Pension tax changes. University of Kent USS members. Jackie Holmes Towers Watson. November Towers Watson. All rights reserved.

Transcription

1 Pension tax changes University of Kent USS members Jackie Holmes Towers Watson November Towers Watson. All rights reserved.

2 Agenda Annual Allowance changes from April 2016 The impact on your retirement planning and options available Lifetime Allowance changes from April 2016 and protections available USS tax mitigation options Where to find further information Q&A Today s session is intended to provide information and guidance. If you want specific financial advice you will need to arrange this separately yourself. See: ( for useful tips on choosing a suitable financial adviser. 2

3 Annual Allowance changes 4

4 The Annual Allowance The Annual Allowance (AA) is the maximum total pensions savings that can be made in one year from all sources tax-efficiently This includes FS/CRB benefits, Added Years AVCs and Money Purchase AVCs and DC contributions from October 2016 (both employer and member), as well as any contributions to external pension arrangements The period over which your pension savings has been measured in the USS up until now has been 1 April to 31 March each year If your total yearly pension savings exceed the AA and you do not have sufficient unused Allowances from the 3 previous tax years to offset the excess, you are required to pay income tax at your marginal rate on the excess amount So what is changing? 4

5 Annual Allowance changes - Summary Next tax year (2016/17) Annual allowance (AA) reduction for high earners 40,000 AA reduced by 50p for every 1 of adjusted income above 150,000, to a minimum of 10,000 (income levels above 210,000) No reduction for those with threshold income of no more than 110,000 This tax year 5

6 The tapered AA From 6 April 2016, the 40,000 AA will be tapered down for higher earners. The AA will reduce by 50p for each 1 of adjusted income above 150,000, until it reaches 10,000 for people whose adjusted income is over 210,000. Annual Allowance ( ) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Adjusted income ( 000s) If your threshold income is 110,000 or less you are not affected. 6

7 Annual Allowance taper - income thresholds Threshold income all taxable earnings from employment (net of pension contributions); plus all taxable income from other sources e.g. rental income, dividends; plus any new pension salary sacrifice made on or after 9 July Adjusted income all taxable earnings from employment (net of pension contributions); plus all taxable income from other sources e.g. rental income, dividends; plus member and employer contributions to pension schemes. 7

8 USS Pension Input Period (PIP) /15 tax year USS Pension Input Period 1 April March April April 2015 Tax year 8

9 PIPs to be aligned with tax year from 2016 USS Pension Input Period 6 April April 2017 Tax year Making the AA dependent on taxable income from 2016/17 cannot work without Pension Input Periods being aligned with tax years. 9

10 Transitional year 2015/16 tax year 1 April July April 2016 Pre alignment tax year (99 days) Post alignment tax year (272 days) Examples Annual Allowance for pre-alignment tax year: 80,000 Annual Allowance for post-alignment tax year: up to 40,000 Total pre-alignment pension savings (1 April 2015 to 8 July 2015) Annual Allowance remaining (from 80,000) Post-alignment Annual Allowance carried forward (9 July 2015 to 5 April 2016) Member 1 26,000 54,000 40,000 Member 2 40,000 40,000 40,000 Member 3 65,000 15,000 15,000 10

11 The impact and options available 11

12 Step one: Calculate adjusted income Income source Member 1 Member 2 Member 3 Salary (P60 amount) 100, , ,000 Total gross dividend income and deposit interest 3,200 2,500 3,000 Other taxable income (e.g. rental income) 7, ,000 Threshold income 111, , ,000 Pension savings 32,415 35,540 64,104 Adjusted income 143, , ,104 12

13 Step two: What is my Annual Allowance for 2016/17? Reduced by 50p for each 1 of adjusted income above 150,000, until it reaches 10,000 (for those with adjusted income over 210,000). Member 1 Member 2 Adjusted income 143, ,040 AA reduction calculation N/A (Adjusted income < 150,000) 40,000 (( 168, ,000)/2) AA 2016/ ,000 30,980 Member 3 has adjusted income ( 236,104) in excess of 210,000 therefore their AA is 10,

14 What are my options if my pension savings will exceed my Annual Allowance? It is your responsibility to monitor your AA and take action if needed. Option 1: Utilise carried forward unused Allowances Tax year Annual Allowance Pension savings Unused AA carried forward in tax year? In year Cumulative 2013/14 50,000 30,000 20,000 20, /15 40,000 30,000 10,000 30, /16 40,000* 30,000 10,000 40, /17?^ * Transitional provisions apply (could be up to 80,000) but a maximum carry forward of 40,000 will remain ^Depends on your level of adjusted income for the 2016/17 tax year 14

15 Annual Allowance tax charge Option 2 Pay the tax charge An excess after carry forward of any unused Allowances will give rise to a tax charge. Tax is payable at your marginal rate. You pay If the tax due is less than 2,000 you must pay it to HMRC yourself through your self-assessment tax return. Scheme pays If the tax arising on pension savings to the USS is 2,000 or more, you can elect for the Scheme to pay the tax and reduce your pension fund accordingly (Scheme pays election). Tax will be covered by reducing your retirement benefits. You must report a charge on your self-assessment tax return for both scenarios. 15

16 What are my options if my pension savings will exceed my Annual Allowance? Option 3 reduce your pension savings for the year It is your responsibility to monitor your AA and take action if needed. If you anticipate exceeding the AA, the following options will be available* to both FS and CRB members from April 2016: Enhanced opt out Voluntary Salary Cap Reduce DC matching contributions (after new DC arrangement in place) Temporary cessation of accrual and defer and restart options will no longer be available from 1 April 2016 * Subject to ratification by the trustee board later this month 16

17 The Lifetime Allowance (LTA) 17

18 Lifetime Allowance (LTA) LTA for 2015/16: 1,250,000 LTA from April 2016: 1,000, x any DB pension + Cash Lump Sum + DC fund value LTA tax charge (unchanged from 2006): 55% if excess withdrawn as capital sum 25% plus marginal rate if received as annual pension LTA test at benefit crystallisation event, including: retirement transfers of funds to an overseas pension scheme death in service lump sums LTA to be indexed in line with CPI from

19 What are the LTA implications on death in service? Member s retirement pension will not be payable Survivor s pension ignored for LTA test purposes Only lump sum death benefits tested: Life cover of 3 times annual salary on death Additional lump sum if you have no spouse/partner or children Fund value of money purchase AVCs Money purchase transfers-in Defined contribution funds (from 1 October 2016) derived from contributions over and above the standard employer and employee contributions Tested against the LTA (or protected LTA) in force at the time of death 19

20 Lifetime Allowance (LTA) protection options Fixed Protection 2016: 1,250,000 Individual Protection 2016: Up to 1,250,000 LTA from April 2016: 1,000, x any DB pension + Cash Lump Sum + DC fund value Fixed Protection 2016 will allow you to keep a Lifetime Allowance of 1.25 million BUT no further pension contributions are permitted beyond 5 April 2016 Individual Protection 2016 will allow you to keep a Lifetime Allowance equal to the value of your benefits at 5 April 2016 but capped at 1.25 million and you can continue to make pension provision beyond April 2016 To apply for pension protection, you must contact HMRC directly. To elect enhanced opt out by 5 April 2016 you must notify USS in good time Pre-retirement workshop 20

21 LTA protection application process Enhanced opt out must be effective by 5 April 2016 for Fixed Protection No HMRC protection application deadline Online self-service available from July 2016 Must have HMRC digital protection reference before benefits are paid 21

22 Tax mitigation - Enhanced opt-out No further pension accrual Ongoing member contribution of 2.5% for continued survivor pension and incapacity benefits (subject to review from time to time) Enhanced opt out must be effective by 5 April 2016 for Fixed Protection Election can be cancelled by member but must remain in place for at least 12 months Pensionable service ceases at election date (unless retirement due to incapacity, in which case service calculated to relevant date) Member can make contributions to DC section but no employer contribution 22

23 Tax mitigation Voluntary Salary Cap (VSC) Primarily for AA planning VSC cannot be lower than salary threshold (initially 55,000) For 2016, elections only valid from 1 October Subsequent years, elections must be made at 1 April each year and must remain in place for the full scheme year (1 April to 31 March) Member contribution will be 8% of VSC Employer matching facility available on salary up to VSC 12% employer contribution payable to DC section on salary above salary threshold up to VSC Member contribution of 2.5% of salary above VSC to retain incapacity and death in service benefits based on full salary 23

24 Where to find further information 24

25 Where to find further information USS has launched a website dedicated to the scheme changes: Further USS information and tools will be made available before April 25

26 The website includes a benefit modeller showing projected benefits following the scheme changes 26

27 Any Questions?

28 Limitations of reliance This presentation is for employees of the University of Kent who are members of the Universities Superannuation Scheme and may not be suitable for use in any other context and we accept no responsibility for any such use whether by attendees or by any other party. It has been prepared for general purposes only and does not purport to be and is not a substitute for specific professional advice to individual members. As such it should not be relied upon by individual members for individual investment or other financial decisions and those persons should take their own professional advice on such investments or financial decisions. The contents are based on information available to Towers Watson at the date of the presentation, and takes no account of subsequent developments after that date. This presentation may not be provided or its contents disclosed by any person to any other party without Towers Watson s prior written permission. In the absence of our express written permission to the contrary, Towers Watson accepts no responsibility for any consequences arising from any third party relying on the contents of this presentation or the opinions expressed therein. Taxation Towers Watson Limited is a firm of Actuaries and Employee Benefits Consultants. Where the advice we provide has taxation implications, we rely on our clients obtaining definitive advice on such issues from their accountants and/or legal advisers. 28