NHS Pensions - Information about the reduction to the Lifetime Allowance from 6 April 2016

Transcription

1 NHS Pensions - Information about the reduction to the Lifetime Allowance from 6 April 2016 Introduction Since 6 April 2006 there has been no absolute limit on the level of benefits that a member of a registered pension scheme, such as the NHS Pension Scheme, can be provided with. Instead every member has a Lifetime Allowance in respect of all their pension benefits before they become subject to a tax charge at the point of taking benefits. Any benefits above the Lifetime Allowance will be subject to a Lifetime Allowance tax charge. The rate of tax charged will depend on whether the excess is taken in as a pension or a lump sum. The Lifetime Allowance charge is: 55% if the excess is taken as a lump sum, and 25% where it is taken as a taxable pension income. The Lifetime Allowance charge is paid by the scheme administrator and NHS benefits are permanently reduced to recoup the charge. Members may have applied to HMRC and hold valid protection and a personal Lifetime Allowance that is higher than the standard Lifetime Allowance. The Lifetime Allowance increased for the first five years of its existence, but since then, it has steadily reduced. The historic level of the Lifetime Allowance is set out below: Tax Year Lifetime Allowance 2006/ m 2007/ m 2008/ m 2009/ m 2010/ m 2011/ m 2012/ m 2013/ m 2014/ m The standard Lifetime Allowance is reducing to 1 million from 6 April Lifetime Allowance reduction (v2) 1

2 In the Summer Budget 2015 the Chancellor announced a reduction in the standard Lifetime Allowance from 1.25 million to 1 million from 6 April 2016, remaining at this level for tax years 2016/17 and 2017/18. From 6 April 2018, the standard Lifetime Allowance will be indexed annually in line with the Consumer Prices Index (CPI). Tax Year Lifetime Allowance 2015/ million 2016/17 1 million 2017/18 1 million 2018/ million Legislation for the reduction in standard Lifetime Allowance will be delivered in Finance Act From 6 April 2016 without a valid HMRC protection, NHS benefits would exceed 1 million at the following pre-commutation pension amounts: 1995 Section - 43, Section - 50, Scheme - 50,000 The capital value of NHS benefits being measured for Lifetime Allowance purposes is dependent upon how the benefits are being taken. Where a pension is to be taken the capital value of the pension is calculated as 20 x the pension, while the capital value of taking a pension commencement lump sum is simply the amount of lump sum actually being paid. A standard lifetime allowance of 1 million will affect those members who crystallise their NHS benefits when they: retire with a payable date on or after 6 April 2016 and the date benefits are authorised is on or before 5 April 2016; or retire with a payable date before 6 April 2016 and the date benefits are authorised is on or after 6 April For all members the percentage of Lifetime Allowance used will be based on 1 million unless they hold HMRC protection. In addition, any Lifetime Allowance charge that may apply to their NHS benefits will be based on 1 million unless they hold a valid protection certificate from HMRC. Any delay in claiming benefits may therefore result in: a bigger percentage of the Lifetime Allowance being used up Lifetime Allowance charges may then apply if there is a later benefit crystallisation because there is insufficient amount remaining; or a Lifetime Allowance charge or increased Lifetime Allowance charge. NHS Pensions has no discretion on the date NHS benefits crystallise and the Lifetime Allowance used. The following illustrates the impact of the reduced Lifetime Allowance: Member A: 2

3 NHS benefits are payable from 1 April The retirement application form is received three months before retirement, NHS benefits are calculated and authorised on 19 March NHS benefits are tested against a Lifetime Allowance of 1.25 million because the benefits crystallisation date is the same as the payable date of 1 April Member B: NHS benefits are payable from 1 April The retirement application form is completed three months before retirement but there is a delay before NHS Pensions receives the form and benefits are not be authorised until 9 April Because of the delay the benefits crystallisation date is 9 April 2016 and NHS benefits must therefore be tested against the lower Lifetime Allowance of 1 million. Member C: NHS benefits are payable from 8 April The retirement application form is received before the last day of service, NHS benefits are calculated and authorised on 16 March NHS benefits are tested against a LTA of 1 million because the benefits crystallisation date is the same as the payable date of 8 April Impact of the reduced Lifetime Allowance on the maximum tax free lump sum payable on or after 6 April 2016 As a result of the Lifetime Allowance reducing to 1 million the amount of tax free lump sum available from the NHS Pension Scheme is also reduced. The permitted maximum is 25% of the lower of: i. the available Lifetime Allowance (i.e. 1 million or such other protected Lifetime Allowance if higher less the value of any benefits already crystallised); and ii. the capital value of the member s NHS benefits being paid. Consequently, a member with large pension benefits, with no Lifetime Allowance protection and who has not previously crystallised any pension benefits cannot receive a tax free lump sum from of more than 250,000 from 6 April Example 1 Dr Brown has a normal pension age of 65, has no other pension benefits elsewhere and no Lifetime Allowance protection. He has an accrued pension in the 1995/2008 Scheme of 60,000, but wants to take the maximum tax free lump sum available by giving up some of this pension. Before 6 April 2016, a pension commencement lump sum of 257, would have been payable and a pension of 38, A crystallisation of benefits on or after 6 April 2016 now means that Dr Brown is restricted to a maximum tax free lump sum of 250,000. A difference of 7, in tax free lump sum due to the reduction in the Lifetime Allowance to 1 million from April

4 There is also an increased risk that 1995 Section members will not be able to take the full value of their mandatory lump sum as a tax free pension commencement lump sum. Example 2 Mrs Scott has a normal pension age of 60, no Lifetime Allowance protection and no previous crystallisations from other pension schemes. She is to take benefits on her 60 th birthday in September The NHS pension at age 60 is 88,000 and her mandatory lump sum is 264,000, and therefore not all tax free. The 14,000 excess over 250,000 will instead be a Lifetime Allowance excess lump sum and taxed at 55%. After tax of 7,700 has been deducted Mrs Scott will receive a lump sum of 256,300. Important action for employers Retiring members who want to take advantage of the higher Lifetime Allowance of 1.25 million must have a last day of pensionable membership, including annual leave entitlement, of 4 April 2016 or earlier. As a result the completed retirement application form must be with NHS Pensions at least three months before their intended retirement date. This is essential for those retiring members who have Enhanced Protection, as there is a statutory requirement on NHS Pensions to check for Relevant Benefit Accrual (RBA) before NHS benefits are authorised. Where NHS benefits fail RBA the member may have scope, within the NHS Pension Scheme regulations, to rearrange their NHS benefits to try and remain within the RBA limits. Where this is possible NHS Pensions notifies the member before NHS benefits are authorised. Possible rearrangement of their NHS benefits would ensure that their enhanced protection remains valid so they can rely on this protection before NHS benefits are crystallised. To allow members to consider how they might be affected by the reduced Lifetime Allowance, Pensions Officers must bring the reduction to the attention of those members who are planning to retire during: the last quarter of 2015/16, and the first quarter of 2016/17. This includes members who have already confirmed their intention to retire. For members who are intending to retire on or before 5 April 2016, Pensions Officers must ensure that that their pension record is updated and the retirement application form is with NHS Pensions details with sufficient time for the awarding process to be completed that allow for NHS benefits to be authorised before 6 April NHS Pensions cannot accept responsibility for any delay in authorising benefits if the retirement application form is delayed, incomplete or the member has Enhanced Protection. 4

5 Any revision to NHS benefits (a substitute award) is a separate crystallisation of benefits and if authorised on or after 6 April 2016 will be based on the reduced Lifetime Allowance of 1 million. Calculation of the reduction in benefits on account of the Lifetime Allowance charge Members who have a capital value of NHS benefits in excess of 1 million will be subject to a Lifetime Allowance charge unless they hold a protection certificate from HMRC. The Lifetime Allowance charge is: 55% if the excess is taken as a lump sum, and 25% where it is taken as a taxable pension income. The Lifetime Allowance charge is paid by the scheme administrator and NHS benefits are permanently reduced to recoup the charge. From 1 April 2015, the scheme actuary provided new factors to calculate the reduction in NHS benefits. The factors are now age related; there are separate factors for members retiring on the grounds of ill health and those who retire on any other grounds. The reduction in pension on account of a Lifetime Allowance charge will affect any future entitlement to a surviving adult pension, but not a child s pension. 5