As part of the Government’s deficit reduction plans, new legislation in the Finance Act 2011, has been introduced, changing the restrictions on the tax relief individuals can receive from their pensions.
What are the changes?What is a pension input period?
What happens if my pension savings exceed the annual allowance?
What are the carry forward rules?
Are there any exemptions from the annual allowance?
Example illustrations for members - Will the reduced annual allowance affect me?
If my savings exceed the annual allowance what do I do?
What information will NILGOSC send me?
The main
changes to the current rules are as follows:
· The
annual allowance for the tax years 2011/2012 onwards will be reduced to £50,000.
· The
annual allowance tax charge, payable on any pension savings accrued in excess
of the annual allowance, will be linked to the individual’s marginal tax rate.
· Any
unused annual allowance from the previous three tax years can be carried
forward, so long as the individual was a member of a registered pension scheme
in those years.
· A
valuation factor of 16 will be used to calculate the value of a scheme member’s
pension savings.
· The
annual allowance test will apply in the year that a member retires.
· The
opening value of a member’s pension rights will be subject to revaluation
(CPI).
· From
April 2012 the lifetime allowance (LTA) will be reduced from £1.8 million to
£1.5 million.
There are no limits to the amount an individual can save in a registered pension scheme. However there is an overall limit on the total annual amount of pension savings that an individual can have with tax relief. This is known as an annual allowance (AA).
Pension
savings is the term used to describe the growth of an individual’s pension
benefits in a year. To measure this growth
the opening value of an individual’s pension benefits at the start of the year,
revalued in line with inflation, is deducted from the closing value at the end
of the year. If additional voluntary
contributions (AVCs) have also been paid during the year, the amount of
contributions paid is added to the growth in the pension benefits to get the
total pension savings for the year. This
is known as the pension input amount (PIA).
To check the
value of an individual’s benefits in the Local Government Pension Scheme
(Northern Ireland) (LGPS (NI)) against the annual allowance the annual pension
is multiplied by a flat factor of 16.
A detailed annual allowance illustration is set out below.
The
calculation illustrates the annual allowance used for an LGPS (NI) member with
30 years pensionable service as at 31 March 2011.
The pensionable pay for the year
2010/11 is £76,500 and no pay increase is due for 2012.
They have
also paid 50% of their salary into the Scheme's AVC arrangement.
| Opening value of pension benefits at the start of the pension input period, i.e. 31/03/2011 | |
| Annual pension = 1/80 x 28 x £76,500 PLUS 1/60 x 2 x £76,500 = | £29,325 |
| Multiply annual pension by flat factor of 16 = £29,325 x 16 = | £469,200 |
| Plus lump sum (3/80 x 28 x £76,500) = | £80,325 |
| £549,525 | |
| Increase by CPI of 3.1% = £549,525 x 1.031 = £566,560.27 | |
| Opening value is £566,560.27 | |
| Closing value of pension benefits at the end of the pension input period, i.e. 31/03/2012 | |
| Annual pension = 1/80 x 28 x £76,500 PLUS 1/60 x 3 x £76,500 = | £30,600 |
| Multiply annual pension by flat factor of 16 = £30,600 x 16 = | £489,600 |
| Plus lump sum (3/80 x 28 x £76,500) = | £80,325 |
| £569,925 | |
| Closing value is £569,925 | |
The pension savings amount for the
LGPS (NI) is the closing value less the opening value = £569,925 – £566,560.27
= £3364.73
Pension savings amount for AVC
arrangement
50% x £76,500
= £38,250
Pension savings amount for AVC is
simply £38,250
Total pension savings amount for
2011/12
Add together
the pension savings amounts from the LGPS (NI) and the AVC:
£3,364.73 +
£38,250 = £41,614.73
The total pension savings amount is
£41,614.73.
This is less than the £50,000 annual allowance
so no charge arises.
The pension input period (PIP) is a 12 month period over which the increase in pension savings is tested. For members of the Local Government Pension Scheme (NI) the pension input period is 1 April to 31 March.
If the level of pension savings during the pension input period exceeds the annual allowance, and there is no available unused annual allowance from the previous three tax years, a tax charge will be applied to the excess. The rate of the annual allowance tax charge will be subject to the individual’s marginal tax rate. The marginal tax rate is the income tax rate which would apply if the excess pension savings over the annual allowance were additional earnings on top of the individual’s taxable income.
· An
individual can only carry forward unused annual allowance from any year during
which they were a member of a registered pension scheme.
· The
amount of any unused annual allowance for the years 2008-09, 2009-10 and
2010-11 should be calculated by applying the rules for 2011-12, i.e. assuming
the annual allowance is £50,000 and increasing the opening value of the pension
rights in line with the Consumer Price Index (CPI). (See Example 1)
· You
can only carry forward unused annual allowance to 2011-12 if it has not been
used up in a previous year. (See Example 2)
Example
1
The
pension input amounts for Member A for the last three tax years are as follows:
|
Tax Year |
Pension Input Amount |
Unused Annual Allowance |
|
2008-09 |
£20,000 |
£30,000 |
|
2009-10 |
£15,000 |
£35,000 |
|
2010-11 |
£17,000 |
£33,000 |
The
total unused annual allowance to carry forward to 2011-12 is £98,000.
Example 2
The
pension input amounts for Member B for the last three tax years are as follows:
|
Tax Year |
Pension Input Amount |
Unused Annual Allowance |
|
2008-09 |
£40,000 |
£10,000 |
|
2009-10 |
£70,000 |
NIL |
|
2010-11 |
£40,000 |
£10,000 |
The total unused annual allowance to carry forward to 2011-12 is the £10,000 from 2010-2011 only. This is because the £10,000 unused in 2008-09 would have been used up in 2009-10, as the pension input amount exceeded the annual allowance by over £10,000.
The annual
allowance test will not be carried out in the following circumstances:
· When
benefits are payable as a result of death.
· If
the reason for retirement is due to serious ill health, i.e. with a life
expectancy of less than 12 months. (Currently not applicable in LGPS(NI))
· When
pension increases are applied to deferred benefits.
· When
a transfers of pension rights takes place between registered pension schemes.
To
help members understand how the reduced annual allowance might affect them, we
have provided some example illustrations in the table below. The illustrations have been calculated at the
first relevant year of the new tax rules, i.e.
2011/2012, on the following scenarios;
Case
1 - Job Evaluation
Member A is
employed as a Cleansing Operative in the City Council. He has been a member of the scheme for 7
years and has now received a significant increase in his pensionable pay due to
a job evaluation.
Case
2 – High Earner with long scheme service
Member
B is employed as a Chief Executive of an Education & Library Board. He joined the scheme in 1970 and receives an
annual increment to his pensionable pay.
Case
3 – Ill health retirement with Tier 1 enhancement
Member C is employed as a Clerical Officer in a Housing Association. She is 33 years of age and has recently been granted ill health retirement with enhancement to age 65.
Case
4 – Retirement on redundancy with augmented service
Member D is employed as a Bursar with a Grammar School and is taking early retirement on the grounds of redundancy. She has been a member of the scheme for 25 years and her employer has awarded an additional 5 years augmented service on leaving.
Results:
Case 1 - Job Evaluation
Even with a
38% rise in pay, the total pension savings for the year is less than the Annual
Allowance of £50,000 and therefore no tax charge is payable.
Case 2 – High Earner with long scheme
service
The total
pension savings in the year is less the Annual Allowance of £50,000 and
therefore no tax charge is payable
Case 3 – Ill health retirement with
Tier 1 enhancement
The pension
savings exceeds the annual allowance for the year by £168,848.40. However, this member has pension savings of
less than £7,000 in the years prior to ill health retirement and she can
therefore carry forward the unused annual allowance in excess of £129,000 from
the previous three tax years. The resulting excess is therefore now in the
region of £39,000 and it is this amount that would be subject to the tax
charges.
Case 4 – Retirement on redundancy with
augmented service
The pension
savings exceeds the annual allowance for the year by £18,718.53. However, this member’s pension savings in the
previous year was £20,000 so she can therefore carry forward the £30k unused
annual allowance from the previous tax year to avoid the tax charges.
Please note that no account has been taken of any Additional Voluntary Contributions (AVCs) paid in the above examples. Individuals should note that the value of any AVCs, paid to our in-house AVC provider or any other free standing arrangement, will be added to the total value of pension savings to test against the £50,000 annual allowance.
The lifetime
allowance is a limit on the total amount of pension benefits that an individual
can accrue over his or her lifetime without incurring an extra tax charge. It applies to the pensions benefits accrued in
all registered pension schemes.
A check is
carried out against the lifetime allowance each time a benefit crystallisation
event (BCE) occurs, for example when retirement benefits are paid or when a
member dies. To test the value of an individual’s
pension against the lifetime allowance a valuation factor of 20 is applied to
the annual amount to provide a capital value.
If the
capital value of an individual’s pension benefits exceeds the lifetime
allowance a tax charge will be payable at a rate of 25% on the pension and 55% on
the lump sum payments.
The lifetime allowance is currently £1.8 million but this will be reduced to £1.5 million from April 2012.
If you think
that you may be affected by any of these changes you should contact your own
tax adviser or an Independent Financial Adviser.
NILGOSC staff are not permitted to give advice, but if you have any queries in relation to the calculations or procedures please contact our offices for assistance.
The HMRC website provides a more extensive list of questions and answers on the reduced annual allowance at: www.hmrc.gov.uk/pensionschemes/annual-allowance/reduced.htm
Firstly, if
your total pension savings for the year do not exceed the annual allowance you
do not need to inform HMRC. Also, if
your pension savings for the year do exceed the annual allowance you must check
if you have unused annual allowance from the previous three tax years. If your pension savings for the year do not
exceed the total annual allowance now available you do not need to inform HMRC.
However, if your total pension savings for the year and any unused from the previous three tax years, do exceed the annual allowance you must inform HMRC of the amount by which your pensions savings have exceeded the annual allowance.
If your savings have exceeded the annual allowance you will be liable to pay the appropriate tax charge. It is your responsibility to pay the tax charge and you can do this by completing a Self Assessment tax return. If you do not normally complete a Self Assessment tax return you should inform HMRC that you now need to complete a tax return.
If requested,
NILGOSC will provide a ‘pension savings statement’ to a member of the scheme by
the later of 6 October following the end of the relevant tax year or three months
after receiving the request. The
statement will provide details of the pension savings in the previous pension
input period.
This will be a mandatory requirement for those who exceed the annual allowance from April 2013. Therefore NILGOSC will provide all active members of the scheme who have triggered an annual allowance charge with a statement of his or her pension savings for 2012-2013 by 6 October 2013. Please note that NILGOSC can only provide information on pension savings within the Local Government Pension Scheme (NI).
Individuals
who are liable to pay a tax charge can do this by completing a Self Assessment
tax return. If the amount due is less
than £2,000 the charge is payable from his or her current income.
If the tax
charge is greater than £2,000 individuals will have the option to meet this
charge from their pension benefits. If
this option is taken the tax charge will be paid by the scheme at the point it
arises and the pension benefits will be adjusted accordingly. Individuals must make this irrevocable
election at the point of completing their self assessment tax return.
If an individual
is liable to a tax charge in the year of retirement, the election to meet the
charge from their pension benefits must be made before the benefits are paid.
Possible methods for making the adjustment to individual’s pension benefits are still being discussed with the idea of adapting a single approach within all public sector pension schemes.