferred pesio, statutory icreases to pesio rights will ot usually cout towards the AA. However, if there is ay form of discretio i determiig the level of the icrease applied to deferred pesios, the AA value will eed to be assessed. 2 PMI TECHNICAL NEWS OCT 2015

3 The impact of the Freedom ad Choice Reforms from April 2015 Before discussig how the July 2015 Budget chages affect the productio of PSS s, it is probably worth summarisig how the Freedom ad Choice reforms affected the AA. If a member draws their DC beefits flexibly O drawig beefits flexibly the AA i respect of ay future cotributios to a DC arragemet reduces to 10,000 ad ay uused relief from previous years will be lost. What costitutes drawig I additio to a tax-free cash sum, taxable icome is draw (flexible drawdow) DC rights flexibly Beefits are draw as a lump sum (25% tax-free, remaider taxed) (iduces 10,000 AA)? (Ucrystallised Fuds Pesio Lump Sum) O buyig a o-stadard auity (e.g. short-term auity) What does NOT costitute drawig DC rights flexibly ( 40,000 AA remais)? Oly a tax-free cash sum is draw; or O drawig tax free cash ad buyig a lifetime auity or beig paid a pesio directly by the scheme; or O cashig i all beefits i a scheme for a small pot up to 10,000, (members ca do this up to three times from persoal pesio schemes ad ay umber of times from occupatioal pesio schemes) If a member commeced capped drawdow before 6 April 2015 ad maitais icome withi the maximum level If a member is already i flexible drawdow, their AA would have bee il. From 6 April 2015 this is icreased to 10,000. All of the above is highly relevat to who is (ad who is t) potetially goig to eed a PSS ad will eed to be take ito cosideratio whe plaig for the productio of PSS s. Member resposibilities for what purpose is the iformatio cotaied i a PSS eeded? It is members resposibility to calculate ay AA charge based o their margial tax rate ad report ad pay ay AA charge. The charge is usually payable via the Self-Assessmet Tax Retur process for the year of the charge ad is payable by 31 Jauary followig the ed of the tax year i which the charge was icurred (for example, 31 Jauary 2016 for a charge icurred i the tax year). Members eed to cosider: Whether to use scheme pays Tax efficiecy ad reportig Makig sure members have the right iformatio A member who makes savigs of more tha the AA i oe pesio scheme AND icurs a AA charge of 2,000 or more i a tax year, ca require the pesio scheme admiistrator to meet the AA charge. Their pesio beefits will (ormally) be reduced by a amout equivalet to the charge. It is likely that usig a scheme pays facility (i.e. payig the charge from pre-tax pesio beefits) will be more tax-efficiet tha payig the charge directly to HM Reveue ad Customs (HMRC) (i.e. out of savigs/icome o which tax has already bee charged). However, members able to access scheme pays will eed to check other cosideratios also: e.g. the method that the scheme uses to reduce their pesio beefits. Members must report ay tax charge paid from pesio beefits o their Self- Assessmet Tax Retur for the year of the charge. If a member s pesio savigs exceed the stadard AA, the scheme admiistrator MUST provide them with the iformatio they eed to accout to HMRC for ay AA charge. That icludes pesio savig figures for the curret tax year ad the three prior tax years. That iformatio must be provided by 6 October followig the ed of the relevat tax year; for example, by 6 October 2015, for the tax year. Otherwise, members ca request a PSS. How the chages made i the 8 July 2015 Budget affect PSS s The aoucemet by the Chacellor to restrict tax relief o pesio savigs for those with icome over 150,000 will icrease demad for PSS s as idividuals seek to maximise their pesio savigs before valuable tax reliefs are reduced. It may also result i schemes beig required by legislatio to issue statemets to a greater umber of people (see below, re: Evet Reportig). 3 PMI TECHNICAL NEWS OCT 2015

4 Taperig Aual Allowace from 2016 The Budget chages reflect proposals aouced by the Coservatives before the electio i.e.to gradually reduce the Aual Allowace for idividuals with icome over 150,000, reducig it to 10,000 oce icome reaches 210,000. This is achieved by reducig the AA by 50p for every 1 of icome above 150,000. For example, a idividual with earigs of 170,000 i the tax year will have a Aual Allowace of 30,000. The taperig process is structured as follows: Threshold Icome Workig out Threshold Icome Adjusted Icome Workig out Adjusted Icome Caterig for DB ad cash balace arragemets The icome below which (i the absece of drawig DC rights flexibly), the 40,000 AA will always be available. Threshold Icome is made up of taxable earigs from employmet after deductig ay employee cotributios, plus other taxable icome e.g. retal icome, plus ay icome that has bee salary sacrificed i retur for pesio savigs if there is a ew salary sacrifice arragemet after 9 July If the member s Threshold Icome is greater tha 110,000, the the member eeds to work out their Adjusted Icome, as the taperig of relief bites. Adjusted Icome is taxable earigs from employmet before deductig ay employee cotributios, plus other taxable icome e.g. retal icome, plus (the value of) employer cotributios to pesio savigs. For DB ad Cash Balace arragemets, employer cotributios are valued usig the ormal AA methods ad the deductig ay employee cotributios. There are also other cosideratios i assessig the admiistrative burde: Ous o members to determie icome The impact o Evet Reportig Admiistrators will ot be resposible for determiig the member s icome. This will be up to the member; ot least because the test for Threshold Icome ad assessig Adjusted Icome icludes taxable icome from sources that will be ukow to admiistrators (ad which they will have o desire to lear, assumig that members would be happy to covey this iformatio). There could be a timig issue i that members may ot kow the level of their earigs util after the ed of the tax year ad, correspodigly, they will ot kow their AA util after the ed of the tax year. While the ous is o members, the umber of queries admiistrators are likely to have to field is expected to icrease sigificatly. Clarificatio o reportig requiremets is outstadig. Admiistrators curretly have to sed Pesio Savig Statemets to members who exceed their AA ad iclude the fact that they have doe so i the scheme s aual Evet Report; the problem is: how will admiistrators kow who these people are? Will admiistrators have to sed statemets to all members or, will members have to request them if their AA is less tha 40,000? Hopefully these questios will be clarified by HMRC. Soo. Aligig PIPs with tax years Makig the taper work The ew taper comes i from the tax year ad, i order to achieve eve the remotest possibility of this beig workable i practice, pesio savigs eed to be measured over the same period as taxable icome. All PIPs are therefore beig aliged with the tax year from 6 April (Some schemes are already aliged with the tax year but others used alterative periods; e.g. scheme year) a trasitioal year Adjustmets i the tax year are ecessary (ad arguably ievitable, from a forestallig for movig to a tax-year PIP perspective, as the chages have bee aouced part-way through that tax year): i effect, a exteded PIP is created by movig the ed date of ay PIP that would have closed i 2015 to 5 April 2016 broadly, the aual allowace for has bee icreased to a maximum of 80,000 Members ca still beefit from ay uused carry forward, largely as before PMI TECHNICAL NEWS OCT

5 Practical cosideratios, exteded PIPs ad pre ad post aligmet Admiistrators eed to cosider two periods withi the exteded PIP: pre-aligmet period from begiig of PIP that would have eded i the tax year to 8 July 2015 post-aligmet period from 8 July 2015 to 5 April Although the Govermet has erred o the side of geerosity i settig the 80,000 for the tax year, it did ot wish idividuals to be able to maipulate their savigs disproportioately. It therefore itroduced the followig restrictio: Maximum savigs i the pre-aligmet PIP is 80,000 ad for the post-aligmet PIP it is the lesser of: 40,000; ad, 80,000, less pesio savigs i the pre-aligmet period A aomaly or ot? If the PIP i the scheme was already aliged with tax years, the period should still be split ito two for ad the AA of 80,000 is still to be used (albeit that the maximum savigs i the post-aligmet period will be restricted, as above). This may allow some additioal scope for icreased savigs i the post-aligmet period. While the media have highlighted this poit, i practice, very few idividuals will be able to take advatage of it other tha as HMRC iteded; as a structured trasitio. Pesio Iput Amout (PIA) Calculatios for Pesio iput calculatios for will require calculatio of the total pesio savigs over the exteded PIP, which the eed to be divided ito pre ad post aligmet values. For DC arragemets the split is as ow: i.e. accordig to the date paid. For DB ad Cash Balace arragemets, the Govermet has itroduced a special uplift a easemet - to the opeig value of 2.5% (rather tha Sept 2014 CPI of 1.2%). HMRC has agreed a admiistrative relaxatio, i that it will ot be ecessary to calculate a value for the member s beefits as at 8 July. No chages to the reportig requiremets have bee published ad so admiistrators should issue the ormal PSS for the PIP edig i Thereafter, pedig ay yet-to-be aouced chages, they should issue a PSS for the ext PIP ed date of 5 April 2016 (ad each subsequet 5 April). The resultig Pesio Iput Amout (PIA) for the exteded period is the divided ito pre ad post aligmet periods accordig to the umber of days i each period. Special rules apply where a idividual becomes a deferred member withi the exteded period. The example below, illustrates how this works i practice for a DB arragemet with a exteded PIP of 1 July 2014 to 5 April 2016: i) calculate the total PIA for the whole period, but uprate the opeig value at 1 July 2014 by 2.5% ii) the calculate the post aligmet PIA as 272/645 times the total PIA. 272 is the umber of days from 9 July 2015 to 5 April 2016 ad 645 is the umber of days from 1 July 2014 to 5 April 2016 iii) the pre-aligmet PIA is the the total PIA mius the post-aligmet PIA Calculatig whether a Aual Allowace Charge will apply Havig worked out the pre ad post aligmet PIAs, it is ow possible (for the member, at least theoretically) to work out if ay PIA will be subject to a AA charge for Firstly, it is ecessary to calculate ay excess PIA for the pre-aligmet period by workig out whether the total of ay pre-aligmet PIAs exceeds 80,000, plus ay carry forward from the previous three tax years. After that, the AA for the post-aligmet period eeds to be worked out by takig: the miimum of 40,000 ad ( 80,0000 less the total of the pre-aligmet PIA); plus, ay remaiig carry forward ot used for the pre-aligmet period The, ay excess post-aligmet PIA ca be calculated by comparig the total of the post aligmet PIA with the result of the postaligmet AA calculatio show above. The total PIA subject to charge is the sum of the pre ad the post-aligmet charges. The process described above is best illustrated by the followig example: 5 PMI TECHNICAL NEWS OCT 2015

6 Example 1 - calculatio of excess PIA for (with carry forward) with a charge Assume a member has 50,000 to carry forward from the previous three tax years ( 20,000 from , 20,000 from ad 10,000 from ) They have a pre-aligmet PIA of 95,000 ad a post-aligmet PIA of 45,000 Pre-aligmet PIA subject to charge = 95,000 ( 80, ,000) = il AA carry forward to post-aligmet period = miimum of ( 40,000 ad ( 80,000-95,000)) = il Plus 35,000 (as 15,000 carry forward used i pre-aligmet period) = total 35,000 Post-aligmet PIA subject to charge = 45,000-35,000 = 10,000 Total PIA subject to charge = il (pre) + 10,000 (post) = 10,000 Calculatig the carry-forward for the tax year To work out the carry forward from , establish if it has bee ecessary to use ay carry forward for the pre-aligmet period: i.e. where pre-aligmet savigs are greater tha 80,000. This will reduce the year first. The work out whether there is ay carry forward ecessary ito the post-aligmet period usig A - B as show, below: (A)Lesser of 40,000 ad ( 80,000 pre-aligmet savigs) (B) Post-aligmet savigs Where post-aligmet savigs eed to use carry forward to be justified, this will similarly reduce year first. The resultig carry forward for is the: ay remaiig carry forward from ay remaiig carry forward from ay additioal carry forward from Oce agai, the process described above is best illustrated by the followig example: Example 2 - carry-forward for the tax year: Assume PIA for is 70,000 - AA is 40,000; leavig 30,000 to justify: pre-aligmet PIA = 50,000 (< 80,000 so o AA charge.) post-aligmet PIA = 10,000 Available carry forward from is calculated as A = 30,000 (lesser of 40,000 ad ( 80,000-50,000)) B = 10,000 A B = 20,000 If available carry forward from earlier years is , , offset 8,000 from leavig 22,000 to be justified 2. offset 5,000 from leavig 17,000 to be justified 3. offset 17,000 from post-aligmet year leavig remaiig carry forward from of 3,000 Coclusio Udoubtedly, the demad for PSS s will grow as idividuals seek to maximise their savigs ad members access DC beefits usig the ew flexibilities. The trasitioal period i , while PIP s are aliged with tax years, does brig complexity ad you are probably woderig what eeds to be icluded i a PSS. At the time of writig, the legislatio is i draft ad questios remai outstadig; as it stads, we thik that the PSS will eed to be broke dow ito pre-aligmet ad post-aligmet periods. I fact it may be ecessary to provide separate PSS s for each period Oce PIP s are aliged with tax years; movig forward, the process of geeratig PSS s should be less oerous ad easier for members to uderstad. Commuicatig the chages to those members likely to be affected will be key ad if you have t yet started that process, the sooer plaig begis, the better. Available space does t permit discussio of the 10,000 Moey Purchase AA ad with a good deal to be clarified it is probably worthy of iclusio i a further PMI Techical News. Coli Fowler Head of Professioal Excellece Kathy Cruse Seior Cosultat Towers Watso, Techology ad Admiistratio Solutios (UK) Opiios expressed i this publicatio are the persoal views of the cotibutor ad should ot be regarded as the official views of the PMI. Published by: The Pesios Maagmet Istitute PMI House 4-10 Artillery Lae Lodo, E1 7LS T: F: E: pmiservices@pesios-pmi.org.uk 6 PMI TECHNICAL NEWS OCT 2015