Appendices. Appendix 1 - Annual allowance Appendix 2 - Lifetime allowance Appendix 3 - Q&A

Transcription

1 Appendices Appendix 1 - Annual allowance Appendix 2 - Lifetime allowance Appendix 3 - Q&A

2 Appendix 1 Annual Allowance Key elements to determine your annual allowance threshold income versus adjusted income HMRC will default to assessing your income-tax position on adjusted income if your threshold income exceeds 110,000. is broadly defined as gross taxable income from DS Smith (before any member contributions or salary sacrifice is deducted) and other regular sources (e.g. salary, bonus, P11D benefits, share proceeds, rental income, investment income, etc.) a. If your threshold income is less than 110,000, you will not be affected and will retain your standard annual allowance of 40,000 for 2017/18. b. However, if your threshold income exceeds 110,000, you should check whether your adjusted income is greater than 150,000. refers to threshold income plus, contributions DS Smith has paid on your behalf. If this is greater than 150,000, your personal annual allowance will be tapered What is tapered annual allowance and how does tapering work? For every 2 of adjusted income that exceeds 150,000, your personal annual allowance will be reduced by 1 but it will never fall below 10,000, as illustrated below: 1.3. Will you be affected by the tapered annual allowance? Your personal annual allowance will be tapered if you meet the following criteria: Your threshold income is over 110,000; and Your adjusted income is over 150,000; It is important to remember that even if your base salary is well below 150,000, when all the elements such as bonus, other taxable benefits and any employer contributions are added in, your adjusted income can quickly reach 150,000. This is illustrated in the example overleaf.

3 Appendix 1 Annual Allowance 2 Income estimates for 2017/18 Income & Benefits David Alice Base Salary* 90, ,000 Company car benefit 8,000 8,000 Other income - 10,000 Medical cover 1,000 1,000 Cash bonus received 13,500 30,000 Dividend income from outside investments 7,000 6,800 Rental income on owned property 13,600 25,000 Threshold Income 133, ,800 Employer contribution - 6% 5,400 7,200 Adjusted Income 138, ,000 * Base salary includes the member pension savings (assumed here to be 9%) paid to the scheme through the salary sacrifice arrangement. Despite very different circumstances, both David and Alice s threshold incomes exceed 110,000. They should therefore add the company s contribution of 6% to estimate their adjusted income in order to determine their annual allowance. Since David s adjusted income is below 150,000, his annual allowance remains at 40,000 and there is no action required. On the other hand, Alice s adjusted income is above 150,000, so she should seek financial advice and consider the options available to her What should you do next? To reiterate, no immediate action is required if your threshold income falls below 110,000 but you should continue to review your position each year. If like Alice, your threshold income exceeds 110,000, and your adjusted income is greater than 150,000, then your annual allowance will be tapered and you should consider requesting a pensions saving statement from the scheme administrator and seek financial advice on the alternative options that DS Smith offers. At 208,000, her adjusted income is 58,000 over the 150,000 limit. Her annual allowance will therefore be reduced by 1 for every 2 she is over the limit, i.e. by 29,000. The standard allowance is 40,000 so after this Alice s tapered annual allowance will actually be 11,000. The combined member and company contribution is 18,000 so this exceeds her tapered annual allowance of 11,000, by 7,000. The first step is to see if she has an unused allowance from previous three tax years to offset this 7,000. If she doesn t, then she will have to pay a tax charge on this 7,000 of up to 45%. To avoid this additional tax charge, Alice may want to consider restricting the value of contributions being made into her pension. This could be a sensible option to consider, especially if there was the option for her to receive a in lieu of the company contributions into the pension scheme which she would normally receive. The next section of this letter goes on to explain the DS Smith approach to cash supplements in lieu of pension contributions.

4 Appendix 1 Annual Allowance Pension cash supplements an alternative cash option for members on a tapered annual allowance In an effort to deliver tax-efficient benefits, the company is currently willing to offer affected members the option to restrict the overall amount of pension contributions going into their pension scheme to their tapered annual allowance figure. To qualify for a cash supplement, members must demonstrate that: Their adjusted income exceeds 150K; and Their total pension contribution is at least 10,000 p.a. (i.e. company and employee contributions, excl. AVCs). It is assumed that the member s contributions are set against the tapered annual allowance first and then the company's contributions are set against any residual. To the extent that the company contributions would take a member over their annual allowance then a taxable cash supplement would be offered in lieu. To ensure that the pension cash supplement is cost neutral to DS Smith, the payment will be discounted to reflect the fact that cash awards attract employer national insurance charges whereas employer pension contributions do not. Should you decide to restrict your contributions, complete the Tapered Annual Allowance Contribution Form and return it to SSC Pensions Department, Solomon House, Caerphilly Business Park, Caerphilly, CF83 3GS; or saverplusadmin@dssmith.com. Continuing with the previous example, Alice has opted to contribute 9% to the pension plan and then receive company matching contributions of 6%. Her total pension savings is 18,000 (EE 10,800 + ER 7,200) and her tapered annual allowance is 11,000. Alice currently pays 9% or 10,800 towards her pension. She could reduce total pension savings to the minimum annual allowance of 10,000 or reduce total pension savings to her estimated personal annual allowance. In any case, any forfeited company contributions will be paid as pension cash supplement through payroll. See below as an illustration: Pension Cash Supplement Estimates 2017/18 Option 1 Option 2 Employee contribution to the plan 10,000 10,800 Employer contribution to the plan Employer contributions forfeited 7,200 7,000 Pension Cash Supplement* 6,600 6,400 * Pension cash supplement has been discounted for the employer s national insurance charge of 13.8% in order to ensure that this option is cost-neutral for the company. Therefore instead of basing it on 6% it has been based on a rounded 5.5%. Option1: Alice reduces her pension savings to 10,000 and forfeits the company s contribution that would otherwise have been made: 6% x 120,000 = 7,200. Cash alternative on offer instead: 5.5% x 120,000 = 6,600. Option 2: Alice restricts contributions to her annual allowance of 11,000. She will pay 10,800 towards her pension; the company will make a pension contribution of 200 and pay the forfeited 7,000 as cash. Cash alternative: 5.5% x 120,000-6,400.

5 Appendix 1 Annual Allowance What are the other things I should consider? All calculations (member contribution, company contribution and pension cash supplements) will be made based on your contribution levels as at 1 st April The pension cash supplement is subject to income tax and national insurance. It also does not form part of your salary or base pay for the purpose of calculating any other benefits and will only be payable when your total pension contributions (excluding AVCs) is at least 10,000 per annum, the minimum tapered allowance. Since various elements of your adjusted income are unknown, towards the end of the year, your actual allowance may be higher than expected. If you have any unused allowance and wish to take full advantage of the tax relief available, you will be able to make an additional voluntary contribution (AVC) into the scheme or into a private pension arrangement. You may choose to do this towards the end of the tax year when you have a clearer view of your adjusted income. Unused allowances from the previous three years may be used to offset against excess contributions. You can contact the pensions department on saverplusadmin@dssmith.com for further details.

6 Appendix 2 Lifetime Allowance Definition This is the maximum amount an individual can accrue in all registered UK pension schemes before incurring additional tax charges. The lifetime allowance is currently 1.0m and it is expected to increase in line with the consumer price index (CPI) from April What should you do if you are affected by the lifetime allowance? You should seek financial advice before making a decision. You may not wish to restrict your contributions but you can request to leave Saver Plus. This would be subject to your providing written confirmation from HMRC that you have applied for lifetime allowance protection and receiving principal employer approval. For guidance on protecting your lifetime allowance, please visit: You can contact the pensions department on saverplusadmin@dssmith.com for further details or to notify us of your decision. To qualify for a cash supplement, members must provide: The HMRC reference number or appropriate certification as evidence of their lifetime protection; or Written financial advice to cease further contributions, in those instances where investment returns can be expected drive the pension savings over the allowance. If approved your pension contributions will cease and the company s contributions would be payable to you as a pension cash supplement. The pension cash supplement would be payable at the rate of your employer contribution as at 1 st April 2017 subject to both income tax, national insurance and also discounted for the employer s national insurance charge. It would not form part of your salary or base pay for the purpose of calculating any other benefits Are any other benefits affected if I choose to leave the scheme? If you were to opt to leave the scheme due to the lifetime allowance changes, the company has agreed to maintain your associated life assurance and income protection eligibility on your existing terms (life assurance will be provided under an excepted life arrangement). The Company will also comply with the employer s auto-enrolment duties under Part 1 of the Pensions Act 2008 and it will automatically enrol or re-enrol you into a pension scheme as and when required by law.

7 Appendix 3 Q&A and Regulatory Considerations What happened in April 2016? From 6 April 2016, a Tapered Annual Allowance was introduced. This meant that for members with Adjusted Income in excess of 150,000, the Annual Allowance was gradually reduced from 40,000 per annum to a minimum of 10,000 per annum. At the same time, the Lifetime Allowance was reduced from 1.25m to 1m What happens if I exceed the Annual Allowance? If you have exceeded your Annual Allowance, it may be possible to carry forward unused allowance from the three previous tax years. If you exceed your available Annual Allowance and any carry forward from previous years, the excess is charged at your highest marginal rate of income tax (i.e. up to 45%). This information is complex in nature but will be important to you or your financial adviser if you are planning on maximising your carry forward allowance. To confirm your contributions made in the last three years, you should contact the pensions department on saverplusadmin@dssmith.com. You may find the HMRC online calculator useful to help work out your own Annual Allowance and carry forward position: Additionally, should you exceed the annual allowance and incur a charge it is your responsibility to settle those charges. You can choose to settle the liability directly with HMRC through your selfassessment tax return or you can request that your scheme administrator use the funds from your pensions account to pay some or all of it for you. This is known as Scheme Pays and you should contact the pensions department on saverplusadmin@dssmith.com for further details. HMRC sets certain conditions to qualify for Scheme Pays and the DS Smith Saver Plus Scheme can support Scheme Pays, both mandatory (i.e. where the tax liability exceeds 2,000 and the member s contributions to the scheme has exceeded 40k) and voluntary (where these conditions aren t met). And 1.3. What happens if I exceed the Lifetime Allowance? Benefits are generally tested against the Lifetime Allowance at the point they are drawn at retirement and each time you draw a benefit, you use up a proportion of the Lifetime Allowance. Defined Contribution pension savings (such as the Saver Plus Scheme) are tested against the Lifetime Allowance based upon your fund value at retirement. Defined Benefit pension arrangements are valued as twenty times the pension put into payment, plus any tax free cash lump sum. From 6 April 2016, the Lifetime Allowance reduced to 1m. It is expected to increase from April 2018 in line with increases in the Consumer Prices Index. If you have previously protected your Lifetime Allowance with HMRC, and have kept this protection, you won t be affected by the reduction from April 2016 and do not need to take any further action.

8 Appendix 3 Q&A and Regulatory Considerations 7 If you think you might be affected by the reduced Lifetime Allowance and your pension benefits at April 2016 already exceeded 1m, you may be able to reduce the tax payable on the excess amount by applying a form of protection. As mentioned above, benefits are generally tested against the Lifetime Allowance at the point they are drawn (i.e. at retirement or in the event of your death when the death benefit is paid to your beneficiary). Should your total pension fund exceed the Lifetime Allowance, any benefits paid from the excess fund will be subject to additional tax of 55% How do I protect some of all of my benefits from the Lifetime Allowance changes? There are various ways in which you can protect your benefits and the correct method will depend on your personal circumstances. Further details are available on the Governments website where the application process is also outlined. We would recommend you seek financial advice regarding your options. HMRC Protection Certificate: If you are impacted by the reduction in the Lifetime Allowance, you may be able to protect your benefits against a higher level of Lifetime Allowance i.e. the level prior to any reduction. Protection was made available in 2006, 2012, 2014 and The registration process is completed online on the HMRC website, and HMRC will subsequently provide either a certificate or reference number to confirm this protection. Lifetime Allowance Protection: There have been numerous changes to the Lifetime Allowance since its introduction in 2006 and notably, some large drops (from 1.8 million to 1.5 million in 2012, then down to 1.25 million in 2014 and 1.0m in 2016). It is possible for individuals, in certain circumstances, to apply for protection against the reductions in Lifetime Allowance. However, some types of protection restrict people from being able to make any further contributions, or accrue any further pension entitlement under a defined benefit scheme Do I have a reporting requirement to the tax authorities? If your contributions exceed the Annual Allowance, you will be required to provide this information to HMRC in your annual tax return. The Saver Plus administrators (Friends Life) are required to automatically provide a Pensions Savings Statement (with details of the value of your savings for comparison with the Annual Allowance) to both you and HMRC once your total Saver Plus savings over the tax year exceed the 40,000 standard Annual Allowance, and to any other member on request. As part of this process, it may be necessary for you to provide information to the Saver Plus administrators and any other administrators about any other pension contributions you are making and whether you have accessed any personal pension scheme or defined contribution pension you have contributed to with another employer.

9 Appendix 3 Q&A and Regulatory Considerations 8 For the purposes of examples in this document, we have assumed no members are affected by the Money Purchase Annual Allowance (which is triggered by taking benefits in certain flexible formats such as an Uncrystallised Funds Pension Lump Sum or taking income from a Flexible Drawdown policy). If you are affected by the Money Purchase Annual Allowance, please contact the Shared Service Centre. Membership of any pension scheme / arrangement is subject to the documentation governing the relevant arrangement (including but not limited to any contract, policy, trust deed and/ or rules) from time to time in effect and the governing documentation will take precedence in the event of any discrepancy with this letter. DS Smith reserves the right to discontinue, vary or amend any pension arrangements (including but not limited to any Pension cash supplement) provided to you at any time (where this is permitted by law).