Your retirement savings and tax November 2015
Content 1. Ways you can access your retirement savings and how they are taxed 2. Further information on the Annual Allowance 3. Further information on the Lifetime Allowance 4. Appendix: history of retirement savings and tax 2
1. Ways you can access your retirement savings and how they are taxed
Taxation of retirement savings what is happening? Changes announced in the Summer Budget 2015 Reduction in Annual Allowance For members with adjusted income over 150,000 or more Adjusted income is broadly your total taxable income plus your pension contributions (by you and your employer). It includes all employment income and personal income. Transitional Arrangements The Government is also changing the period over which the Annual Allowance is measured to align it with the tax year. There are transitional arrangements in place for the 2015/16 tax year. Lifetime Allowance The overall amount of tax efficient savings at retirement will reduce from 1.25 million to 1 million for everyone from 6 April 2016. From 6 April 2018 this will be increased in line with CPI. 4
Limits on your retirement savings Annual Allowance (AA) The AA is the total value of retirement savings you can build up (from all sources) tax-efficiently, in a year The AA has been 40,000 since April 2014 but is changing from 6 April 2016 for those with adjusted income of 150,000 or more You can carry forward any unused AA for up to three years. If your pension savings exceed the AA in a year, the excess (after allowing for carry forward) would be liable for income tax Pension Input Period is the technical term for the yearly period over which retirement savings are measured. They were different for pension arrangements but will be aligned to the tax year from 6 April 2016. If you take your DC savings using the new flexibilities then this will trigger an alternative AA of 10,000 for contributions to DC retirement arrangements (or cash balance arrangements). If you and/or the bank make significant contributions to your retirement savings, you will need to monitor these in future if you do not want to incur a tax charge. 5
Limits on your retirement savings Lifetime Allowance (LTA) The LTA is the total value of retirement savings you can build up (from all sources) tax efficiently, in your working lifetime The LTA has been 1.25 million since 6 April 2014 but is reducing to 1 million in April 2016. From 6 April 2018 this will be increased in line with CPI. If your retirement savings exceed the LTA: You will be charged 55% tax if you take the excess savings as a lump sum, and 25% tax if you take them as a pension (although the pension will still be liable for income tax) Protection options will allow members to maintain an LTA of 1.25 million but may restrict the ability to make future retirement savings. Please see section 3 for more details. The LTA also applies upon death before retirement. Lump sum death benefits are assessed against the Lifetime Allowance in these circumstances, please see slide 23. If you have substantial pension savings, you should find out the value of them (both in your current and previous retirement arrangements) to check how close you are to the LTA. 6
Your retirement options from April 2015 Members with DC retirement savings can access them in a number of ways from April 2015: Visit www.baml.com/pensionupdate for more information 7
Your savings at retirement and how they are taxed If you choose to use your retirement savings as a DC pot annuity or a DB scheme pension You can take up to 25% as a tax-free lump sum The remainder of your income will be taxed at your marginal rate. Your benefits will be tested against the Lifetime Allowance (LTA). More detail on the LTA is provided later in this pack. If you have DB benefits you should contact your Plan Administrators for information about how these benefits need to be calculated for LTA purposes. 8
Your savings at retirement and how they are taxed If you choose to use your DC retirement savings to utilise the new flexibilities available since April 2015 You can take up to 25% as tax free lump sum The remainder of your income will be taxed at your marginal rate. Your benefits will be tested against the Lifetime Allowance (LTA). More detail on the LTA is provided later in this pack. The Government has confirmed that if you take your benefits in this way you will trigger an alternative AA of 10,000 for future contributions to DC arrangements (or cash balance arrangements). 9
Tool and resources BofAML Pensions freedom and choice website For full details for how you can access your DC savings and other tools and resources to help you with your retirement planning, visit www.baml.com/pensionupdate. This includes: Plan Handbook for full details about the Plan Retirement Options factsheets for full details about your retirement options Case study examples to help you see what the retirement options could mean for you A Retirement Option decision tree to help you explore more MyBenefitChoices website www.mybenefitchoices-uk.com (or via SSO) Update your pension contributions at any time Use the AA modeller to see the remaining AA you have for 2015/16 and to help you consider whether or not to increase your contributions 10
Finding out more It is ultimately your responsibility to understand your tax situation and take any steps that you believe may be appropriate for your circumstances. We suggest you take financial advice before making any decisions about, or changes to, your retirement arrangements. Savings, tax and the changes You can find more details on the HM Revenue & Customs website at www.gov.uk/tax-on-your-private-pension/overview. Your savings with Bank of America Merrill Lynch If after vising the BoAML Pensions freedom and choice website at www.baml.com/pensionupdate, you need more information, contact the Plan Administrators: Bank of America Merrill Lynch UK Pension Plan and Merrill Lynch (UK) Defined Contribution Plan: email boaml@capita.co.uk, or phone 01227 773915, or go to www.hartlinkonline.co.uk/boaml Bank of America UK Pension Plan: email boa@capita.co.uk, phone 0800 917 6071, or go to www.hartlinkonline.co.uk/boa Getting advice If you wish to understand more about how the changes will affect your specific circumstances, we encourage you to consider seeking financial advice. For details on how to contact a financial adviser in your local area, visit www.moneyadviceservice.org.uk/en/categories/financial-help-and-advice. 11
2. Further information on the Annual Allowance (AA)
Reduction in the AA from 6 April 2016 The AA will reduce by 1 for every 2 of adjusted income above 150,000, to a minimum of 10,000. 13
Reduction in AA from April 2016 From tax year 2016/17 onwards, your AA will be calculated using your earnings in the same tax year, this will be calculated as follows: 1. Is threshold Income above 110,000? 2. Is adjusted income above 150,000? Threshold income equals: (Broadly) taxable income, PLUS Salary sacrifice for pension* If threshold income exceeds 110,000: Go to 2. Otherwise AA is 40,000 * HMRC will confirm how this will work in practice in due course Adjusted income equals: (Broadly) taxable income, PLUS Pension savings over the tax year measured using the AA methodology, PLUS Other adjustments in certain circumstances If adjusted income exceeds 150,000: AA is reduced by 1 for every 2 of Adjusted Income over 150,000, to a minimum of 10,000 Otherwise AA is 40,000 Taxable income in both cases broadly means basic salary plus non-basic earnings less any salary sacrifice less employee contributions made directly to a pension scheme. Note that this includes all outside income (both personal and from other employment) in addition to that received from the bank. As a result, the bank is unlikely to have all of the relevant information to calculate the above income definitions. 14
Reduction in the AA key issues Income definitions are complicated Potentially involve adding or subtracting non-standard reliefs and other (non-bank) income amounts. Annual Allowance now linked to earnings in the same tax year Earnings not known until the end of the tax year Bonus payments made near the end of the tax year can cause the AA to reduce unexpectedly Adjusted income includes retirement savings You need to be aware of the level of retirement savings being made How to measure your savings against the AA To calculate savings made in a specific tax year, you would include any savings for the whole Pension Input Period (PIP) ending in that tax year. For the Bank s UK pension arrangements that Pension Input Period (PIP) is broadly the tax year, details of this for your Plan can be found in your Plan Handbook (available at www.baml.com/pensionupdate > Library & tools ) 15
Transitional arrangements new Pension Input Period for 2015/16 April 2015 8 July 2015 9 July 2015 April 2016 Pre-alignment tax year Post-alignment tax year The Government is changing the period over which the AA is measured to align with the tax year. There are transitional arrangements in place for the 2015/16 tax year. The relevant contributions to be measured against this year s AA are from 9 July 2015 to 5 April 2016, inclusive. For you this means your AA is (effectively) higher for this transitional year only: 40,000, plus the amount that has been contributed into your pension plan(s) by you and/or your employer between 6 April 2015 and 8 July 2015. Use the AA Calculator on the MyBenefitChoices website to see you work out the remaining AA you have for the 2015/16 tax year 16
Carrying forward unused AA If you do not use your full AA in the three previous tax years, this allowance can be carried forward. Use carry-forward in the future? It may be helpful for those affected by the change to the AA in April 2016 since it may be difficult to monitor retirement savings and adjusted income at the same time. Restricting pension contributions to 10,000 and then using any excess carry forward in the next year may be easier. Any carry forward for 2012/13 would be lost on 6 April 2016 2013/14 would be lost on 6 April 2017 2014/15 would be lost on 6 April 2018 2015/16 would be lost on 6 April 2019 17 Please note: your current year AA must be used first before using unused AA from previous years (starting with the oldest first)
Monitoring savings and paying tax Reminder: if your retirement savings exceed the AA in a year, the excess (after allowing for carry forward of unused AA from the previous three tax years) would be liable for income tax. If you are liable for additional tax, you are able to pay this in a number of ways: Through Self-Assessment Tax Return: - You will need to request to complete this if you do not receive one. Through Scheme pays facility: - The Plan pays the tax charge which you are liable for and your retirement savings are reduced accordingly - Only available for a minimum tax liability of 2,000. - Amount deducted from Member/Retirement Account. - Assuming above threshold met, member should send requests to Plan Administrators. - Both DC and DB plans will normally have to pay the entire charge relating to savings earned in that Plan. 18
3. Further information on the Lifetime Allowance
How to measure your savings against the Lifetime Allowance upon retirement The LTA is the total value of tax efficient savings you have made at retirement (across all your retirement arrangements). If you have Defined Contribution benefits: If you have Defined Benefits: Retirement savings over your lifetime. = Value of fund at retirement Retirement savings over your lifetime = Lump sums are taken at face value at retirement and any pension at retirement is multiplied by 20 Note: State pensions do not count towards the LTA The LTA reduced from 1.5 million to 1.25 million on 6 April 2014. It will reduce from 1.25 million to 1 million on 6 April 2016 and from 6 April 2018 it will increase in line with consumer price inflation (CPI). 20
How to measure your savings against the LTA upon death before retirement If you were to die before retirement, your death benefits are assessed against your LTA as follows: - Spouse s pensions are not assessed against the LTA. - Lump sum death benefits are assessed against the LTA. You will need to consider: - The death benefits that may be payable from your savings in addition to any lump sum death in service benefits provided. - The death benefits that may be payable from other retirement arrangements. The value of any lump sum death benefits above the LTA would be liable for a LTA charge before it is payable. Please note that if you choose to flex up your lump sum death benefit, this may mean that the lump sum benefits payable if you were to die before retirement would be liable for a LTA charge (assuming they exceeded the LTA at that time). 21
Protecting your LTA You are currently able to protect your LTA using Individual Protection 2014, in respect of the reduction in the LTA which occurred on 6 April 2014. This Protection needs you to have had retirement savings of 1.25 million or more at 5 April 2014. The deadline to apply for Individual Protection 2014 is 5 April 2017. We also expect two new forms of protection will be available to members with effect from 6 April 2016, Individual Protection 2016 and Fixed Protection 2016. We will provide further information in due course about these new Protections, however some information on the expected Protections to be made available is set out on slide 27. 22
Individual Protection 2014 Individual Protection 2014 Available to you if the value of your savings in retirement arrangements at 5 April 2014 was 1.25 million or above. Provides Individual Lifetime Allowance equal to the value of your savings in retirement arrangements at 5 April 2014, up to a maximum of 1.5 million. You are allowed to make savings after 5 April 2014. Deadline of 5 April 2017 to apply. Please note: If the standard LTA is greater than the protected LTA at retirement, you automatically revert to having the standard LTA. You will be able to apply for this Protection if you meet the conditions even if you have already applied for Fixed Protection 2014. If you have either Primary Protection, Enhanced Protection or Fixed protection 2012, these notes do not apply to your circumstances. Please contact your Plan Administrators (see slide 6) if you want to check how the changes apply to you. 23
How to apply for Individual Protection (IP2014) If you are thinking of applying for IP2014, we recommend you take financial advice. The deadline for IP2014 is 5 April 2017. The form is available on the HMRC website at www.hmrc.gov.uk/pensionschemes/ip14online.htm IP2014 will be retrospective to 6 April 2014. 24
New LTA Protections It is expected that the Government will introduce the following Protections, the current expectations are set out below and the detail will be confirmed in due course. Fixed Protection 2016 Individual Protection 2016 Fixes Lifetime Allowance at 1.25M. Members must not have relevant benefit accrual on or after 6 April 2016 effectively must become a deferred member Only available if member does not have Primary Protection, Enhanced Protection or previous Fixed Protections Available to members whose benefits at 5 April 2016 are valued at 1M or above Provides Individual Lifetime Allowance equal to value of benefits at 5 April 2016, up to a maximum of 1.25M. Members allowed to accrue benefits after 5 April 2016 25 Please note: If the standard LTA is greater than the protected LTA at retirement, you automatically revert to having the standard LTA. It is not possible at present to apply for either protection, we expect further details to be published in due course.
Who should apply for protection? The example below considers one scenario where someone may wish to consider Protection Emma s value of retirement savings at 5 April 2016 = 0.98 million She wishes to retire in 5 years time If she assumes their savings were to earn investment returns of 5% p.a. Value of retirement savings in 5 years time (assuming 5% p.a.) = 1.25 million Emma could not apply for Individual Protection 2014 or 2016 as the value of her retirement savings at 5 April 2016 was less than 1 million. Emma could apply for Fixed Protection 2016 i.e. opt out of accrual from 5 April 2016 preserving LTA of 1.25 million. This would mean: - Value of retirement benefits at retirement date in 5 years time = 1.25M - Emma s LTA = 1.25M - LTA charge = Nil If we think consider the LTA will be 1.06 million in the year Emma retires (assuming CPI inflation has been 2% p.a. since 2018) the approximate saving from Fixed Protection 2016 is of the order of 50,000 In addition, Emma would get 5 years of pension savings flexed into cash. 26
How to pay the Lifetime Allowance charge at retirement If your retirement savings exceed the LTA at retirement, the excess would be liable for a tax charge. If your retirement savings exceed the LTA: - You will be charged 55% tax if you take the excess savings as a lump sum, and - 25% tax if you take them as a pension (although the pension will still be liable for income tax) For example, if you had defined contribution savings worth 1.75 million (and assuming no protections with HMRC). - 1.75 million will be tested against the LTA in the tax year you retire. For 2015/16 this is 1.25 million - Taking savings as a lump sum, you would be liable for 275,000 (55% of 0.5 million) as a tax charge, leaving the remainder of your savings to be taken as a lump sum - Taking excess savings as a pension, you would be liable for 125,000 (25% of 0.5 million) as a tax charge, your remaining savings ( 1.625 million) could then be used to purchase a pension. The pension payable is then taxed at your marginal rate of income tax - If you choose to access your retirement savings using the new flexibilities, your savings will be tested against the LTA when you draw them and will also be dependent upon how you choose to draw them (55% tax for a lump sum and 25% tax plus income tax for non lump sums) 27
4. Appendix: history of retirement savings and tax
Appendix: history of savings and tax Before April 2006 27 Jan 6 April 2006 Budget 2009 Coalition Government 2010 Budget 2013 Concept of maximum benefits allowable by the Government (e.g. two-thirds of pay at normal retirement). 1989: The above limit was further restricted by the earnings cap (a maximum pensionable pay figure for new hires). Introduced: Annual Allowance (AA) (maximum tax-efficient savings in any year). Lifetime Allowance (LTA) (maximum taxefficient savings at retirement - 1.5 million increasing to 1.8 million over 5 years broadly equivalent to pension value of two-thirds of earnings cap). Certain protections against LTA introduced: Enhanced Protection and Primary Protection (both no longer available). Anti-forestalling additional taxes for high earners who wanted to increase their savings above what they had made previously. Anti-forestalling is no longer available. Extended scope of these taxes in December 2009. Introduced new tax structure from tax year 2011/12 to bring in same tax revenue as previous Government s changes by: Reducing AA from 255,000 to 50,000 (from April 2011). Reducing LTA from 1.8 million to 1.5 million (from April 2012). Introduced another protection against reduction in LTA: Fixed Protection 2012 (no longer available). AA was reduced to 40,000 from April 2014. LTA was reduced to 1.25 million from April 2014. Two new forms of protection against reduction in LTA: Fixed Protection 2014 (only available if application made before 6 April 2014) and Individual Protection 2014 (application to be made before 6 April 2017). 29
Appendix: history of savings and tax 27 Jan Budget 2014 Budget 2015 Summer Budget 2015 The Government announced that members with DC pots would get more flexibility on how to draw their benefits from April 2015. From April 2015 members are allowed full access to DC funds as cash lump sums or unrestricted drawdown, subject to the marginal rate of income tax, with the facility for 25% as a tax free lump sum as present. Members who utilise the new options will trigger an alternative AA of 10,000 for contributions to DC arrangements (or cash balance accrual) LTA is to be reduced to 1 million from April 2016. The LTA will increase in line with CPI inflation from April 2018. The Government announced that the AA is to reduce for members with adjusted income of 150,000 or more from April 2016. Certain technical changes are being made in 2015/16 tax year which may give some short term opportunities for those who want to make additional pension savings before April 2016. 30
Appendix: example 1 no AA charge Situation, in tax year 2016/17: Chris is in a DC scheme The bank pays 12% of Plan Salary into Chris pension Chris pays no pension contributions He has a basic salary of 100,000 Chris receives a 50,000 bonus in 2016/17 He has a Plan salary of 150,000 Taxable income for 2016/17 is also 150,000 Impact: Threshold income is 150,000: 150,000 taxable income, PLUS Nil salary sacrifice Adjusted income is 168,000: 150,000 taxable income, PLUS 18,000 pension savings over the year, PLUS Nil other adjustments AA is 31,000 40,000 standard AA, LESS 9,000 reduction = ( 168,000 150,000) / 2 No tax charge for 2016/17 Carry forward 13,000 to 2017/18 ( 18,000 pension savings whereas the AA is 31,000 leaving 13,000 to be carried forward) 31
Appendix: example 2 member incurs an AA charge Situation, in tax year 2016/17: Amy is in a DC scheme The bank pays 12% of Plan Salary into Amy s pension Amy pays no pension contributions She has a basic salary of 100,000 Amy receives a 90,000 bonus in 2016/17 Amy s Plan Salary is 151,200 (capped at the Plan earnings cap for 2016/17 of 151,200) Taxable income for 2016/17 is 190,000 Impact: Threshold income is 190,000: 190,000 taxable income, PLUS Nil salary sacrifice Adjusted income is 208,144: 190,000 taxable income, PLUS 18,144 pension savings over the year, PLUS Nil other adjustments AA is 10,928 40,000 standard AA, LESS 29,072 reduction = ( 208,144 150,000) / 2 Pension savings exceed AA by 7,216; potential tax charge for 2016/17 of up to 3,250 (liable for income tax of 45% on 7,216 retirement savings in excess of 10,928 AA) 32