Pension tax relief Factsheet This factsheet provides a summary of the rules in relation to pension tax relief, including recently introduced changes and information on proposals for further changes during 2015/16 and from April 2016. The information is current as at September 2015.
Reminder of the recent tax changes Tax relief on pension savings is restricted by: Reducing the Annual Allowance to 40,000 from 6 April 2014: this is the maximum tax-free build up of pension savings you can make each year. Under certain circumstances, the Annual Allowance may be restricted to 10,000 from 6 April 2015. You will be advised by your pension provider if such a restriction applies to you. The Annual Allowance will be further reduced to 10,000 from April 2016 for those who earn more than 210,000 each year and will be tapered for those who earn between 150,000 and 210,000. Reducing the Lifetime Allowance to 1.25 million from 6 April 2014: this is the total value of pension savings you can build up over your entire working lifetime before a tax penalty applies. The value of your pension savings are only measured for Lifetime Allowance purposes when your savings are brought into payment. The Lifetime Allowance will be further reduced to 1 million from 6 April 2016. 2
Who will be affected by the new tax changes? The pension tax allowances are unlikely to affect the vast majority of our members. Unless you make any additional pension savings (e.g. Additional Voluntary Contributions) you are unlikely to be affected in the tax year 2015/16, if, for example: You joined Pace Complete (the defined benefit section of Pace) after 6 April 2006 and your pensionable salary was less than 150,000 You were in Pace Complete, your pensionable salary is less than 65,000 and you joined Pace before 6 April 2006, or you are a Closure Member of one of the Group s closed final salary schemes. You are a Pace DC member earning less than 200,000. However, members who are affected may be able to reduce or eliminate the tax payable by using any unused allowance from the three previous tax years. Some individuals who take their pension benefits after 6 April 2015 and who continue to save in a pension may be affected. If so, they will be notified individually by their pension provider. The Group Pensions Department will provide generic and personal information to help you understand the tax changes but managing your personal tax position is your responsibility. If you believe you may be affected by the tax rules, the remainder of this document provides more details on the changes. What is the Annual Allowance? This is the maximum tax-free build up of pension savings you can make each year. How much is the Annual Allowance? The Annual Allowance for pension savings was 50,000 for any pension savings in respect of the tax years 2011/12 to 2013/14. This limit reduced to 40,000 from the 2014/15 tax year onwards. If you draw some of your pension savings under the new flexible retirement tax rules, and continue pension saving, the Annual Allowance may be restricted to 10,000 from 6 April 2015. You will be advised by your pension provider if such a restriction applies to you. As set out on page 2, further changes to the Annual Allowance are due to take effect from April 2016, however, the full details have not yet been made available by the Government. How do I calculate my pension savings? Pension savings will differ depending on the type of benefits: For members of Pace Complete (the defined benefit section of Pace), it means the increase above inflation to your pension benefit over the pension input period multiplied by a factor of 16. (See section below for information regarding the pension input period.) For members of Pace DC, and for any Additional Voluntary Contributions paid, or in respect of contributions made to personal pensions, it is simply the total contributions made over the pension input period. If you are an active member of more than one scheme or arrangement, then you have to account for all the pension savings for each scheme or arrangement. An example pension savings calculation can be found on page 4. What is my pension input period? This is a period set for the purpose of measuring your pension savings against the Annual Allowance test. Each pension scheme has its own pension input period. All of the Group s pension arrangements have a pension input period which runs from 6 April to 5 April with the exception of the United Norwest Co-operatives Employees Pension Fund and the Yorkshire Co-operatives Limited Employees Superannuation Fund, where the pension input period runs from 1 February to 31 January. For Additional Voluntary Contributions, the pension input period runs from 6 April to 5 April. How do I know which pension input period relates to a particular tax year? As a general rule of thumb, the end date of the pension input period dictates the tax year that pension savings apply to. So if your pension input period ends on, say, 31 January 2015 or 5 April 2015 then your pension savings over that pension input period would be compared against the 2014/15 tax year. You may have other pension plans that use different pension input periods, however to simplify this the government will be aligning the pension input periods of all pension schemes to tax years from 6 April 2016. Transitional arrangements this year mean that you may have the chance to contribute more before 6 April 2016. For further details please contact the Group Pensions Department. If you have any questions about the Lifetime Allowance please contact the Group Pensions Department David Tivey 0843 751 1607 / email david.tivey@co-operative.coop Norton Howden 0843 751 1628 / email norton.howden@co-operative.coop 3
What happens if my pension savings exceed the Annual Allowance? If your pension savings exceed the Annual Allowance, a potential tax charge will be payable on the amount of any pension savings in excess of the Annual Allowance. The tax rate applied to the excess amount will normally be equivalent to your marginal rate of income tax. Any additional tax payable in respect of the Annual Allowance is collected via your annual tax return each year. You may be able to elect to have this tax charge paid out of your pension benefits rather than paid out of your income. However, if you exceed the Annual Allowance in any one year, you may be able to offset the potential tax payable by carrying forward any unused allowances (effectively a tax credit ) from the previous three tax years. Will I exceed the Annual Allowance? This will depend on a number of factors specific to your circumstances such as how much you earn, the increase in your earnings, your length of service and the rate at which you build up pension each year and whether you make extra pension savings. Because the Annual Allowance test is applied to all pension savings, any additional pension savings you make outside the Group s pension arrangements will also count towards the test. The example below demonstrates how pension savings are calculated and measured against the Annual Allowance. Example Sam is a member of Pace Complete. Sam s pension increased from 20,000 p.a. to 23,000 p.a. over the year (the pension input period). In this example, price inflation is assumed to be 3%. Pension at the end of the year = 23,000 p.a. Less Pension at the start of the year = 20,000 p.a. Pension built up in year = 3,000 p.a. Less Adjustment for inflation ( 20,000 x 3%) = 600 p.a. Sam s pension saving over the year = 2,400 p.a. Sam s pension savings would be valued at 38,400 (i.e. 2,400 x 16), which is within the 40,000 Annual Allowance. Therefore no additional tax charge would arise. If Sam had paid into Pace DC or made Additional Voluntary Contributions of 5,000 then the total pension savings would be 43,400 ( 38,400 plus 5,000). This would be 3,400 above the 40,000 Annual Allowance and, based on a marginal income tax rate of 40%, a potential tax charge of 1,360 (40% x 3,400) would be payable. For further information, you can read HMRC Guidance at: www.gov.uk/tax-on-your-private-pension 4
The Lifetime Allowance The Lifetime Allowance was introduced as part of new pension legislation that took effect from 6 April 2006. The Lifetime Allowance is the overall value of pension benefits you can build up over your entire working lifetime without further tax penalties applying. The Lifetime Allowance was reduced from 1.8 million to 1.5 million with effect from 6 April 2012. The Lifetime Allowance reduced to 1.25 million with effect from 6 April 2014 and will further reduce to 1 million with effect from 6 April 2016. The government intends to increase the Lifetime Allowance from April 2018 by reference to the Consumer Price Index each year. How are pension benefits valued for Lifetime Allowance purposes? Unlike the Annual Allowance test that is applied annually, the Lifetime Allowance test only applies when pension benefits are brought into payment, for example, on retirement or death. However, similar to the Annual Allowance, the value placed on pension benefits under the Lifetime Allowance will differ depending on the type of pension scheme you belong to: For members of a defined benefit scheme (see page 3), it means the actual retirement pension that you will receive, multiplied by a factor of 20, plus the amount of your tax-free cash lump sum. For any Additional Voluntary Contributions paid, or in respect of contributions made to personal pensions or other defined contribution schemes, it is simply the total fund value accumulated at the time you decide to draw your pension benefits. If you are a member of more than one scheme, then the Lifetime Allowance test applies to the value of all your pension benefits from all schemes, when these are brought into payment. What if the value of my pension benefit is higher than 1 million at 5 April 2016? It is anticipated that HMRC will introduce similar forms of protection to those introduced at 5 April 2014 but details are not yet available. The Group has an arrangement in place so that members affected by the Lifetime Allowance can opt out of building up future pension benefits and receive a pension cash allowance instead. Additional information on this option will be made available to you if you are affected. The Group Pensions Department (contact details on page 3) can help with any queries you may have. However, please note we cannot provide financial advice and you are strongly recommended to seek independent financial advice before making any pension planning decisions. This factsheet should not be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this factsheet alone. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. What if the value of my pension benefit was higher than 1.25 million at 5 April 2014? Members whose pension savings exceed 1.25 million may be able to obtain a protected Lifetime Allowance, provided they apply to HMRC within the deadlines. Protection takes either or both of two forms. Fixed protection 2014 Members could personally register with HMRC for a Lifetime Allowance of 1.5 million. This is conditional on making no further pension savings in a tax-approved pension scheme after 5 April 2014, which would mean no further build up of benefits in any defined benefit arrangements past 5 April 2014 (other than the pension revaluation that applies to members with a deferred benefit) and no further contributions being paid to defined contribution arrangements. Registration for fixed protection 2014 ended on 5 April 2014. Individual protection 2014 HMRC have introduced a further form of protection that entitles members to a personalised Lifetime Allowance equal to the value of their pension rights as at 5 April 2014 up to an overall maximum of 1.5 million. For example, a member with pension savings of 1.3 million on 5 April 2014 who applies for individual protection will have a personalised Lifetime Allowance of 1.3 million. But if a member s pension savings exceed 1.5 million on 5 April 2014, their personalised Lifetime Allowance will be limited to 1.5 million. Unlike fixed protection, individual protection allows members to build up pension benefits and make pension contributions in future. The deadline for members to register for individual protection 2014 is 5 April 2017. This will give members time to gather the necessary pension benefit valuations to prove they qualify for protection. 5