Pension tax changes and what they mean for you

Transcription

1 Pension tax changes and what they mean for you Aon Hewitt February 2016

2 Introduction We spoke to you in November 2015 about the changes to pensions taxation happening in April 2016: o The Lifetime Allowance is reducing from 1.25 million to 1 million for everyone from 6 April 2016 o The Annual Allowance is reducing if you have Adjusted Income of 150,000 or more, from 40,000 to a minimum of 10,000 from 6 April 2016 The purpose of these sessions is to go into further detail on the changes to the Lifetime Allowance and the options available to you. We will also talk to you about what the bank is doing in respect of the changes to the Annual Allowance for those who may be impacted. Note the Government is currently consulting on future pensions taxation with its response expected on Budget day (16 March 2016). It is therefore not possible at this time to take account of any changes arising from this consultation. 2

3 Changes to the Lifetime Allowance Do you need to make use of Protection options? 3

4 Lifetime Allowance a reminder Lifetime Allowance (LTA) Total value of pension savings you can build up tax-efficiently in your working lifetime Reducing from 1.25 million to 1 million from April 2016 From 2018 it is set to start increasing again If your pension savings exceed the LTA: o charged 55% tax if you take the excess savings as a lump sum, and o 25% tax if you take them as income (although the income will still be liable for income tax) Protection options will allow members to maintain an LTA of 1.25 million but this may restrict the ability to make future retirement savings LTA 4

5 The value of your pension savings for the Lifetime Allowance Pension savings over your lifetime LTA Defined Contribution members Face value of your pension savings at retirement Defined Benefits members Lump sums are taken at face value at retirement Any pension at retirement is multiplied by 20 to calculate its value To estimate defined contribution savings at retirement, it will be necessary to make an assumption about future contributions and future investment returns. For defined benefit pension, there are also a number of assumptions which need to be made (e.g. future inflation and possibly early retirement reduction factors). 5

6 Lifetime Allowance the changes at a glance Currently 1.25 million but reducing to 1 million from 6 April 2016 Increasing in line with CPI from April ,750,000 Lifetime Allowance 1.5m in ,500,000 1,250,000 1,000, , , , Tax year Actual Projected (2% a year) 6

7 Testing your pension savings against the Lifetime Allowance Steven has asked the administrators of the Plan to provide him with information on his pension savings at 30 April 2017, when he is intending to retire. At that date he estimates that he will have 1.1 million in his DC pension and has no DB benefits. If Steven were to retire at 30 April 2017: The Lifetime Allowance would be 1 million o 1 million would be within the Lifetime Allowance, and his benefits would be subject to standard pension taxation treatment (25% tax free lump sum and income charged at his marginal rate of income tax) o 100,000 would be over the Lifetime Allowance and subject to a Lifetime Allowance tax charge If he takes this as a lump sum he would receive 45,000 (55% tax charge) If he takes this as income, there would be an immediate 25% tax charge and subsequent income payments would be subject to income tax If your benefits are likely to be impacted by the Lifetime Allowance, there are certain options available to you. 7

8 Protections available Two new forms of Protection will be available o Fixed Protection 2016 o Individual Protection 2016 Note that you can also still apply for Individual Protection 2014 until 5 April 2017 if you satisfy certain requirements (in particular, if you had pension benefits worth 1.25 million or more as at 5 April 2014) IMPORTANT! If the standard LTA is greater than the protected LTA under either form of protection, you automatically revert to having the standard LTA. 8

9 Fixed Protection 2016 FP 2016 Fixes LTA at 1.25 million Members must not have relevant benefit accrual on or after 6 April 2016 effectively must become a deferred member Only available if member does not have Primary Protection, Enhanced Protection or previous Fixed Protections Example Meet Rishab Rishab s pension savings are 1.1 million at 5 April 2016 If he applies for Fixed Protection 2016 then his LTA would be fixed at 1.25 million when he retires* However, Rishab would need to opt out of relevant benefit accrual If at the point he draws his pension savings, they are worth over 1.25 million, then any pension savings in excess of 1.25 million would be subject to the additional Lifetime Allowance tax charge outlined previously * if the Standard LTA is higher then this applies 9

10 Fixed Protection how you would be tested against the LTA Caroline is considering if she should apply for Fixed Protection: The value of her DC pension at 5 April 2016 = 0.9 million She intends to retire in 5 years time She is expecting to earn an investment return of about 5% p.a. Caroline is a 40% income tax payer Caroline can only apply for Fixed Protection 2016 and not Individual Protection If she opts out of accrual and applies for Fixed Protection 2016: In 5 years time the value of her pension savings is 1.15 million (assuming 5% p.a.) Her personal Lifetime Allowance = max { 1.25 million (FP), 1.08 million (expected Lifetime Allowance) } = 1.25 million Because Caroline has applied for Fixed Protection 2016 her LTA charge = Nil Had she not applied for Fixed Protection 2016, her pension savings would have been 70,000 in excess of the Lifetime Allowance. Applying for Fixed Protection 2016 has saved her about 17,

11 Individual Protection 2016 IP 2016 Available to members whose pension savings at 5 April 2016 are valued at 1 million or above Provides Individual LTA equal to value of pension savings at 5 April 2016, up to a maximum of 1.25 million Members allowed to build up pension savings after 5 April 2016 * if the Standard LTA is higher then this applies Example meet Sarah Sarah s pension savings at 5 April 2016 are 1.1 million. If she applies for Individual Protection 2016 then her LTA would be fixed at 1.1 million when she retires (value of her pension savings at 5 April 2016)* Sarah can continue to build up pension savings At the point Sarah draws her pension savings, anything over 1.1 million would be subject to the additional Lifetime Allowance tax charge outlined previously (including her pension savings arising from the period after 5 April 2016) 11

12 Example for member who can apply for both protections Colin is considering which protection he should apply for: The value of his DC pension at 5 April 2016 = 1.1 million He intends to retire in 5 years time He is expecting to earn gross investment returns of about 5% p.a. on his pension savings The bank contributes 12% of his Plan Salary of 150,000 He is eligible to apply for both Individual Protection 2016 and Fixed Protection

13 Fixed Protection how you would be tested against the LTA If Colin applies for Fixed Protection 2016: Colin would fix his LTA at retirement to be 1.25 million (or the standard LTA if this is higher) Colin would need to opt out of pension accrual and his pension contributions would cease from 5 April 2016 In 5 years time the value of his pension savings is 1.4 million His personal Lifetime Allowance = max { 1.25 million (FP), 1.08 million (SLTA) } = 1.25 million His pension savings will exceed the Lifetime Allowance by 0.15 million He would also receive additional salary in lieu of his pension contribution of about 8.5K p.a. (allowing for 45% tax pre-retirement and national insurance) At retirement: 1.25 million of his pension savings would be within the Lifetime Allowance His pension savings between 1.25 million and 1.40 million would be in excess of the Lifetime Allowance and would be subject to a Lifetime Allowance tax charge He would have received 8.5K p.a. salary in lieu of pension contributions for five years 13

14 Individual Protection how you would be tested against the LTA If Colin applies for Individual Protection 2016: At 5 April 2016 the value of his pension savings is 1.1 million so his individual LTA is 1.1 million (or the standard LTA if this is higher) He would continue to receive pension contributions from the bank In 5 years time the value of his pension savings is 1.5 million ( 1.1 million pension savings at 5 April 2016 plus pension savings between 2016 and retirement) His personal Lifetime Allowance = max { 1.1 million (IP), 1.08 million (SLTA) } = 1.10 million His pension savings will exceed the Lifetime Allowance by 0.4 million At retirement he would get: 1.1 million of his pension savings would be within the Lifetime Allowance His pension savings between 1.1 million and 1.5 million would be in excess of the Lifetime Allowance and would be subject to a Lifetime Allowance tax charge Comparison with Fixed Protection 2016: Pension savings at retirement are bigger His personal Lifetime Allowance is lower There is no salary in lieu of pension contributions 14

15 Fixed Protection 2016 summary of benefits (excess of LTA lump sum) Net salary in lieu of pensions: 45K Gross pension savings: 1.4 million Pension savings within the LTA: 1.25 million Excess over LTA: 0.15 million 75% pension income liable to income tax: 937.5K At retirement: Lump sum from pension savings: 380K Residual pension savings available for pension income: 937.5K Net salary in lieu of pensions (assume invested at 3.5% p.a. to allow for income and capital gains tax): 45K Note: the results are dependent on the underlying choice of assumptions, you and your advisor would need to assess what is appropriate for your circumstances. 25% tax-free lump sum 312.5K Excess over LTA lump sum 67.5K Excess over LTA tax charge: 82.5K 15

16 Individual Protection 2016 summary of benefits (excess of LTA lump sum) Net salary in lieu of pensions: nil Gross pension savings: 1.5million Pension savings within the LTA: 1.1 million Excess over LTA: 0.4 million 75% pension income liable to income tax: 825K At retirement: Lump sum from pension savings: 455K Residual pension savings available for pension income: 825K Net salary in lieu of pensions: nil Note: the results are dependent on the underlying choice of assumptions, you and your advisor would need to assess what is appropriate for your circumstances. 25% tax free lump sum 275K Excess over LTA lump sum 180K Excess over LTA tax charge: 220K 16

17 Differences between Individual Protection and Fixed Protection 2016 Fixed Protection 2016 Individual Protection 2016 Lump sum (net of any tax) Pension savings (liable for income tax) 425K 455K 937.5K 825K On the assumptions adopted, Fixed Protection 2016 provides 30K less lump sum but 112.5K more taxable pension savings. What is more tax efficient over funding the LTA or additional salary? o It depends! o If no Annual Allowance taxes (see later), it is as follows Individual Protection - pension savings in excess of the LTA gross investment returns but 55% tax upon drawing savings Fixed Protection - salary in lieu of pension contributions income tax and national insurance (including employer) upon receipt (could be a maximum of 53% tax) but unlikely to be able to earn gross investment return. 17

18 Considerations for choosing protection and which type of protection Are your pension savings over 1.25 million now and you do not have protection? Are your pension savings expected to be over 1 million at retirement? When are you likely to retire? If you have substantial pension savings and do not have protection, you may need financial advice to help you decide which type of protection is more appropriate 18

19 Summary - Fixed Protection 2016 & Individual Protections 2014 and 2016 Fixed Protection 2016 Individual Protection 2016 Individual Protection 2014 Eligibility Member must not have any current protection arrangements in place other than Individual Protection 2014 Member must not have Primary Protection in place Pension Savings at 5 April 2016 over 1 million Member must not have Primary Protection in place Pension Savings at 5 April 2014 over 1.25 million LTA protected after 5 April million or the standard LTA if this is higher in the future LTA charge LTA tax charge applied to pension savings above 1.25M Future pension savings Broadly, members cannot accrue any pension savings in UK pension arrangements after 5 April Members wishing to apply for and rely on this must take action before April 2016 Individual LTA equal to value of pension rights at 5 April 2016 (maximum 1.25 million), or the standard LTA if this is higher in the future LTA tax charge applied to pension savings above individual LTA Members can continue building up pension savings after 5 April 2016 However, this may lead to an AA and/or additional LTA tax charge Individual LTA equal to value of pension rights at 5 April 2014 (maximum 1.5 million), or the standard LTA if this is higher in the future LTA tax charge applied to pension savings above individual LTA Members can continue building up pension savings after 5 April 2014 However, this may lead to an AA and/or additional LTA tax charge 19

20 How to apply for the Protections (1) Members who want to apply for Fixed Protection 2016 must complete an LTA 2016 Opt Out form by 31 March 2016 o o Details are provided in the communications sent to you in February 2016 The bank will stop contributions from 6 April 2016 and pay cash (reduced for employer national insurance) pension contribution means 88 cash (prior to income tax and employee national insurance) Please note that you must do this before 31 March 2016 in order to apply for Fixed Protection as your pension contributions must stop from 5 April 2016 If you opt for Fixed Protection 2016 and opt out of future pension savings you will still be covered for the same level of death benefits 20

21 How to apply for the Protections (2) A new HMRC online self-service for pension scheme members will be introduced to apply for these protections and the service is expected to be available for members to use from July 2016 Whilst Fixed Protection 2016 will not be available to apply for online before July 2016, pension scheme members will need to ensure that they effectively opt out of future pension benefit accrual before 6 April 2016 Individuals will need to apply for protection before they take their benefits as they will need an HMRC reference number if they want to retire using the protection The Government has suggested that there will be no application deadline for either Individual Protection 2016 or Fixed Protection 2016 The deadline for applying for Individual Protection 2014 is 5 April

22 Changes to the Annual Allowance More detail 22

23 Annual Allowance a reminder AA The Annual Allowance (AA) Total value of pension savings you can build up tax-efficiently each year Currently 40,000 but will reduce from April 2016 for those with Adjusted Income of 150,000 or more If your pension savings exceed the AA in year: o The excess is liable for income tax at your marginal rate o You can carry forward any unused AA from the previous three tax years 23

24 Reduction in Annual Allowance (AA) The AA will reduce by 1 for every 2 of Adjusted Income above 150,000, to a minimum of 10,000. Adjusted Income is broadly your total taxable income plus your pension contributions (by you and the bank). It includes all employment income and personal income. 24

25 Reduction in Annual Allowance (AA) key issues AA now linked to earnings in the same tax year o Earnings not known until the end of the tax year o Bonus payments made near the end of the tax year can cause the AA to reduce unexpectedly Adjusted income includes pension savings o You need to be aware of the level of pension savings paid on your behalf 25

26 Reduction in AA what is the bank doing from April 2016? If, based on your recent earnings and pension contributions with the bank, you are likely to be affected by the AA changes, the bank will take action and notify you (you may have been notified already) o the bank will automatically flex down its core pension contribution to 10,000 with effect from April 2016 o Pay salary in lieu (reduced for employer NI) in place of any excess bank core contributions pension contribution is equivalent to 88 salary in lieu All members with income above 100,000 will be encouraged to review their position as others may be affected o Access to an AA calculator in March o Pensions contributions can be updated at anytime on the MBC website o Further tools and support will be available to make an informed choice see following slides for details 26

27 Example of bank s practice of salary in lieu of pension contribution Anita has bank earnings (calculated as above) of 180,000 and a Plan Salary of 150,000. The bank s Plan contribution would be 18,000 (i.e. 12% of Plan Salary because Anita has been with the bank for more than 10 years), equivalent to a monthly contribution of 1,500. After April 2016, the bank s Plan contribution would be 10,000 equivalent to a monthly contribution of 833 ( 10,000/12) and she would receive a salary in lieu of pension of 7,030 ( 8,000/1.138) equivalent to a monthly payment of 586 (subject to income tax and national insurance). 27

28 Tools and support 28

29 Available help & support Talk to us o We will be here for another couple of hours and can talk in general about any pensions queries o By law, we cannot give you financial advice Get advice o For further detail on your specific issues, we recommend that you speak to an impartial financial adviser o For details on how to contact a financial adviser in your local area, visit 29

30 Helpful tools and resources (1/3) Visit o See your remaining AA for 2015/16 Explore the pensions freedom and choice website at o Tools and resources for your retirement planning o View the library section for useful information on the tax changes Refer to the recent communications which you received o Pensions Update which you received in February

31 Helpful tools and resources (2/3) Review your Member Account on Hartlink Online* o Members of the BoAML and ML DC Plan use SSO or o Members of the BoA Plan: use SSO or o View your latest benefit statement to see what was contributed over the past year o Use the Pension Planner tool to see the expected value of your Account and expected income when you retire Visit the Government website o Helpful information around tax changes and the AA and LTA *If you are a member of the Bank of America International Pension Plan 2006 or the Merrill Lynch 2005 International Pension Plan, please contact the RBC cees Communication Centre on +44 (0) or at ceescommunications@rbc.com. 31

32 Helpful tools and resources (3/3) Upcoming communications o Further detail on the reduction in the Annual Allowance o Pensions Update March 2016 o Access to an 2016/17 Annual Allowance estimator on the MBC website 32

33 Any questions? 33

34 Appendix AA examples 34

35 Example 1: No Annual Allowance charge Situation Impact Member A Employer pays 12% of plan salary Employee pays no contributions Member A has a basic salary of 100,000 Member A receives a 50,000 bonus in 2016/17 Therefore taxable income for 2016/17 is 150,000 Threshold income is 150,000: 150,000 taxable income, PLUS Nil new salary sacrifice Adjusted income is 168,000: 150,000 taxable income, PLUS 18,000 pension savings over the year, PLUS Nil other adjustments Annual Allowance is 31,000 40,000 standard AA, LESS 9,000 reduction = ( 168, ,000) / 2 No tax charge for 2016/17 Carry forward 13,000 to 2017/18 35

36 Example 2: Member incurs an Annual Allowance charge Situation Impact Member B Employer pays 12% of plan salary (capped at earnings cap of 151,200) Employee pays no contributions Member B has a basic salary of 140,000 Member B receives a 50,000 bonus in 2016/17 Therefore taxable income for 2016/17 is 190,000 Threshold income is 190,000: 190,000 taxable income, PLUS Nil new salary sacrifice Adjusted income is 208,144: 190,000 taxable income, PLUS 18,144 pension savings over the year, PLUS Nil other adjustments Annual Allowance is 10,928: 40,000 standard AA, LESS 29,072 reduction = ( 208, ,000) / 2 Pension savings exceed AA by 7,216; potential tax charge for 2016/17 of up to 3,250 prior to bank flex down 36

37 Example 3: Threshold income < 110,000 Situation Impact Member C Employer pays 12% of plan salary Employee pays 10% of plan salary via salary sacrifice Member C has a basic salary (before any reduction for salary sacrifice) of 100,000 Member C receives nil bonus in 2016/17 Taxable income for 2016/17 is 90,000: 100,000 basic salary before salary sacrifice, PLUS Nil non-basic taxable income, LESS 10,000 salary sacrifice contributions Threshold income is 100,000: 90,000 taxable income, PLUS 10,000 salary sacrifice Annual Allowance is 40,000 Threshold income does not exceed 110,000 Annual Allowance remains at 40,000 37

38 Example 4: Threshold income > 110,000 but adjusted income < 150,000 Situation Impact Member D Employer pays 12% of plan salary Employee pays 8% of plan salary via salary sacrifice Member D has a basic salary (before any reduction for salary sacrifice) of 100,000 Member D receives a 20,000 bonus in 2016/17 Taxable income for 2016/17 is 110,400: 100,000 basic salary before salary sacrifice, PLUS 20,000 non-basic taxable income, LESS 9,600 salary sacrifice contributions Threshold income is 120,000: 110,400 taxable income, PLUS 9,600 salary sacrifice Adjusted income is 134,400: 110,400 taxable income, PLUS 24,000 pension savings over the year, PLUS Nil other adjustments Annual Allowance is 40,000 Adjusted income does not exceed 150,000 Annual Allowance remains at 40,000 38

39 One of the two certainties - taxes What does employee get post-tax for every 100 of pension contribution spent pre-tax (ignoring investment returns)? Tax efficiency for 45% tax payer now, 40% in retirement 100 Efficiency (%) Pension options No tax Under AA, Under AA, under LTA over LTA Over AA, under LTA Over AA, over LTA Cash Unfunded EFRBS 39

40 Copyright 2016 Aon Hewitt Limited. All rights reserved. Aon Hewitt Limited, The Aon Centre The Leadenhall Building 122 Leadenhall Street London EC3V 4AN Registered in England & Wales No To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the prior written consent of Aon Hewitt Limited. Aon Hewitt Limited does not accept or assume any responsibility for any consequences arising from any person, other than the intended recipient, using or relying on this material. 40