Changes to the Annual Allowance & Lifetime Allowance

Craig MartinPension Manager

Annual allowance: Definition

Annual Allowance is the amount your pensions savings can increase in any one year

before you become liable to a tax charge

If you exceed in one year, can offset against unused allowances from previous three years

Any excess is charged at normal rate of tax

£50,000 limit, reducing to £40,000 from 1 April 2014

Date Annual Allowance

2006/07 215k

2007/08 225k

2008/09 235k

2009/10 245k

2010/11 255k

2011/12 50k

2012/13 50k

2013/14 50k

2014/15 40k

17

Pension/lump sum at 31 March 2013

Based on Final Pensionable Salary and Pensionable

Service at that date

Inflation (CPI) increase Pension/lump sum at 31 March 2014

Based on new Final Pensionable Salary and

Pensionable Service at that date

Start End

Pension ‘growth’ x 16

+ lump sum ‘growth’ + AVCs

=Annual “growth”

“Pension Input Period” (PIP)

Annual AllowanceHow does it work?

3

Example calculation of Annual Allowance…

Assumption: Pensionable pay is £60k for 2012/13 and £63k in 2013/14 15 years scheme membership and CPI is 3.1%

Opening balance 2012/13 £

Pre 08 pension p.a.Post 08 pension p.a.

10/80 x £60k 5/60 x £60k

7,5005,000

Pre 08 pension p.a.Post 08 pension p.a.

10/80 x £63k 6/60 x £63k

7,8756,300

Closing balance 2013/14 £

Add lump sum 10 x 3/80 x £60k

22,500

Total annual pension 12,500

Multiply annual pension by 16 200,000

222,500

Increase by inflation X 1.031

Opening value 229,397.50

The increase in the member’s benefits for 2013/14 is £251,425 - £229,397.50 = £22,027.50As this is less than £50k annual allowance, no tax charge due

Total annual pension 14,175

Add lump sum 10 x 3/80 x £63k

23,625

Multiply annual pension by 16 226,800

Add AVCs paid in year 1,000

Closing value 251,425

19

Example calculation of carry forward

Assumes increase in pension of £60k for 2013/14, exceeding the £50k limit by £10k

Year Increase in pension value

Annual Allowance

Unused relief Carry forward

2010/11 £50,000 £50,000 £0 £0

2011/12 £40,000 £50,000 £10,000 £10,000

2012/13 £22,027.50 £50,000 £27,972.50 £37,972.50

2013/14 £60,000.00 £50,000 £0 £27,972.50

Member exceeded Annual Allowance in 2013/14 by £10k

The member can now use the £37,972.50 unused relief to offset the £10,000

Leaves excess amount of £27,972.50 for 2014/15 onwards

20

What happens if I exceed the annual allowance?

If annual allowance charge is <£2,000

you will have to pay charge directly to HMRC

Taxed at normal rate of tax, e.g. 40%

If the annual allowance charge is >£2,000

can elect for the amount to paid by the Pension Fund (if the whole charge relates

to EAPF)

Pension Fund will actuarially reduce the value of your LGPS benefits accordingly

21

Considerations for you

Pension Fund will inform you if you exceed the annual allowance in a year

Changes to LGPS and Annual Allowance threshold:

Accrual rate of the LGPS increasing to 1/49th

Annual allowance threshold reducing to £40k

Impact depends on individual circumstances including:

pay growth and

length of service and

AVCs

Potential options?

22

Lifetime Allowance: Definition

Lifetime Allowance is the total value of all your LGPS and any other pension

benefits that you may have accrued, and any excess over and above the threshold is

taxed

Date LifetimeAllowance

2006/07 1.5m

2007/08 1.6m

2008/09 1.65m

2009/10 1.75m

2010/11 1.8m

2011/12 1.8m

2012/13 1.5m

2013/14 1.5m

2014/15 1.25m 23

Lifetime allowance: How does it work?

Assessed when pension benefits come into payment

20 x Annual Pension; plus

Any Lump Sum payable; plus

Value of AVC Fund (if applicable)

Compare with current Lifetime Allowance

Anything above the LTA limits will be taxed at special rates

24

Example calculation of LTA

Assumes pension of £50,000 and a lump sum of £112,500 at retirement

(Factor of 20 x pension) + lump sum

(20 x £50,000) + £112,500 = £1,112,500

£1,112,500 / £1,250,000 x 100 = 90% of LTA

Pension benefits are less than both current and new LTA threshold

No lifetime allowance tax due upon retirement

25

New LTA protections: Fixed protection and Individual protection

Background and existing LTA protections

Fixed protection 2014

Have to apply before 5 April 2014

Protected LTA of £1.5 million regardless of current level of benefits

Not permitted if you have primary protection

No further benefits can accrue from April 2014 (only CPI increase)

Individual protection 2014

You can apply if the value of your benefits are over £1.25 million on 5 April 2014

You do not have primary protection

You can continue to accrue benefits and protect benefits up to £1.5 million

Legislation will not be in place until August 2014 but backdated to April 2014

Individuals will have until 5 April 2017 to apply 26

What should I do?

Protection Deadline for registration

Notes

Fixed Protection 5 April 2014 Protects benefits up to £1.5m but no further accrual allowed

Individual Protection 5 April 2017 Only apply if benefits are over £1.25m on 5 April 2014 and you do not have Primary Protection

You can register for both forms of protections if you qualify

What should I do?

Pension Fund will contact you if you qualify for FP14 or IP14 to discuss your options

The Pension Fund can provide further information relating to your EAPF benefits but will not be able to give you individual advice

HMRC has published a Q&A entitled Pension Restriction on tax relief and you can access this from www.hmrc.gov.uk/pensionschemes

27

Any questions?

www.eapf.org.uk