University of Leicester Pensions Tax Issues ADVISORY December 2015
Pensions tax issues Today s Agenda Introduction Changes to Universities Superannuation Scheme (USS) Pensions tax changes Annual Allowance (AA) Annual Allowance transitional arrangement Lifetime Allowance (LTA) Green Paper the future? 1
Pensions tax issues USS Changes Final Salary Scheme - 1/80 th of final salary and 3/80ths lump sum for each year of service Career Revalued Section - 1/80 th of current salary and 3/80ths lump sum for each year of service - CPI linked (subject to caps) From 1/4/2016 Career Revalued Benefits - 1/75 th of current salary and 3/75ths lump sum for each year of service - CPI linked (subject to caps) - 8% member contributions From 1/10/2016 - Defined contribution section - Salary above 55,000 p.a. - Matching contributions 2
Pensions tax issues Scope Summary of the changes with illustrations of financial impact No financial advice is being provided Illustrations may not reflect your benefits basis and are not scheme specific - view as examples only 3
Pensions Taxation Background OBJECTIVES A reminder of how pensions are taxed in the UK EXEMPT EXEMPT TAX PENSION CONTRIBUTIONS/ BUILD UP PENSION INVESTMENT RETURNS ON PENSION INCOME SUBJECT TO AN 1) ANNUAL ALLOWANCE AND 2) LIFETIME ALLOWANCE 2015 KPMG LLP, 4 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 4
Pensions Taxation Background PENSIONS TAXATION - BACKGROUND BACKGROUND WHAT IS YOUR ANNUAL ALLOWANCE? The maximum amount you can save towards your pension each year without paying tax The maximum amount of pension savings you can build up over your lifetime without paying tax WHAT IS YOUR LIFETIME ALLOWANCE? 2015 KPMG LLP, 5 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 5
WHAT ARE THE CHANGES? ANNUAL ALLOWANCE LIFETIME ALLOWANCE Tapered annual allowance for the highest earners 50,000 40,000 40,000 10,000 1.5 million 1.25 million 1.00 million 2013/14 2014/15 2016/17 2013/14 2014/15 2016/17 5 2015 KPMG LLP, 6 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 6
Annual Allowance How are savings tested? OBJECTIVES DEFINED CONTRIBUTION SCHEMES = DEFINED BENEFIT SCHEMES, INCLUDING CARE = Contributions paid over the year Additional pension built up that year (adjusted for CPI) x 16 plus additional lump sums 2015 KPMG LLP, 7 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 7
ANNUAL ALLOWANCE PENSION INPUT PERIODS OVER WHAT PERIOD ARE YOUR PENSION SAVINGS TESTED AGAINST THE ANNUAL ALLOWANCE? Measured over a period of time called the pension input period (PIP) It usually covers 12 months The PIP for USS was 1 April to 31 March Your pension savings for a tax year = pension savings made in PIPs that end in the same tax year The PIP has changed to match the tax year (i.e. 6 April to 5 April) from 2016/17 onwards. 2015 KPMG LLP, 8 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 8
ANNUAL ALLOWANCE Pension at start of PIP Revalue with CPI Pension at start of PIP (revalued) Pension at end of PIP Increase in Pension X16 (cash lump sum at 1x) Value for tax purposes (Annual Allowance) The information contained in this presentation is for your general guidance only and is not necessarily a comprehensive or complete statement or analysis of your pension and tax issues. Taxable value x Marginal Tax Rate AA Charge 9
ANNUAL ALLOWANCE CASE STUDY 1 JOHN JOHN S PENSION SAVINGS Pension at the end of the year 21,500 JOHN S PENSION SAVINGS OVER THE YEAR 28,500 Pension at the start of the year (allowing for inflation) 20,000 PENSION TYPE CARE PENSION AT BEGINNING OF THE YEAR: 20,000 INCREASE IN PENSION OVER THE YEAR INCREASE IN LUMP SUM OVER THE YEAR: = 1,500 = 4,500 PENSION AT END OF THE YEAR: 21,500 LUMP SUM AT BEGINNING OF THE YEAR: 60,000 LUMP SUM AT END OF THE YEAR: 64,500 40,000 2016/17 ANNUAL ALLOWANCE VALUE OF THE INCREASE IN BENEFITS OVER THE YEAR: ( 1,500 X 16) + 4,500 = 28,500 ANNUAL ALLOWANCE - 40,000 AMOUNT LIABLE TO TAX = NIL 2015 KPMG LLP, 10 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 10
ANNUAL ALLOWANCE HIGH EARNERS 2016/17 ONWARDS ANNUAL ALLOWANCE WHAT ARE THE CHANGES? Tapered annual allowance for the highest earners ANNUAL ALLOWANCE 50,000 40,000 40,000 10,000 ANNUAL ALLOWANCE 50,000 Members with adjusted income < 150k have annual allowance of 40k 40,000 30,000 20,000 2013/14 2014/15 2016/17 Members with adjusted income > 210k have annual allowance of 10k 10,000 0 130,000 150,000 170,000 190,000 210,000 230,000 250,000 EARNINGS 7 2015 KPMG LLP, 11 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 11
ANNUAL ALLOWANCE HIGH EARNERS If this is more than 110k, add in pension accrual and test against 150k limit Threshold Income If this is less than 110k, 40k annual allowance applies Pension accrual (include if threshold income exceeds) Pension income Investment income Property income Bonus Taxable benefits Employment income If this is more than 150k then a tapered annual allowance applies Adjusted Income If this is less than 150k then the 40k annual allowance applies 2015 KPMG LLP, 12 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 12
ANNUAL ALLOWANCE CASE STUDY 2 HIGH EARNER ANNUAL ALLOWANCE PATRICK PATRICK S PENSION SAVINGS OVER THE YEAR 35,000 Self-assessment Employment income 110,400 UK property income 15,000 Investment income 20,000 SubTotal 145,400 TOTAL REWARD STATEMENT Salary 120,000 Total 120,000 Less employee pension contributions 9,600 TOTAL 110,400 24,800 2016/17 ANNUAL ALLOWANCE AMOUNT LIABLE TO TAX = 10,200 + pension input amount Pension Input Amount 35,000 TOTAL Adjusted Income 180,400 Amount over 150,000 30,400 STD ANNUAL ALLOWANCE = 40,000 AA REDUCTION ( 30,400 /2) = 15,200 PATRICK S REDUCED AA = 24,800 2015 KPMG LLP, 13 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 13
ANNUAL ALLOWANCE TRANSITIONAL ARRANGEMENTS IN 2015/16 TRANSITIONAL RULES ANNUAL ALLOWANCE Tax year 2015/16 will be split the pre-alignment tax year will run from 6 April 2015 to 8 July 2015. Any open PIPs are treated as having ended on 8 July 2015 The post-alignment tax year is the period 9 July 2015 to 5 April 2016 Pension savings made in PIPs that ended in the pre-alignment tax year are tested against an AA of 80,000 Any unused AA from the pre-alignment tax year can be carried forward to the post-alignment tax year, subject to a maximum of 40,000 = 45,487 2015 KPMG LLP, 14 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 14
ANNUAL ALLOWANCE TRANSITIONAL ARRANGEMENTS IN 2015/16 TRANSITIONAL RULES ANNUAL ALLOWANCE PATRICK S PENSION SAVINGS OVER THE YEAR 15/16 ARE 35,000 PRE BUDGET SAVINGS - 8,750 CARRY FORWARD 71,250 CAPPED TO 40,000 POST BUDGET SAVINGS - 26,250 CARRY FORWARD 40,000 2016/17 PIP AA 40,000 (reducing if adjusted income over 150,000) Apr 2015 May Jul Sep Nov Jan 2016 Mar Apr 2016 April 2017 Pre-alignment tax year AA 80,000 Plus carry forward from 2012/13, 2013/14, 2014/15 Post-alignment tax year AA nil Plus pre-alignment tax year unused allowance (Max 40,000) and carry forward from 2012/13, 2013/14, 2014/15 Tax year PIP = 45,487 Note: carry forward figures above exclude carry forward from previous tax years. 2015 KPMG LLP, 15 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 15
ANNUAL ALLOWANCE TRANSITIONAL ARRANGEMENTS IN 2015/16 TRANSITIONAL RULES ANNUAL ALLOWANCE FIONA S PENSION SAVINGS OVER THE YEAR 15/16 ARE 60,000 PRE BUDGET SAVINGS 15,892 CARRY FORWARD 64,108 CAPPED TO 40,000 POST BUDGET SAVINGS 44,108 CARRY FORWARD 40,000 Excess above AA is 4,108 2016/17 PIP AA 40,000 (reducing if adjusted income over 150,000) Apr 2015 May Jul Sep Nov Jan 2016 Mar Apr 2016 April 2017 Pre-alignment tax year AA 80,000 Plus carry forward from 2012/13, 2013/14, 2014/15 Post-alignment tax year AA nil Plus pre-alignment tax year unused allowance (Max 40,000) and carry forward from 2012/13, 2013/14, 2014/15 Tax year PIP = 45,487 Note: carry forward figures above exclude carry forward from previous tax years. 2015 KPMG LLP, 16 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 16
ANNUAL ALLOWANCE CARRY FORWARD 2016/17 Unused allowances from previous 3 tax years can be carried forward This increases annual allowance in current tax year Cumulative test, not aggregate. NB you may need to look back further than three years (NOTE 1) TRANSITIONAL RULES APPLY FOR CARRY FORWARD FIONA S CARRY FORWARD POSITION YEAR AA PENSIONS SAVINGS UNUSED ALLOWANCE YEAR 2013/14 50,000 38,309 11,691 YEAR 2014/15 40,000 16,529 23,471 YEAR 2015/16 (PRE-ALIGNMENT) 40,000 (NOTE 1) 44,108 (- 4,108) CARRY FORWARD FOR YEAR 2016/17 31,054 PLUS AA FOR 2016/17 (TAPERED)* 25,000 TOTAL PERSONAL AA FOR 2016/17 56,054 PENSION SAVINGS 2016/17 62,000 FINAL TAXABLE AMOUNT 5,946 * Fiona s adjusted income is 180,000 in 2016/17 2015 KPMG LLP, 17 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 17
ANNUAL ALLOWANCE TAX CHARGES HOW DO YOU KNOW IF YOU HAVE EXCEEDED THE ANNUAL ALLOWANCE? HOW DO YOU KNOW IF YOU HAVE TO PAY A TAX CHARGE? Your pension scheme will tell you by sending you a Pensions Saving Statement They will confirm the value of your benefit built up in; the current tax year and the previous three tax years Your pension scheme will NOT tell you You must work out the charge yourself and declare to HMRC. You can elect Scheme pays option Notes: This is the current position there will be further changes when the AA taper for high earners takes effect. You may have AA inputs for other pension schemes which increase or create an AA excess. 2015 KPMG LLP, 18 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 18
Annual Allowance Scheme Pays option Meeting the tax charges AA - member can elect that scheme pays the tax in any year (if tax is more than 2,000) - tax paid by the pension scheme & a debit is applied to the benefits payable at retirement The information contained in this presentation is for your general guidance only and is not necessarily a comprehensive or complete statement or analysis of your pension and tax issues. 19
Example Annual Allowance scheme pays option Age when charge paid Pension debit Male Pension debit Female 50 92 pa 84 pa 55 80 pa 73 pa Factors are for illustration only actual factors may differ Illustrations show the pension debits for a notional 1,000 tax charge Debit increases each year with CPI The information contained in this presentation is for your general guidance only and is not necessarily a comprehensive or complete statement or analysis of your pension and tax issues. 20
Lifetime allowance LIFETIME ALLOWANCE The maximum amount of pension savings you can build up over your lifetime without paying tax WHAT IS YOUR LIFETIME ALLOWANCE? 21 21
Lifetime allowance LIFETIME ALLOWANCE FOR DEFINED CONTRIBUTION SCHEME = FOR DEFINED BENEFIT SCHEME = Fund value at retirement Pension at retirement X 20 + lump sum* * For a defined benefit pension commencing before 6/5/2006, the LTA value is 25 x the annual pension at a post 5/4/2006 benefit crystallisation event. 22
Lifetime allowance Case study 1 ROGER AGE 57 CURRENT VALUE OF ROGER S PENSION 1.219M ROGER S PENSION SAVINGS Value of current benefits 1,219,000 LIFETIME ALLOWANCE - 1,000,000 CURRENT PENSION : 53,000 P.A. AMOUNT LIABLE TO TAX = 219,000 LUMP SUM: 159,000 1.25 million 2015/16 LIFETIME ALLOWANCE 1.00 million 2016/17 LIFETIME ALLOWANCE 23
Lifetime allowance Case study 2 ALICE AGE 46 CURRENT VALUE OF ALICE S PENSION 750,000 ALICE S PENSION SAVINGS Current defined benefit pension Value of current defined benefit pension 690,000 45,500 x 20 910,00 Value of other pension benefits 60,000 Total value of pension benefits 750,000 LIFETIME ALLOWANCE - 1,000,000 CURRENT PENSION : 30,000 P.A. LUMP SUM : 90,000 1.25 million 2015/16 LIFETIME ALLOWANCE 1.0 million 2016/17 LIFETIME ALLOWANCE AMOUNT LIABLE TO TAX NIL No immediate problem. Monitor position and perhaps opt-out in the future. 24
Lifetime allowance Paying the charge WHO PAYS THE TAX CHARGES? WHAT IS THE CHARGE? Paid to HMRC by the pension scheme - benefits will be reduced 1. Charge on lump sum = 55% of excess 2. Charge on pension = 25% of excess 25
Lifetime allowance Individual protection 2014 Protect value of benefits as at 5 April 2014 (subject to a minimum of 1.25m & a maximum of 1.5m) Can continue in membership of registered pension schemes Must register by 6 April 2017 26
Lifetime allowance Protections 2016/17 PROTECTIONS 2016/17 Similar transitioning protections are expected to previous options, i.e. Fixed protection 2016 Retain an LTA of 1.25m but no further pension contributions to defined contribution schemes and limited accrual in defined benefit schemes Individual protection 2016 Register value of pensions at 5 April 2016, if > 1m, subject to a cap of 1.25m. Can continue with pension contributions to defined contribution schemes and accrual in defined benefit schemes 27
Lifetime allowance Paying the charge KEN AGE 65 OPTION LTA EXCESS IS PAID AS PENSION PENSION: 48,000 P.A. LUMP SUM: 144,000 VALUE OF PENSION: 960,000 Member s LTA (2016/17) LTA Value of Pension LTA value of lump sum 144,000 Excess above LTA 104,000 1,000,000 960,000 LUMP SUM: 144,000 MEMBER HAS NOT USED LTA BEFORE Tax charge where excess paid as pension 26,000 Reduction in pension p.a. 2,167 RESIDUAL PENSION = 45,833 IN THIS EXAMPLE THE SCHEME USES A 12:1 COMMUTATION FACTOR TO CONVERT PENSION TO LUMP SUM LUMP SUM = 144,000 Note: Schemes may also allow LTA excess to be paid as lump sum 28
USS Tax mitigation options Option When appropriate Impact on benefits Enhanced opt-out Option when member has reached Lifetime Allowance and / or Annual Allowance limits - Pay 2.5% of salary for risk benefits only no further pensions accrual - Minimum 12 months - Retirement due to incapacity or death-inservice: benefit calculations ignore the opt-out - Member can contribute to the defined contribution section, but no employer contributions are payable Voluntary salary cap Option when member wishes to manage Annual Allowance position - Member elects to cap pensionable salary - Cap cannot be lower than DB salary threshold (initially 55,000) - Member pays 8% contributions up to voluntary salary cap - Incapacity and death-in-service protection up to full salary subject to member paying 2.5% of salary contribution above the voluntary salary cap 29
Green paper the future? Key points and aims Encourage saving Complexity of current tax reliefs Recent Budget reforms Balance of DB vs DC NIC treatment Alignment with ISAs Consultation ended 30 September. Announcement expected in Budget 2016 30
Green Paper the future? Current basis of tax relief: Exempt contributions Exempt investment gains and income Taxed benefits (except tax-free lump sum) Is this still appropriate given demographic/market/policy changes? Open consultation but hints at favoured Taxed/Exempt/Exempt outcome Possible reform of Lifetime and Annual Allowances? T/E/E basis implies: End of tax-free lump sum benefit Higher rate taxpayer in work, basic in retirement negative outcome Gov t top-up will mitigate to some extent Year 1 Treasury saving on contribution tax relief > 20 billion 31
Questions QUESTIONS? 2015 KPMG LLP, 32 a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 32
Important notes The information contained in this presentation is for general guidance only and is not a comprehensive or complete statement or analysis of the relevant pension and tax issues. The examples quoted are illustrations only; individuals should not make any decisions or act or refrain from acting on the basis of any example within this presentation without first taking independent financial or tax advice in relation to individual circumstances. The University of Leicester and KPMG LLP accept no responsibility or liability for any consequences of decisions or actions taken as a result of the information contained in this presentation. Pension benefits are governed by the rules and/or legal documentation of the appropriate pension arrangements. If there is a discrepancy between these and any other information issued, the rules and/or legal documentation will prevail. The future basis and rates of tax may vary, and the value of any tax relief available will depend upon the individual circumstances of the investor. All references to taxation are to UK taxation and are based on KPMG s understanding of current UK law and HM Revenue & Customs practice which may change at any time, together with information available in draft legislation and guidance. 33