Pensions Future View. Welcome to the latest issue of Pensions Future View

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1 Pensions Future View Welcome to the latest issue of Pensions Future View Welcome to the latest issue of Pensions Future View, the pensions newsletter designed for members of the Local Government Pension Scheme (LGPS). In this edition we cover a range of topics: We have the latest on limits to the amount that people can receive on redundancy, what negative inflation might mean for your pension and how the end of contracting out will affect how much you pay in National Insurance Contributions. We also bring you up to date on changes to tax thresholds and a consultation that might fundamentally change the way we save for pensions in future. Finally we look the Chancellor of the Exchequer s recent comments on the LGPS and consider what they mean. February 2016

2 Proposed Limit on Public Sector Exit Payments On 23 May 2015, the Government announced that it intends to place a cap on the payments made to public service employees when they leave employment, as it wants to stop six-figure exit payments. This cap will cover all of the major public services, including local government, teachers, civil service and NHS employees. What is the Government proposing? The government is proposing to apply a 95,000 limit (or exit cap ) on the total value of all payments made to people leaving employment in the public sector. The cap will cover a broad range of circumstances including both voluntary and compulsory termination of employment and it will affect most of the possible components of severance packages. The proposed cap will include: Redundancy payments Any other compensation or severance payments Employer capital costs of providing early unreduced access to benefits (often referred to as pension strain). This is covered in more detail below. What does this mean for members of the LGPS? There are two important points to be aware of: The LGPS covers many different types of employer, although not all will be directly impacted by the arrival of the public sector exit cap. The cap will apply to employees of local authorities but if you are employed by an employer that is not a local authority it is best to check with them directly whether the cap will apply. If you leave on redundancy or reasons of efficiency after the age of 55, you are entitled to receive unreduced benefits immediately. While this is good for you, it does generate a cost to your employer, reflecting the fact you will be receiving your benefits before your normal retirement age. This is known as the pension strain cost. This pension strain cost, along with any other payment, e.g. redundancy payment, that you receive will be added together and measured against the 95,000 cap. Benefits relating to ill health retirement are not affected by the cap.

3 How will the exit cap affect me? Not everyone will be affected by the introduction of the exit cap. You will be able to receive the full value of any termination payments, as well as your LGPS pension, if the value of your redundancy payment, the pension strain figure and any other payments add up to less than 95,000. In some cases though, the value of all exit payments will be greater than the 95,000 limit. If this applies to you, then your pension benefits will be recalculated with a reduction applied. Reducing the pension means that the pension strain figure is also reduced. Your pension will be reduced to the point where the total value of your exit payment is equal to 95,000. In some cases, even if benefits are reduced to the point where the pension strain is zero, the value of the exit payment may still be greater than 95,000. In these cases your other exit payments, e.g. redundancy payment, will also be reduced, until you reach the 95,000 limit. If your LGPS benefits are reduced in this way, then you will have to make a choice: 1. Receive payment of the reduced pension and lump sum. 2. Give up some of your redundancy or other exit payments to remove the reduction to your pension and lump sum. You receive a lower redundancy pension but unreduced retirement benefits. 3. Choose a mixture of 1 and 2, above. This means you give up some of your redundancy pay to remove some (but not all) of the reduction on your pension and lump sum. When will the exit cap come into force? At the moment there is no confirmed date for when the exit cap will come into force, although some think that it could be by summer Keep a look out for further information from us which will be provided once more detail is known. Remember the possible restrictions that could be applied to your benefits when thinking about retirement before the normal pension age.

4 Negative inflation: what it means for your LGPS benefits In April 2014, the LGPS moved to a new way of working out your benefits. This new way is referred to as Career Average Revalued Earnings or CARE for short and it applies to any LGPS pension you build up from April CARE works by calculating your pension every year, based on your pay in that year. Over time you build up lots of individual pension pots which, when added together, make up your LGPS CARE pension. The value of your individual CARE pots are increased each April up until the date you retire. This ensures the CARE part of your LGPS pension maintains its buying power. Once in payment, the whole of your LGPS pension continues to increase in April each year for as long as you draw it. Negative inflation In the LGPS, the inflation figure used to increase your CARE pots is the annual increase in the Consumer Prices Index (CPI) figure for the previous September. In September 2015, prices actually decreased over the previous year, meaning that inflation went down. The actual figure was minus 0.1%. If this negative figure is applied to your LGPS CARE pots it will mean that the CARE pension you have built up between April 2014 and March 2015 will actually go down in value by a tenth of one percent. Note that any benefits you have built up in the Scheme or transferred into it before April 2014 will not be affected as they will be calculated using your final pay when you eventually leave the scheme or retire. It is not clear at this stage whether or not LGPS benefits will be reduced as described above. The rules say that before your CARE pension can be reduced in this way, the matter must go before Parliament for discussion. Only if Parliament is in agreement, will your CARE pension be reduced. If Parliament doesn t agree to a reduction, then your CARE pension will simply stay as it is, and no increase or reduction will be applied. As soon as we know anything more on this topic, we will let you know. What if I already receive a pension in payment? If you have already retired and currently receive an LGPS pension, this will be treated in a slightly different way. The current rules for pensions in payment mean that even if inflation goes down, your pension won t.

5 End of contracting out The current State Pension is made up of two elements: a basic flat-rate pension and an additional element known as the State Second Pension (or S2P) 1. As a member of the LGPS, you will have been automatically contracted-out of S2P. This means you have not paid contributions towards S2P and so have not built up any S2P benefits. Instead, the LGPS has guaranteed to provide you with a pension that is at least as good as, if not better than, the State Second Pension. From 6 April 2016, the Government is replacing the current State Pension with a single tier benefit. As a result of this reform, contracting-out of the State schemes will cease from that date. So what does this mean for you? As far as your membership of the LGPS is concerned, this reform will have no impact at all; you will continue to pay the same amount of employee contribution into the scheme and build up the same benefits. From your April 2016 pay packet though, you will notice an increase in the amount of National Insurance that you pay. This is because you currently pay a reduced amount of National Insurance to reflect the fact that you are not building up any S2P while you are a member of the LGPS. The rules can be a little complicated to follow, but your National Insurance contribution is currently reduced by 1.4% between certain pay thresholds. Once contracting out ends, you will no longer pay a reduced National Insurance and will instead pay the full rate. The overall impact of this on your take-home pay will vary according to how much you earn but many people may end up seeing a reduction of around 1% of pay. You should also be aware of the impact that the move to a single tier State pension will have on your entitlement to that benefit going forward. Firstly, the move to the new single tier State benefit will take a number of years to settle in. As a result, not everyone will receive the full flat-rate benefit from the start. Furthermore, as a member of the LGPS, your single tier State pension will be adjusted to reflect the period you were contractedout of S2P to 5 April You can read more about the single tier state pension here: your employer? Your employer also receives a reduction to the National Insurance contributions it pays as a result of providing you with access to a work-based pension scheme in the LGPS (3.4% between certain pay thresholds). The ending of contracting out will see an increase in its National Insurance contributions, too, in the region of 2.0% of its payroll costs. 1 Before S2P, the second tier of state pension was called State Earnings Related Pension Scheme or SERPS. We talk about S2P in this article but the same principles applies to any periods of LGPS membership during the SERPS era.

6 Pension tax changes The Summer 2015 Budget introduced yet further changes to the rules governing taxation and pension savings. These changes, along with changes already announced in the 2014 Budget, will affect people in different ways. The key points are summarised below. Lifetime Allowance This is the overall limit on the amount of pension saving you can have during your working life, without incurring a tax charge. In his 2014 Budget, the Chancellor announced that this allowance would reduce on 6 April 2016 from its current value of 1.25 million to 1 million. Following previous changes to the lifetime allowance, the Government introduced interim arrangements for those people who are close to or exceed the revised limits, and it is no different this time round. From April 2016, individuals will be able to apply for individual protection 2016 and fixed protection Unlike previous protections, there will be no deadline for making these applications (although it must be done before applying to receive LGPS benefits). An online self-service application process is expected to be in place from July If you expect to retire between April 2016 and July 2016 and have benefits which are valued in excess of the lifetime allowance then you will have to write to HMRC in order to have your 2016 interim arrangements confirmed. Even if you are not close to this limit, you may need to consider your overall position in light of this change. Annual Allowance This is the annual limit on pension savings that can be made in each year which will receive tax relief. The annual allowance rules can be complex, but if the value of pension benefits grows by more than this allowance then the excess amount may become subject to a tax charge. The Summer 2015 Budget announcement confirmed a number of changes to the Annual Allowance specifically aimed at higher earners, by reducing the limit on the amount of pension benefit that can be built up before tax is payable. These changes come into effect on 6 April 2016 and will reduce the annual allowance for those individuals who have income over certain levels. Broadly speaking, you will be affected if: 1. your threshold income is above 110,000, and 2. your adjusted income is above 150,000. Threshold income is broadly defined as your total earnings, less what you pay in pension contributions. Adjusted income is broadly your threshold income plus the value that your pension grows over the year. You will need assistance from the pension section to help you calculate this figure. Where someone satisfies both points 1 and 2 above, the annual allowance will be reduced by 1 for every 2 that the adjusted income exceeds 150,000. However, the maximum reduction that can apply to the annual allowance is 30,000, which leaves a reduced annual allowance of 10,000 available.

7 Example: Threshold Income Adjusted Income Annual Allowance Below 110,000 N/A 40,000 Above 110,000 Below 150,000 40,000 Above 110,000 Above 150,000 and below 210,000 The original 40,000 Annual Allowance is reduced by 1 for every 2 by which threshold income exceeds 150,000 Above 110,000 Above 210,000 10,000 At the end of the financial year, we will be checking to see if anyone in the Fund is affected by this change and if the annual allowance is exceeded, we will send you details. In the meantime, if you are concerned that you might breach the 2015/16 annual allowance limits, please contact us for further information.

8 Government Consultation on Pensions Tax Relief At the moment, most people who save into pension schemes get a big boost in the form of tax relief on the pension contributions they pay. This tax relief provides an incentive for people to pay into pension schemes in order to save for their retirement. In July 2015, the Government published a consultation 2 with the aim of considering what changes, if any, were needed to the current system of tax incentives to ensure they reflect the needs of a modern workforce. What are the current incentives? The Government currently encourages individuals to save for retirement by offering full tax relief on the pension contributions they pay; meaning that you pay your pension contributions before your earnings are assessed for income tax. This approach means you end up paying no tax on your pension contributions and, if you earn enough to pay income tax, you will pay less tax overall. All of this is carried out automatically when your pay is worked out by your employer and you don t need to do anything. The contributions you and your employer pay towards your pension are invested by the pension fund; and the returns that these investments make are also largely exempt from tax. Once your pension is in payment, it is treated like income and will be assessed for income tax purposes (although you won t pay National Insurance Contributions on your pension). This system, known as Exempt, Exempt Taxed (or EET ), has been in place for many decades. Once you take account of income tax paid on pensions, the net cost to the Treasury of providing pension tax relief in this way across all types of pension scheme, is around 21 billion a year. Principles for reform Evidence suggests that employees are not fully aware and appreciative of the benefits that full tax relief currently provides. The Government is therefore asking the question is there a better way? The Government believes that any reform should be simple and transparent, while encouraging people to take personal responsibility for ensuring they have adequate savings in retirement. It also believes that greater simplicity and transparency may encourage greater engagement with pension saving and strengthen the incentive for individuals to save into pension schemes. Ultimately, any changes to the current system need to be sustainable over the longer term and fit in with the Government s wider policy intentions. What will this mean for you? At the moment it is difficult to say what impact this will have on you, as a member of the LGPS. The Government is still to publish the results of the consultation it undertook on the future of pension tax relief or to confirm any changes it intends to make to the current system. Only once the detail of any proposed change is known will we be able to assess the impact on LGPS members. We will, of course, keep you informed as we find out more. 2 Strengthening the incentive to save: a consultation on pensions tax relief

9 Proposed Changes to LGPS Investments You may have come across a number of news items in the press and on TV over the last few months reporting on the Government s plans to radically restructure the way that the LGPS organises its investments. For example, at the recent Conservative Party conference, the Chancellor announced plans to work with councils in order to pool LGPS investments into half a dozen British wealth funds spread across the country. How are things currently set up? The LGPS is a funded scheme which means that the contributions you and your employer pay into the scheme are invested in a range of different assets in order generate income which is used to pay pensions when people retire. The LGPS is locally administered and there are 89 separate LGPS funds across England and Wales, which in most cases are run by local councils. This means there are 89 separate pots of money with each fund largely making its own decisions about how and where the money is invested. What are the proposed changes? Despite the Chancellor s statement on the creation of British wealth funds, nothing has been decided for definite yet. The Government has asked the organisations that run LGPS funds to put forward ideas to pool investments to significantly reduce costs, while maintaining overall investment performance. What this may mean is that although your own LGPS benefits will continue to be worked out and paid locally, your fund will join together with other LGPS funds to invest its money as part of a larger group. Some suggest that the 89 funds may join into 6 groups that will each be worth in the region of 30 billion, for the purposes of investing jointly. The Government believes that significant savings can be generated by making these changes. It also believes that by pooling resources, the LGPS will be able to invest in opportunities that existing funds do not have access to on their own, because of their current size. Once we know more, we will, of course, let you know. Will my pension be affected? It is important to stress that these changes only affect the way that LGPS funds invest their money. The pension and lump sum you receive at retirement will not be affected. These benefits are not directly related to the investments that LGPS funds make and they will continue to be worked out in the same way, even if the way the LGPS invests the money changes.

10 Where can I find out more? For more information: Visit the Croydon Council Website at View the LGPS 2014 Website at The website includes videos, explaining how the Scheme works. It also includes examples of how different members could be affected to help you to understand how the changes could affect you and a comparison of how the new Scheme is different to the old arrangement. So please visit the site to find out more about LGPS us at Pensions@croydon.gov.uk Contact details We hope you ve found this newsletter helpful and please feel free to contact us if you have any questions using the details provided below: Pensions Team, 11th Floor Zone A, Bernard Weatherill House, 8 Mint Walk, Croydon CR0 1EA : Pensions@croydon.gov.uk Ext : This communication is for information only. It does not take into account your personal circumstances and does not constitute financial advice. Neither Croydon Pension Fund or Hymans Robertson can provide you with advice; if you are unsure as to what action to take we strongly recommend that you seek independent financial advice. Designed and produced by like minds