Pension Services

Pension Tax Relief Limits

Implications to Higher Earners

USS

December 2012

Pension Services

Today’s Presenters

Fenella NeedhamUCL Pensions Manager

Gary O’NeillAustin Chapel Independent Financial Advisers

Pension Services

Agenda• Introduction & Background• Legislation & Scheme Rules update• Annual Allowance (AA) – how calculated• The impact of a large salary increase & Mechanisms / actions to

consider to remove or reduce a tax charge• Carry forward• USS Tax Relief options• Your responsibilities• USS’ responsibilities• How a tax charge can be paid• Will you need financial Advice• Further guidance & outcomes of today• Questions & Answers

Pension Services

Introduction & Background

• Recap of UCL activities: Presentations, communications

• Dedicated area on website – UCL & USS

• Why you’ve been invited today

• Awareness of evolving legislation and scheme rules’ changes

• Objective and outcomes of today’s presentation

Pension Services

Legislation & Scheme rules update

• Finance Act 2006 – A Day, 6th April 2006, Introduction of Annual

Allowance (AA) and Lifetime Allowance (LTA)

• Finance Act 2011- AA reduced to £50k (was £255k) from 6th April 2011- LTA reduced to £1.5m (was £1.8m) from 6th April 2012

• USS rules changed – 3 Tax Relief Options introduced to help manage the impact of an AA/LTA tax charge

• HM Treasury 2012 Autumn Statement – are the rumours true? Slides represent position at 12.29pm today!

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Annual Allowance (AA) – how calculated

The AA measures the increase in the value of a member’s benefits over the course of a 12 month period know as the Pension Input Period (PIP). For the purposes of calculating the AA, the USS PIP is from 1 April to 31 March and is the value of accrual using pensionable service and pensionable salary over the course of a PIP which is measured against the AA using a set formula. Figures produced by USS are calculated as follows:

• USS benefits only – excludes any benefits from another non-USS pension arrangement

• Monthly Added Year AVC contract – service counted in full during each PIP

• Money Purchase AVCs (Prudential) – contributions paid during the PIP

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Annual Allowance – where to start

• USS website – Tax Relief Limits– USS Online modeller

– Watch the video – Tax Overview of USS options

– Factsheets – Tax Relief Limits

– FAQs etc

– Options for mitigating a tax charge

• See handout

• Request for accurate calculations to UCL Pension Services: pensions@ucl.ac.uk

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The impact of a large salary increase

• Large salary increase during the PIP year at same employer or as a result of moving between 2 USS employers– Increases in pensionable salary result in a direct increase to the AA value,

as its based on all your service in USS at that point.

• Member would not normally exceed the AA limit and incur a charge

• All is not lost – various mechanisms/options to consider– Carry forward mechanisms– Review level of Money Purchase AVCs– Election for one of the 3 USS tax relief options– Pay the charge

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The influence of the USS Pensionable Salary

• Definition per the scheme rules

– This is your highest average salary worked out to a formula designed to get the best possible calculation – “smoothing out” any adverse ups and downs in your salary over the years, and making adjustments for price inflation.

Example: Your salary is determined for each period of 12 months of USS membership, over a maximum of 13 years previous to the date on which pensionable salary is to be calculated, each salary is revalued, except for the last 12 months, using the Retail Prices Index (RPI - The official “cost of living” index in the UK based on a monthly survey of the prices of a basket of goods and services) measure of inflation.

Your Pensionable Salary is whatever comes out best – either the highest revalued annual salary during the last 3 years or your highest revalued salary averaged across any 3 consecutive “best years” over the last 13 years.

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Application of a back-dated Pay Award

• Back-dated pay awards effective in a prior PIP tax year

– When a backdated salary award is paid to a member, it is taken into consideration for annual allowance purposes only in the year in which USS is notified of the award, ie the year it is awarded

– For the PIP prior to the one in which the award is notified, the opening and closing values are calculated based upon the original, lower salaries which were in place prior to the backdated award.

 – For the calculation of the opening value of the PIP in which the award is notified to

USS it is similarly ignored.  However for the calculation of the closing value, the backdated salary award is considered in full - ie the new, higher salary is treated as if it had been in place since the date it was backdated to.

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Carry Forward

• HMRC mechanism - A member can carry forward any un-used AA in the previous 3 years and use to off-set in the current year

• If an individual has an AA value of more than the current AA limit of £50K, 2011/2012 onwards, there may still NOT be a charge payable

• This may be the solution for many members who have unused

previous years’ allowances to reduce or remove a charge

• HMRC web – Annual Allowance guidance

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USS Money Purchase AVCs (Prudential)

• Contributions paid in a PIP year from April to March– Warning! The amount shown on Prudential Annual Statement, although

shows 31/03/XX, its actually March to February!– Warning! Extracting figure from payslip YTD amounts

• Paying large amounts or paid lump sum in March

• Consider reducing/suspending for the remainder of the PIP year

• Review position at start of new PIP year

• Contact Prudential directly 0845 0700 007

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Tax Relief Options

• USS rules changed – introduction of 3 options to help manage the impact of an AA/LTA charge

• Elections only permitted for those using it to remove/reduce a charge

• USS Factsheet, addendum to Tax Limits Factsheet

• Forms – send all Election Forms to UCL Pension Services

USS options to mitigate tax charges

Enhanced opting out

• FS members only• Retain life &

incapacity benefits• Cannot rejoin FS • Must rejoin CARE • Fixed Protection

election

Temporary cessation

• FS members only

• Max 6 months

• Retain life & incapacity benefits

• Auto rejoin on following 6th April

• Rejoin FS scheme

Salary cap

• Elect for deferred benefits

• Future service FS but with salary cap

Members’ responsibilities

• Personal taxation matter• Responsibility of the employee to manage their own allowances and

tax position• Provide the required notification to HMRC of a potential charge• Completion and submission of any HMRC Self Assessment Tax

Return (SATR)• UCL provide you information, where to find out what you need to know• Declare & Pay any AA charge• When you receive your Pension Savings Statement – check it!

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USS’ Responsibilities

• Statutory Deadline 6 October 2013• Calculations run across the USS membership• Full pensionable service & salary history• USS will provide a Pension Savings Statement for those whose AA

value in the current year exceeds the AA limit• For those cases, automatically produce 3 prior PIP years• Using Carry Forward and other mechanisms may result in there being

no tax charge payable

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How a Tax Charge can be paid

• Self Assessment Tax Return (SATR)– Values produced by USS modeller accepted by HMRC

– Under £2K will be expected to be paid immediately

– HMRC website – Information, deadlines etc

– Wait for HMRC to send you the invoice/bill to pay the charge

• Scheme Pays– USS website – Information, rates etc

– If charge £2K+ and is applicable to USS benefits

– Permanent reduction to benefits, and increases year by year to retirement

– Inform HMRC of this option

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Paying an AA Tax charge (AAC)

Date Your action Scheme action

Apr - Oct You may request an AA calculation Auto provide you with AA calculation + 3 years, if > AA

Oct - Jan Ask scheme of impact of reduction in benefits if you ask them to pay AAC

Decide whether to pay immediately the AAC or ask scheme to

Provide you with impact scenario(s)

Jan Send HMRC your SATR with option – Pay AAC

Jan - Jul Inform scheme you want them to pay AAC charge – make irrevocable election

confirming thisProcess irrevocable election

Dec Report to HMRC AAC to be paid – Pay AAC to HMRC

Jan + HMRC undertake compliance checks to match elections to payments – If no AAC paid then AAC reverts to you with demand for late payment

Life Time Allowance (LTA)

• Reduced to £1.5M from £1.8M with effect from 6 April 2012

• A limit on the total value of all pension benefits before any tax charge, value determined on a Benefit Crystallisation Event (BCE)

• Any excess over the LTA is subject to a tax recovery charge of 55% if taken as a lump sum, 25% (in addition to the ordinary marginal income tax rate) if taken as pension

• Some transitional Protection available – Primary (PP), Enhanced (EP) and Fixed (FP) - no longer able to apply for these

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Life Time Allowance – calculation

On a BCE, LTA equals total of :

1. USS Pension pa x 20

2. USS cash

3. Any pre-2006 pension pa already in payment x 20

4. Any lump sum received from a previous BCE

5. Fund value of any Defined Contribution (DB) schemes (personal/group pensions)

6. Fund value of any AVC, FSAVC or other registered pension plans

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Life Time Allowance – things to consider

• If you have any transitional protection, make sure you know the level of your protection and what actions are permitted to ensure cover is not lost

• USS website – Tax Relief Limits• Review levels of Money Purchase AVCs & non-USS benefits• Check the Pension Savings Statement issued by USS• Impact of a salary increase• If considering one of the USS tax relief limit options, know the effect

on the amount of pension at retirement• Review retirement plans – when & how• Seek Financial Advice!

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Will I need Financial Advice?

• Why do I need to seek Independent Financial Advice?

• Where do I find out details of Independent Financial Advisors (IFAs)?

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Independent Financial Advice – Why

• UCL Pension Services & USS can:– provide information about the scheme and your benefits– clarify technical issues/queries– direct you to where guidance / information is located

to enable you to make an informed decision about the options available / choices facing you

• but CAN NOT give financial advice

• Complex matters, difficult decisions to make, its natural you will want help in making a decision which is best for you

• You should seek advice as your net benefits, even after a potential tax charge, may be greater than the net cost of the contribution paid by you.

• Identify / discuss your retirement objectives

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Independent Financial Advice – Where

• USS worked closely with the Personal Finance Society (PFS)– List of IFAs on web

• Unbiased.co.uk – Use their search service, tick your requirements and receive details of advisers close to your home or office

• Alternative arrangements for the provision of advice may be provided your employer (as set out on USS web)

• Help from other organisations– BMA– Money Advice Service “Do you need a Financial Advisor?”

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Things to consider – Financial advice

• Over 16 years experience of advising Higher Education professionals.

• Provide a ‘financial advice in the workplace programme’ for Queen Mary, University of London and The University of Northampton

• Pre and post retirement advice for individuals in order to maximise pension benefits and mitigate taxation.

• Investment advice and management service which includes a review of existing investments held and also recommendation of suitable future investments.

• Individual meetings can be held at the work place or at your home.

Austin-ChapelIndependent Financial Advisers LLP

Further Information

• UCL Pension Services website: www.ucl.ac.uk/hr/pensions– Tax Relief Limits, Guidance Note, Contacts details

• USS website: www.uss.co.uk– Tax Relief Limits

• Austin Chapel Independent Financial Advisors – Gary O’Neill– gary.oneill@austin.chapel.co.uk Mobile: 07860 240855

• Prudential Retirement Education Consultant– Austin Brydon– austin.brydon@prudential .co.uk Mobile: 07824 522947

Pension Services

Outcomes of today’s presentation

• Good or better understanding of the AA/LTA

• How calculated & what factors influence the calculations

• Aware of your responsibilities & timescales

• Know where to locate information, who you should ask

• Know why you may need to seek independent advice

• What will be the 1st action you take after leaving this room?

• HM Treasury Autumn Statement – what’s changed!!!!

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QUESTIONS?????

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