Capgemini UK plc - Pensions Briefing Important tax changes to pensions from 6 April 2016

Transcription

1 July 2016 Capgemini UK plc - Pensions Briefing Important tax changes to pensions from 6 April 2016 Changes to the rules governing how pensions are taxed were introduced from 6 April This notice is to remind you of these changes and any action that may be required from you. It is important you read this briefing to understand whether you are likely to be affected by the tax changes. If you think you will be affected, you should consider whether you need to take any action. Please note this briefing is intended to give a high-level summary of the tax changes. As the changes are wide-ranging and affect individuals differently, it is not intended to cover every eventuality that may arise. It is recommended that you consider taking independent specialist advice should you have any specific questions or concerns about your own position. Two major changes to the taxation of pensions have been announced 1. The Lifetime Allowance What is the Lifetime Allowance? The Lifetime Allowance (LTA) is the amount of savings you can take from all your pension schemes combined without facing a tax charge. The LTA is currently 1 million, having reduced from 1.25 million with effect from 6 April The LTA is due to be increased from 6 April 2018 onwards in line with inflation, as measured by the Consumer Prices Index (CPI). To calculate the value of your pension savings, you need to add up the value of: Your pension benefits with Capgemini; Any pension benefits from previous employers; Any private pensions such as personal pensions or stakeholder pensions; and Any pensions you are currently receiving. It is important to note that even if the value of your pension with Capgemini is not currently close to the LTA limit, the impact of future contributions and investment growth may put you close to or over the limit. How is the LTA calculated? The LTA is the sum of: 1. any defined benefit pensions multiplied by 20; 2. any cash lump sums; and 3. any defined contribution funds Two illustrative examples of how these calculations work are shown in Appendix 1.

2 What happens if I exceed the LTA? Any excess amount over the LTA will be subject to a tax charge. The tax charge will be: 55% if you take any amount in excess of the LTA as a cash sum; or 25% if you take any amount in excess of the LTA in pension form. You would then pay further tax on the pension in line with standard PAYE at the marginal rate of tax that applies to you at the time. What can I do if I am affected or might be affected? From 28 July 2016 you will be able to apply to HMRC for one of two new protections, in order to protect the value of your benefits at a higher level than 1 million. How these protections will work and whether such protection is worth applying for is an individual matter based on your own personal circumstances, and so you are advised to take specialist advice. In brief, the protections will be: 1. Individual Protection 2016: this will allow you to protect the value of benefits at 5 April 2016 so long as these have a value of more than 1m. The maximum value you will be able to protect is 1.25m. You will be able to apply online for Individual Protection 2016 from the end of July HMRC has indicated there is no deadline date by which such an application has to be made, although you would need to have confirmation from HMRC before you draw your retirement benefits. 2. Fixed Protection 2016: this will allow you to keep a limit of 1.25m so long as you have made no pension contributions after 5 April This may be suitable for example if your benefits are currently below 1m but you anticipate their value to be more than 1m when you retire. Note: If you (or Capgemini) have paid contributions since 6 April 2016, this form of protection will not be possible. Note: if you think the value of your benefits might have exceeded 1.25m on 5 April 2014, you can still apply to protect your LTA amount between 1.25m and 1.5m. The deadline for online applications to protect at more than 1.25m with HMRC expires on 5 April Can my Capgemini pension scheme pay the tax on my behalf if I exceed the LTA? Under certain circumstances, you can request the scheme to pay any tax on your behalf. If you request to do this, your Capgemini pension benefits will be reduced by the amount of tax you need to pay. Further details on this can be made available to you if you are affected and elect this option. Further information Apart from seeking your own advice, you may contact the specialist pensions helpline operated by our pension advisers, Xafinity Consulting at: Capgemini.LTA@xafinityconsulting.com. Our advisers can assist you with general questions and guidance about your position but are not able to provide any personal advice. Further online information on the LTA is also provided by HMRC in Pension schemes newsletter 72: Pension Schemes Newsletter 72.

3 Annual Allowance ( ) 2. The Annual Allowance The Annual Allowance is the maximum value of pension savings you can build up each year subject to receiving tax relief at your highest marginal rate. The current Annual Allowance is 40,000 but from 6 April 2016 for those individuals who are deemed to have high incomes it is tapering down to as little as 10,000. The definition of income is, unfortunately, very complicated. It is important to note that, in a change from previous regimes, income for this purpose must include any income in addition to that derived from your employment at Capgemini. Such income could be from property, rents, personal savings and investments plus any income from any other source. Unlike the Lifetime Allowance (LTA) above, which is a test applying when you draw your benefits, the Annual Allowance (AA) applies each year. From April 2016 it will apply purely to income received in a tax year. Who will be affected definition of high income? Your Annual Allowance will be reduced from the current 40,000 if both of the following apply: 1. Your Threshold Income is over 110,000; and 2. Your Adjusted Income (which includes the value of your pension savings) is over 150,000. Threshold Income for these purposes is effectively your full taxable income less the value of your pension contributions. It therefore takes account of your full Capgemini Reference Salary, any Flex Uplift not used to purchase a Flex benefit, any P11D benefits such as medical benefits and car allowance, and any bonuses. As mentioned above, it also includes any income from any other source e.g. property, rents, or income from personal savings and investments. Adjusted Income equals your Threshold Income plus the value of your own and Capgemini s pension contributions over the year. If you meet both of the criteria above, your Annual Allowance will be reduced by 1 for every 2 that Adjusted Income exceeds 150,000, down to a minimum of 10,000 for Adjusted Income of 210,000 and over. The position at a range of income levels is summarised in the chart below: Reduction in Annual Allowance for Adjusted Income over 150,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, , , , , , , , , , , ,000 Adjusted Income = Income plus pension contributions ( )

4 What happens if I exceed the AA? If you exceed the AA you will have to pay tax at your highest marginal rate on the excess. For most high earners, this means the tax charge will be at 45% of the excess amount. So, if your reduced Annual Allowance is say 10,000 and you have exceeded this by 15,000, you would expect to pay additional tax of 45% x 15,000 = 6,750. Example of how the tapered AA will affect your tax position An example of how your Adjusted Income is built up and how the reduced AA may affect you is set out in Appendix 2. Appendix 2 also includes a list of the main questions that we expect affected individuals will wish to consider or raise with their advisers. Can my Capgemini pension scheme pay the tax on my behalf if I exceed the AA? Under certain circumstances, you can request the scheme to pay any tax on your behalf. If you request to do this, your Capgemini pension benefits will be reduced by the amount of tax you need to pay. Further details on this can be made available to you if you are affected and elect this option. Do I need to do anything now? You may be able to mitigate any tax charge, either fully or partially, if you have unused carry forward from earlier years. As such, the most immediate action most individuals are likely to consider is to take advantage of carry forward of any unused Annual Allowance from the previous 3 tax years. This is described further below. Carry forward of unused Annual Allowance You will be able to carry forward any unused tax relief from the 3 previous tax years as follows: Year Annual Allowance for the year 2013/ , / , /2016* 40,000* *In addition, in advance of the AA tapering changes introduced from April 2016, transitional rules were brought in from 9 July 2015 (the date of the summer Budget). As a result, you may have an opportunity to build up more than 40,000 of pension savings for 2015/16. Individuals will need to be aware that maximising tax relief will increase the value of overall pension benefits, which may then increase the risk of breaching the Lifetime Allowance. Further information Apart from seeking your own advice, you may contact the specialist pensions helpline operated by our pension advisers, Xafinity Consulting at: Capgemini.LTA@xafinityconsulting.com. Our advisers can assist you with general questions and guidance about your position but are not able to provide any personal advice.

5 Further online information on the AA and the new tapering is also provided by HMRC in Pension schemes newsletter 73: Pension schemes newsletter 73 - October 2015 and Pension schemes newsletter 75 - January GOV.UK Are any further changes to pension tax likely? In 2015, the Government launched a review of the current structure of pension tax-relief entitled Strengthening the incentive to save. It was anticipated that the outcome of this review would be announced as part of the Chancellor s Budget in March In the event, just before the Budget the Government decided not to proceed with the review, and we are not currently aware of any plans for this review to be revisited. July 2016

6 Appendix 1 Examples of Lifetime Allowance (LTA) calculation Example 1 John is aged 55 and is looking to retire at age 60. He has: 1. a pension of 25,000 a year shown on his recent Capgemini benefit statement 2. a defined benefit pension of 5,000 a year from a previous employer 3. Defined contribution funds of 150,000 with Capgemini 4. Defined contribution funds of 80,000 from previous employers/personal arrangements 5. Contributions of around 6,000 a year being paid into Capgemini s Defined Contribution arrangement: this amount will increase in future in line with earnings growth. John is looking to estimate what his LTA may be at age 60. First of all, John has to estimate what the size of his pensions and fund values will be at age 60. This cannot be known for certain as it depends on future increases to his defined benefit pension, and future investment returns on his DC funds. Assuming 2% inflation and 5% fund growth, John estimates as follows: Source of pension benefits Amount now (age 55) Estimated amounts at age 60 (a) LTA valuation factor (b) LTA value (a) x (b) 1) Capgemini pension 25,000pa 27,600 x20 552,000 2) Previous employer s pension 5,000pa 5,500 x20 110,000 3) Current Capgemini funds 150, ,000 x1 191,000 4) Funds from previous employer 80, ,000 x1 102,000 5) Future Capgemini fund 0 35,000 x1 35,000 Total 990,000 John calculates on these assumptions that he will be close to the LTA, but unlikely to exceed it. He notes that: If investment returns are greater than 5%, his DC funds could potentially be much higher; If inflation is higher than 2%, the value of his DB benefits will be higher than assumed; If he retires later than 60 his LTA value is likely to be higher Example 2 Paula is aged 59 and is looking to retire at age 65 in She has a current defined benefit pension of 40,000 a year with Capgemini and has defined contribution benefits with Capgemini of 150,000. She transferred all benefits from previous employers into Capgemini and so has no other pension arrangements. Currently, contributions of 6,000 a year are being paid into Capgemini s Defined Contribution arrangement Source of pension benefits Amount now Estimate at LTA factor LTA value (age 59) age 65 1) Capgemini defined benefit pension 40,000pa 46,000pa x20 920,000 2) Current Capgemini funds 150, ,000 x1 211,000 3) Future Capgemini fund 0 55,000 x1 55,000 Total 1,186,000 Paula calculates based on these assumptions that she will exceed the LTA by around 100,000 if she retires at age 65 (assuming 2% inflation from 2018, the LTA would be c 1.08m), giving rise to a tax charge of around 55,000. She decides to speak to a financial adviser so that she can consider her options, including any way to mitigate the tax charges.

7 Example Example of Annual Allowance calculation Appendix 2 Thomas is aged 45 and is a member of the Defined Contribution Section of the Capgemini UK Pension Plan. He has income as follows: A. Reference Salary 150,000, but reduced by 3% due to 3% member pension contribution being paid by Capgemini as part of a salary sacrifice arrangement; B. Bonuses and/or income from other sources ranging from 20,000 to 100,000; C. Benefits in kind/p11d benefits of 10,000; D. Total pension contributions of 13% (notional 3% member plus 10% Capgemini). We consider the position if Thomas is paying either a) no additional contributions or b) 20,000pa of voluntary contributions. The table below shows the additional tax that would be due in each of the scenarios mentioned: * e.g. Property rental, share options, interest on savings, external directorships ** if no carry forward Based on this information, some of Thomas s immediate questions are: 1. Can or should I make use of the 3-year carry forward provisions? 2. Can or should I make use of the special transitional provisions for 2015/2016? 3. If I use the carry forward provisions does this mean I am just more likely to breach the Lifetime Allowance problem sooner? 4. How can I estimate my AA position in advance when I don t know what my bonus will be or when it will be paid? 5. Should I continue to pay AVCs? 6. Since the AA is likely to affect me each year, is it worth me even staying in the pension plan? 7. What happens if I come out of the pension plan? 8. Who confirms what amount of tax I need to pay? 9. How do I pay the tax? 10. When do I need to pay it by? 11. Can the pension plan pay the tax on my behalf? 12. What information will the pension plan give me to help me? 13. Where can I get further advice from?