Important changes to pension tax relief that could affect you.

Transcription

1 Important changes to pension tax relief that could affect you.

2 2 Important changes to pension tax relief Allen & Overy LLP 2010

3 3 New laws which restrict the current levels of tax relief on pension savings will be introduced with effect from 6 April 2011 The new allowances, although significantly reduced, should not affect the vast majority of pension scheme members It is important that members understand how the new rules work to ensure they do not accidentally incur a tax charge Temporary measures, known as anti-forestalling, still exist to discourage substantial new contributions being made before 6 April 2011

4 4 Important changes to pension tax relief On 14 October 2010, the Government announced details of the way it intends to restrict tax relief on pension savings Allen & Overy LLP 2010

5 5 Changes are proposed to: your Annual Allowance: the maximum taxfree build up of pension savings you can make each year; and your Lifetime Allowance: the overall value of pension savings that you can build up over your entire working lifetime before a tax penalty applies. Whether these changes affect you will depend on a range of factors such as how much you earn, how long you have been a pension scheme member, the pay rises you receive and the extent to which you pay additional voluntary contributions or make extra payments into personal pensions. In this communication, we have set out a summary of what these changes are, when they apply and how you may be affected. This communication is relevant to those individuals where the following is applicable: You are a member of the Defined Contribution Section (the DC Section) of the Allen & Overy Pension Scheme (the Scheme); and /or You may have previously been a member of Defined Benefit Section (the DB Section) of the Scheme and your retirement benefits from this scheme are linked to your earnings; and/or You may be sacrificing some of your bonus for additional pension contributions. This communication aims to give you a broad overview. If you think it is likely that you will be impacted by the changes, it s important that you consider taking financial advice as the Trustee of the Scheme, Allen & Overy and the Scheme administrators are unable to give you financial advice. Allen & Overy believe the current structure of Employer Core Contributions, Employee Ordinary Contributions and Employer Matching Contributions will enable the vast majority of members to fully participate in the DC Section of the Scheme without being affected by these changes in pension legislation. Therefore, there are no plans to alter the Scheme s structure at this time and it continues to form an important part of your reward and benefits at Allen & Overy.

6 6 Important changes to pension tax relief Your Annual Allowance This is an annual limit on how much your pension savings can grow in a year before being subject to tax Allen & Overy LLP 2010

7 7 How much is the Annual Allowance? For the tax year 2010/2011 it is 255,000, but it will reduce to 50,000 for the 2011/12 tax year (and will then be fixed until at least 2015/16). The figure to compare with the Annual Allowance is the sum of all your pension savings paid by you into all of your pension schemes during each Pension Input Period ending in the tax year (6 April to 5 April). What are my pension savings? Your pension savings could be as follows: You are a member of the DC Section of the Scheme (which may include additional voluntary contributions (AVCs)). The relevant pension savings figure is simply the total gross contributions made over the year by you and Allen & Overy. The relevant pension savings figure will also include any gross contribution made through the bonus waiver scheme (please see the final section of this document for further information on the bonus waiver scheme). You may have pension benefits in the DB Section of the Scheme. Whilst you are no longer an active member of that section, your current earnings will determine your retirement benefits. Any increase in your annual pension at retirement (above inflation, as measured by the Consumer Price Index (CPI)) is multiplied by a factor of 16 and will form part of your pension savings. To assist you with this calculation, we provide a step-by-step guide in the final section of this document. Finally, you may have alternative additional personal pension arrangements. Any contributions into such arrangements will also form part of your pension savings. Increases in benefits from other pension schemes (eg DB schemes from prior employment) will not normally be included in the calculation of annual pension savings. What is my Pension Input Period? For any tax year, the Annual Allowance test is assessed against the pension savings in the Pensions Input Period that ends in that tax year. Each scheme has its own Pensions Input Period, so if you are a member of more than one scheme, then you have to add up all the pension savings for each scheme. For the Scheme, the Pension Input Period is 1 January to 31 December. Thus, your Pension Input Period for the 2011/12 tax year will be the year 1 January 2011 to 31 December What if my pension savings exceed the Annual Allowance? If your pension savings exceed the 50,000 Annual Allowance, a special tax charge is payable on the surplus savings above the Annual Allowance. We recommend that you seek financial/tax advice if you think you will be likely to exceed this allowance. Any tax charge (applicable on any surplus pension savings above the Annual Allowance) will effectively cancel out the tax relief you receive when you make pension savings. Therefore, as the pension you receive in retirement is taxable, it will usually not be tax-efficient to make pension savings above the Annual Allowance. If your pension savings exceed the Annual Allowance in any one year, you may offset the potential tax payable by carrying forward any unused allowance from the previous three years (using the reduced allowance of 50,000 to determine the amount which can be carried forward to tax year 2011/12 from each of the tax years 2008/09, 2009/10 and 2010/11). If, for example, you made gross pension savings of 30,000 in each of 2008/09, 2009/2010 and 2010/2011 tax years, you will have underutilised allowances of 20,000 for each tax year. It should therefore be possible to make pension savings of 110,000 in the 2011/12 tax year, ie 50, ,000 (3 x 20,000). In order to determine contributions made in previous years, please follow the guidance noted in the pension savings section above. If you have benefits in the DB Section of the Scheme you will be advised by the scheme administrator of the amount that will be assessed against the Annual Allowance. As this is a complex area, we recommend you take financial/tax advice. Are there situations when the Annual Allowance does not apply? All benefits earned will be subject to the Annual Allowance, except in the cases of death or retirement due to terminal ill health. The Government is considering ways to exempt people retiring on the grounds of genuine ill health, but it is still concerned about tax avoidance. The application of the Annual Allowance will apply in every year that pension savings are made, including: The year in which benefits are drawn If a member retires early or is made redundant

8 8 Important changes to pension tax relief Lifetime allowance This is the overall value of pension benefits you can build up over your working lifetime without further tax penalties applying. This will reduce from 1.8m to 1.5m from April Any excess value above 1.5m will be subject to a Lifetime Allowance tax charge of, currently, 55%. Individuals who have successfully registered for Primary and Enhanced protection (for benefits built up prior to 6 April 2006) will continue to benefit from protection and are unaffected by this change in legislation (assuming they remain eligible for protection). The Government has introduced transitional measures allowing individuals to apply for fixed protection. For individuals with savings above 1.5m or who believe the value of their pension benefits will rise above this level (through investment growth and/or pension saving), they will be able to apply to HMRC for a fixed allowance of 1.8m. To qualify for fixed protection, you must cease accruing benefits in all registered pension schemes before 6 April, Guidance on how to apply for this protection is yet to be released but notifications in writing must be received by HMRC prior to 5 April If you do not have protection and are worried about exceeding the Lifetime Allowance, you can compare the value of your benefits against the Lifetime Allowance. In order to do this comparison, you will need to log on to the Allen & Overy pensions website and follow the steps below: Step 1: Go to the pensions homepage, log into My Pension and select Benefit Details then Benefits Statement on the left hand side of the webpage. Take the current value of the DC Section of the Scheme. If you were previously a member of the DB Section of the Scheme, go to Step 2, otherwise go to Step 3. Step 2: Go to the pensions homepage, log into My Pension and select Pension Planner on the left hand side of the webpage and then click the hyperlink in the first paragraph which will take you to a copy of your latest DB statement. Take the accrued annual pension value (from the pension benefits as at date statement produced section) and multiply by 20 (rather than 16 which is used when comparing your pension savings to the Annual Allowance). Step 3: Obtain the value of any other pension schemes. DC schemes are based on value as per Step 1 and DB schemes are valued at the factor of 20 as per Step 2. If the total of the above sum exceeds 1.5m, you should immediately seek financial advice. If the figure is below the Lifetime Allowance but you believe that there is a possibility of you breaching the Lifetime Allowance (taking into account the current combined value of your pension benefits, the current level of contributions and future growth) in the future, we advise you to consult a financial/tax adviser. Please note that your entitlement to a tax free lump sum is not detailed separately on your benefit statement online. For members of the DC Section of the Scheme, this figure is irrelevant for this exercise. If you are a member of the DB Section of the Scheme, then it is possible that taking tax free cash and a reduced pension will in most instances reduce the value of your pension benefits for Lifetime Allowance purposes. As noted above, we recommend you seek advice in the event of your pension benefits exceeding the Lifetime Allowance. Allen & Overy LLP 2010

9 9 Temporary rules to 5 April 2011 Legislation exists to discourage individuals whose income is above a certain level from paying substantial contributions before the rules change on tax relief. These temporary, anti-forestalling rules will limit full tax relief for individuals who: have total relevant income of at least 130,000 in the current tax year (or in either of the last two tax years) broadly, this is your total income that is chargeable to income tax less up to 20,000 of your pension contributions; and increase their usual pension savings; and have total pension savings of more than 20,000 in the tax year. If all three conditions apply, a Special Annual Allowance tax charge applies on any new pension savings by you or your employer (existing contributions are unaffected until April 2011). The rules around anti-forestalling are complex. Further details on the rules are available on the Allen & Overy Pensions Website If all three conditions apply, a Special Annual Allowance tax charge applies

10 10 Important changes to pension tax relief Bonus waiver You may be eligible for a bonus as part of your current salary package and may wish to consider waiving part of your bonus award as a pension contribution. Although the deadline for the 2010 waiver has passed, this is something that you may wish to consider in the next tax year as the anti-forestalling regulations will not apply. Bonus waiver allows you to give up some or all of your bonus and replace it with an employer s (Allen & Overy) pension contribution. As this is an employer s contribution, the payment will not be subject to tax. Allen & Overy will also save National Insurance on the pension contribution which they share with you. This will create a larger pension contribution for you when compared to the contribution you may have paid personally. An additional benefit of bonus waiver is that any contribution made reduces your gross employment income and your personal tax liability. For individuals earning in excess of 100,000 per annum, this may avoid or reduce the impact of the removal of the Personal Allowance, thus creating a greater tax saving. The Personal Allowance is the element of your income which is normally not subject to tax. For individuals with total gross income in excess of 100,000 in a tax year, the Personal Allowance is reduced by 1 for every 2 of income over the 100,000 income limit. The Personal Allowance is exhausted when income exceeds 112,950. If you are eligible for a bonus, you will be contacted with more detailed information each time there is an opportunity to take part in a bonus waiver arrangement. Again, you should seek appropriate advice from a financial/tax adviser to ensure that you are not exceeding the Annual Allowance by taking part in the bonus waiver arrangement. Allen & Overy LLP 2010

11 11 Defined benefit pension savings calculation In order to determine the relevant pension savings figure from the DB Section, you will need to follow the steps below: Step 1: Go to the pension s homepage after 1 January 2011; log into My Pension and select Pension Planner on the left hand side of the webpage and then click the hyperlink in the first paragraph which will take you to a copy of your latest DB statement. Note the accrued annual pension value (from the pension benefits as at date statement produced section). Step 2: Increase the value of your annual pension (from Step 1) in line with the Consumer Price Index (CPI) and note the resultant figure. For ease, the relevant figure is 3.1% for the first year s calculation. In future years, the relevant figure is CPI % figure as of September each year. CPI figures are available on Step 3: Obtain the same information (as per Step 1) from your pension statement after 1 January Step 4: Take the value from Step 3 and deduct the value from Step 2. The resultant figure reflects the increase in your annual pension at retirement (over the course of the year). This figure is multiplied by a factor of 16 and will form part of your pension savings. For future tax years, you will need to repeat this exercise. Please note that the information provided in this communication is based on our advisers interpretation of the changes in pension legislation announced by Her Majesty s Revenue & Customs (HMRC) in October The information should be used for guidance purposes only and does not constitute financial advice.

12 For more information: Allen & Overy LLP One Bishops Square London E1 6AD Tel +44 (0) Fax +44 (0) Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. Allen & Overy LLP 2010 I CS