Pensions

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Pensions all you need to know
Death and Taxes

• Catherine McFadyen
• Richard Warden
• Steven Law
• 17 18 March 2016

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Recent Pension Changes

• State Pension
• Pension Tax
• Annual
• Lifetime
• Death

In this world, nothing can be said to be
certain except death and taxes"
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Single State Pension
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Changes to the State Pension
Equalisation of Men and Womens SPA
Move of SPA to 68 and beyond
Single State Pension
End of contracting out
Lots of change1 year after freedom and choice
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Impact of Freedom and Choice
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Changes to SPA
Life expectancy and State Pension Age
Life expectancies are based upon historic data
from the Office for National Statistics and the
Human Mortality Database (www.mortality.org).
Projected life expectancies use the 2008-based
ONS principal projections. All life expectancies
are period life expectancies (are based on
longevity at the date of retirement and do not
capture changes in longevity that will occur in
subsequent years). State Pension Ages shown are
based upon our understanding of the State Pension
Age changes proposed in 2010 Spending review.
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Simplifying the State Pension

• Certain categories of contracted out members can
  lose out
• Low earners
• Members with short periods of contracted out
  service
• Members close to retirement that have not built
  up their full state pension

• Single State Pension
• Replaces existing system for those reaching SPA
  after 6 April 2016
• 155 / week
• After 35 years of contributions/credits
• Triple Lock increases
• Transitional arrangements are complicated

Net saving for the Government
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Guaranteed Minimum Pensions (GMPs)

• Public sector funds will need to cover GMP
  increases (for those retiring up to 2018 just
  now)
• All increases on pre 1988 GMP
• Increases up to 3 on post 1988 GMP
• For unfunded public service funds this is a zero
  sum game

Increases will need to be met by LGPS employers
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Pension Tax Changes
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Health warning

• We provide information not advice
• Current position is subject to change

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Pension Tax Relief
Budget 2016 George Osborne's political
balancing act BBC News-14 Mar 2016 Genuinely
radical plans to overhaul pension tax relief have
been put on hold for fear of upsetting middle and
higher earners.

• Strengthening the incentive to save
• Alternative regimes
• EET or TEE
• Flat rate of tax relief
• Estimates that the consultation cost HMT 1.5bn
  in tax relief

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Annual Allowance
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Annual Allowance

• Value of tax privileged saving over the Pension
  Input Period (now 6 April 5 April)
• Allowance for the revaluation of previous years
  benefits in line with CPI
• Flat factor of 16 used to value increase in DB
  pension accrual
• Carry forward 3 years of unused allowance
• Full tax-relief up to the Annual Allowance
  (marginal rate charge above)
• Tapered allowance for High Earners

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Annual Allowance
Tax year Annual allowance
2006/07 215k
2007/08 225k
2008/09 235k
2009/10 245k
2010/11 255k
2011/12 50k
2012/13 50k
2013/14 50k
2014/15 40k
2015/16 40k
2016/17
10k to 40k
Factor of 10 used to value pension
Tax charge above thresholds
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Quiz
Case study 1

• 23 years pensionable service at March 2016 in
  LGPS

Pay in year 1 80,000
Pay in year 2 85,000
CPI 2
How big will their tax bill be?
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Quiz
Case study 2

• 23 years pensionable service at March 2016 in
  LGPS

Pay in year 1 110,000 p.a.
Pay in year 2 180,000 p.a.
CPI 2
How big will their tax bill be?
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Meeting the Tax Charges

• Use historic allowances
• Charges lt 2,000 to be met by member
• Charges gt 2,000 member can elect for scheme to
  pay whole amount and reduce benefits accordingly
• Scheme only obliged to pay if whole charge
  relates to that scheme

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Lifetime Allowance
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Lifetime Allowance

• Value of tax privileged saving over a lifetime
• Flat factor of 20 used to value pension accrual
• Then add on lump sum taken
• Pension Commutation can reduce tax charges
• Includes all pension savings (except state
  benefit)
• LTA tax-charges - if excess is taken as
• Lump sum - taxed at 55
• Pension - taxed at 25

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Lifetime Allowance from 2016
Tax year Annual allowance
2006/07 1.50m
2007/08 1.60m
2008/09 1.65m
2009/10 1.75m
2010/11 1.8m
2011/12 1.8m
2012/13 1.5m
2013/14 1.5m
2014/15 1.25m
2015/16 1.25m
2016/17
1.00m
Inflation escalation from 2018
Tax charge above thresholds
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Meeting the Tax Charges

• Commute additional pension to LS in excess of the
  usual limits up to the point the charge is paid.
  LS taxed at 55
• Excess pension is calculated, taxed at 25 and
  paid either from Lump Sum or by the member from
  other source
• Excess pension is calculated, taxed at 25 and
  paid from pension by means of Scheme Pays option

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Issues to consider

• Remain in scheme no change to accrual, but
  accept tax charge
• Protections are available seek financial advice
• Move to 50/50 half contribution and half future
  accrual, could reduce or remove tax charge.
  Annual allowance implications too
• Opt out
• Balance of contributions v tax charges on excess
• Loss of redundancy benefits
• Loss of ill health/life-cover
• Impact of CPI v career progression

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Death
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The secrets of a longer life
Clara Meadmore
Henry Allingham
Gertrude Baines
Jeanne Calment
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Death is comingsooner for some
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A tale of two cities
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A tale of two cities
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Recent experience has been volatile
28 November 2014
25 November 2015
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Population longevity experience
2000s (years)
2010s (years)
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Harsh winters and the flu are to blame
Total weekly deaths in England Wales (July -
June)
Start of a new trend?
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Thank you
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Disclaimer

• This presentation is for information only. It has
  been compiled by Hymans Robertson LLP, and is
  based upon their understanding of legislation and
  events as February 2016. Legislation may be
  subject to future change.
• The presentation is designed to be a general
  summary of the new tax legislation. It does not
  take into account your personal circumstances and
  does not constitute financial advice. Where the
  subject of this presentation involves legal or
  tax issues you may wish to take specialist
  advice.
• Hymans Robertson is unable to provide you with
  advice if you are unsure as to what action to
  take we strongly recommend that you seek
  independent financial advice. For a list of
  Independent Financial Advisers in your area you
  can contact IFA Promotions on 0800 085 3250 or
  visit www.unbiased.co.uk. Please be aware that
  you may be charged a fee for any advice.
•  

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Working it out
Step 1
Step 2
1 April 2015 1 April 2015 1 April 2015
Pay Pay 80,000
Service Service Service
17 years pre March 09 17 years pre March 09 17 years pre March 09
6 years post March 09 6 years post March 09 6 years post March 09
Benefit calculation Benefit calculation Benefit calculation
Pension 17 x 80,000/80 6x 80,000/60) 17 x 80,000/80 6x 80,000/60)
Lump Sum 17 x 80,000 x 3/80 17 x 80,000 x 3/80

31 March 2016 31 March 2016 31 March 2016
Pay Pay 85,000
Service Service Service
17 years pre March 2009 17 years pre March 2009 17 years pre March 2009
6 years post March 09 6 years post March 09 6 years post March 09
1 year CARE March 2016 1 year CARE March 2016 1 year CARE March 2016
Benefit calculation Benefit calculation Benefit calculation
Pension 17 x 85,0000/80 6 x 85,000/60 1 x 85,000/49 17 x 85,0000/80 6 x 85,000/60 1 x 85,000/49
Lump Sum 17 x 85,000 x3/80 17 x 85,000 x3/80

Pension 25,000
Pension 28,297
Lump sum 51,000
Lump sum 54,188
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Calculation of pension growth
Step 3 Compare for growth
Incl. CPI
Pension at start of PIP 80,000 (25,500)
Pension at end of PIP 28,297
Growth in excess of 2 2,797(A)
Lump sum at start of PIP 51,000 (52,020)
Lump sum at end of PIP 54,188
Growth in excess of 2 2,168(B)
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Calculation of pension growth
Step 4 Apply factor
Growth in pension 2,797(A)
Growth in lump sum 2,168(B)
Flat related factor 16(C)
Growth (A x C) B 46,920
Excess subject to tax charge 6,920
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Calculation of tax rate to apply
Step 5 Calculate marginal tax rate
Gross income 85,000
Less contributions 7,867
77,133
Plus excess over 40,000 6,920
Total net income 84,053
As total income is below 150,000 (45 tax
threshold) tax charge is 40
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Calculation of tax
Step 6 Apply tax rate to excess
Total growth 46,920
Less annual allowance 40,000
Excess 6,920
Apply tax rate 40 2,768
Assumes no carry forward allowance available