Pensions Tax and USS Eifion Morris

Agenda Introduction Future membership Past membership Defined contribution Other considerations Questions Career Revalued Benefits It ’ s complicat ed ! Tax simplification, and relevant context Annual and Lifetime Allowance … am I affected? Protections, and USS options The changes for 2016 Some scenarios Q & A

Presentation on pensions tax and USS | information only | February 2016slide 3 day Annual allowance Lifetime allowance As much as you like ! day

06 / 0707 / 0808 / 0909 / 1010 / / / / / / / / / / / 1 6 Lifetime allowance (LTA) How the lifetime allowance has changed since 2006

Presentation on pensions tax and USS | information only | February 2016slide 5 Lifetime allowance (LTA) Years of Pensionable Service Pensionable Salary £150,000£431,250£646,875£862,500£1,078,125£1,293,750£1,509,375£1,725,000 £140,000£402,500£603,750£805,000£1,006,250£1,207,500£1,408,750£1,610,000 £130,000£373,750£560,625£747,500£934,375£1,121,250£1,308,125£1,495,000 £120,000£345,000£517,500£690,000£862,500£1,035,000£1,207,500£1,380,000 £110,000£316,250£474,375£632,500£790,625£948,750£1,106,875£1,265,000 £100,000£287,500£431,250£575,000£718,750£862,500£1,006,250£1,150,000 £90,000£258,750£388,125£517,500£646,875£776,250£905,625£1,035,000 £80,000£230,000£345,000£460,000£575,000£690,000£805,000£920,000 £70,000£201,250£301,875£402,500£503,125£603,750£704,375£805,000 £60,000£172,500£258,750£345,000£431,250£517,500£603,750£690,000 £50,000£143,750£215,625£287,500£359,375£431,250£503,125£575,000 £40,000£115,000£172,500£230,000£287,500£345,000£402,500£460, Note that this slide is about accrued rights, and is therefore based on existing (pre April 2016) USS benefit structure The LTA will reduce from £1.25 million to £1.0 million from April 2016

Presentation on pensions tax and USS | information only | February 2016slide 6 USS lifetime allowance Pension x MPAVC Savings £ 56 K x 20 + £ 168 K + £ 50 K

Presentation on pensions tax and USS | information only | February 2016slide 7 USS lifetime allowance £ 1,338,000 Maximum tax free cash of 25% of your LTA Total lifetime allowance value of pension saving If your benefits from all pension schemes exceed the LTA, then a tax charge of either 25% (on pension) or 55% (on lump sum) applies. USS can adjust your benefits for the tax charge.

Presentation on pensions tax and USS | information only | February 2016slide 8 LTA protections Government has previously introduced protections when the LTA has been lowered – it will do so again in 2016 Fixed Protection 2016Individual Protection 2016 Offers protected LTA of £1.25m No minimum LTA value required Benefit accrual must cease on or before 5 April 2016 Not available if taken enhanced or primary protection HMRC is yet to provide the online tool to enable elections … will follow from July 2016 (members will need to declare LTA value as at 5 April 2016) Must have pension savings of £1.0m or more at 5 April 2016 Protects actual value of the fund at 5 April 2016, up to maximum of £1.25m Contributions / accrual can continue No deadline (apparently) More later …

Presentation on pensions tax and USS | information only | February 2016slide 9 Annual allowance (AA) Opening valueClosing value

Presentation on pensions tax and USS | information only | February 2016slide 10 Annual allowance (AA) Opening valueClosing value les s Pension Input Amount Gross MPAVC plu s Annual allowance

Presentation on pensions tax and USS | information only | February 2016slide / 0707 / 0808 / 0909 / 1010 / / / / / / / / / / / 1 6 Annual allowance How the annual allowance has changed since 2006

Presentation on pensions tax and USS | information only | February 2016slide 12 £150k£49,590£63,128£76,665£90,203 £140k£46,284£58,919£71,554£84,189 £130k£42,978£54,711£66,443£78,176 £120k£39,672£50,502£61,332£72,162 £110k£36,366£46,294£56,221£66,149 £100k£33,060£42,085£51,110£60,135 £90k£29,754£37,877£45,999£54,122 £80k£26,448£33,668£40,888£48,108 £70k£23,142£29,460£35,777£42,095 £60k£19,836£25,251£30,666£36,081 £50k£16,530£21,043£25,555£30,068 £40k£13,224£16,834£20,444£24, ANNUAL SALARY YEARS OF SERVICE Annual allowance The traditional AA table for final salary members …

Presentation on pensions tax and USS | information only | February 2016slide 13 Annual pension input amounts An estimate of how pension inputs will build up in future years, one year basis only … Salary Pension Input Amount built up in 2016/17 Pension Input Amount built up 2017/18 £210,000£49,000£45,000 £200,000£47,000£43,000 £180,000£42,000£39,000 £170,000£40,000£37,000 £160,000£38,000£35,000 £150,000£35,000£33,000 £140,000£33,000£31,000 £130,000£31,000£29,000 £120,000£29,000£27,000 £110,000£26,000£25,000 £100,000£24,000£23,000 £80,000£20,000£19,000 £70,000£17,000 £60,000£15,000 £50,000£13,000 £40,000£11,000 Note that numbers are approximate, and rounded, for illustration purposes only

Presentation on pensions tax and USS | information only | February 2016slide 14 Working out your AA 35 x 1/80 x£ 130 Kx 2.7% x 19 £ 1,109, th Salary Service x CPI x 19 x x Opening value

Presentation on pensions tax and USS | information only | February 2016slide x 1/80 x£ K x 19 £ 1,167, th Salary Service x 19 x x Closing value Working out your AA

Presentation on pensions tax and USS | information only | February 2016slide 16 Opening value Closing value les s MPAVC plu s Working out your AA £ 1,167,075 £ 1,109,801 £ 10,000 £ 67,274

Presentation on pensions tax and USS | information only | February 2016slide 17 Using ‘Carry Forward’ £ 50,000 £ 20,000 £ 30, / / / 15 PIP Period Annual allowance Less PIP amount Carry forward £ 50,000 £ 25,000 £ 40,000 £ 67,274 ( £ 27,274) £ 30,000 £ 55, £ 27,726

Presentation on pensions tax and USS | information only | February 2016slide 18 Alignment of pension assessment periods The latest changes The government introduced new assessment periods for the annual contributions to pension schemes – aligned with tax years Special split year in 2015/16 into mini tax years, before and after the 2015 Budget. Foresight needed to have taken any material advantage in 2015/16 The Money Purchase Annual Allowance A new reduced allowance, the MPAA, applies once a member chooses to draw flexible DC benefits... to prevent recycling The £10,000 MPAA runs alongside the annual allowance Affects the highest earners and those making significant AVCs, and key point is that once you access flexible DC benefits further DC saving is restricted Future DC contributions permanently restricted

Presentation on pensions tax and USS | information only | February 2016slide 19 AA Tapering … key details Threshold Income Your taxable income (salary, other earned income, rent, dividends) Plus employer contributions to any new* salary sacrifice arrangement Adjusted Income is threshold income plus … The value of the employer contributions to a DC scheme, and for DB schemes the Pension Input Amount less member contributions * entered into on or after 9 July 2015 Generally speaking if threshold income is below £110,000 no tapered AA can apply (special cases can apply, eg large one-off employer contribution) An individual’s AA will be reduced by £1 for every for every £2 of “adjusted income” that exceeds £150,000, up to a maximum reduction of £30,000

Presentation on pensions tax and USS | information only | February 2016slide 20 AA Tapering The following allows you in simple terms to assess if you will be affected by the AA taper … Note that the taper can apply if a member benefits from a large, one-off pension contribution (even if threshold income is less than £110,000)

Presentation on pensions tax and USS | information only | February 2016slide 21 AA Tapering – what is the effect? Note these are estimated calculations based on a number of broad assumptions. They are not intended to be definitive. In particular, assumes: no other income, USS salary = threshold income, marginal tax rate of 45% applies, no carry forward, no matching contribution, tax upon drawing benefits not taken into account ANALYSIS OF ANNUAL ALLOWANCE CHARGE FOR THE YEAR 2016/2017 Threshold Income Net cost Adjusted Income Annual Allowance Pension Input Amount Excess pension saving AA tax charge DC fund Net DC fund* DB pension pa DB lump sum £210,000£9,000 £242,000 £10,000£49,000£39,000£18,000£16,000 -£2,000 £1,800£5,400 £200,000£9,000 £231,000 £10,000£47,000£37,000£17,000£15,000 -£2,000 £1,700£5,100 £190,000£8,000 £219,000 £10,000£45,000£35,000£16,000£14,000 -£2,000 £1,600£4,800 £180,000£8,000 £208,000 £11,000£42,000£31,000£14,000£13,000 -£1,000 £1,600£4,800 £170,000£7,000 £196,000 £17,000£40,000£23,000£10,000£12,000 £2,000 £1,500£4,500 £160,000£7,000 £185,000 £22,500£38,000£15,500£7,000£11,000 £4,000 £1,400£4,200 £150,000£7,000 £173,000 £28,500£35,000£6,500£3,000£10,000 £7,000 £1,400£4,200 £140,000£6,000 £162,000 £34,000£33,000£0 £9,000 £1,300£3,900 £130,000£6,000 £151,000 £39,500£31,000£0 £8,000 £1,200£3,600 £120,000£5,000 £139,000 £40,000£29,000£0 £7,000 £1,200£3,600 £110,000£5,000 £128,000 £40,000£26,000£0 £6,000 £1,100£3,300 £100,000 £4,000 £116,000 £40,000£24,000£0 £5,000 £1,000£3,000 * after the AA charge has been paid

Presentation on pensions tax and USS | information only | February 2016slide 22 AA Tapering – what is the effect? Note these are estimated calculations based on a number of broad assumptions. They are not intended to be definitive. In particular, assumes: no other income, USS salary = threshold income, marginal tax rate of 45% applies, no carry forward, no matching contribution, tax upon drawing benefits not taken into account ANALYSIS OF ANNUAL ALLOWANCE CHARGE POST 2016/2017 Threshold Income Net cost Adjusted Income Annual Allowance Pension Input Amount Excess pension saving AA tax charge DC fund Net DC fund* DB pension pa DB lump sum £210,000£9,000 £238,000 £10,000£45,000£35,000£16,000£31,000 £15,000 £750£2,200 £200,000£9,000 £227,000 £10,000£43,000£33,000£15,000£29,000 £14,000 £750£2,200 £190,000£8,000 £216,000 £10,000£41,000£31,000£14,000£27,000 £13,000 £750£2,200 £180,000£8,000 £205,000 £12,500£39,000£26,500£12,000£25,000 £13,000 £750£2,200 £170,000£7,000 £193,000 £18,500£37,000£18,500£8,000£23,000 £15,000 £750£2,200 £160,000£7,000 £182,000 £24,000£35,000£11,000£5,000£21,000 £16,000 £750£2,200 £150,000£7,000 £171,000 £29,500£33,000£3,500£2,000£19,000 £17,000 £750£2,200 £140,000£6,000 £160,000 £35,000£31,000£0 £17,000 £750£2,200 £130,000£6,000 £149,000 £40,000£29,000£0 £15,000 £750£2,200 £120,000£5,000 £137,000 £40,000£27,000£0 £13,000 £750£2,200 £110,000£5,000 £126,000 £40,000£25,000£0 £11,000 £750£2,200 £100,000 £4,000 £115,000 £40,000£23,000£0 £9,000 £750£2,200 * after the AA charge has been paid

Presentation on pensions tax and USS | information only | February 2016slide 23 It ’ s complicat ed ! Previous USS options The new USS options for the 2016 regime Making sense of the options

Presentation on pensions tax and USS | information only | February 2016slide 24 Previous USS options For some years USS has made available specific options to members affected by the AA and LTA The most used option has been “enhanced opting out”, which has allowed a member to opt out of the scheme whilst retaining death in service and incapacity cover (with special member contribution) Two other options have been available, used in very specific circumstances – Temporary cessation of accrual – Salary capping and past service deferral Options no longer available (from 1 April 2016), but may still apply to existing members

Presentation on pensions tax and USS | information only | February 2016slide 25 USS options from 2016 Enhanced opt-out Allows opting out of scheme with continued death in service and incapacity cover … its value varies for each individual Special member contribution of 2.5% of salary Note that prohibits accessing flexible retirement Available from April 2016, election must run for 12 months, can only be made once Voluntary Salary Cap Available from 1 October 2016 at the earliest Level of salary for pension purposes can be set individually at a minimum of £55,000 No change to effect of taper, and note effect on death / IH benefits The scheme has new options in the light of the 2016 tax regime Can be used alongside, or separate to, HMRC options

Presentation on pensions tax and USS | information only | February 2016slide 26 Pension savings are already above £1.25 million  Individual protection should be considered, as cannot be lost and protects at £1.25 million  Other options can then be considered, for example full opting-out, enhanced opting-out Pension savings are between £1 million and £1.25 million  A difficult decision, with either (i) individual protection on its own, or (ii) both individual protection and fixed protection, deserving consideration  Full-opting out or enhanced opting-out needed with fixed protection Pension savings are below £1 million but are nearing that amount  A difficult decision, with (i) no protection or (ii) fixed protection, deserving consideration  Individual protection not applicable Options for consideration Some general scenarios, and options that might be considered: Note that these are not exhaustive, and it is recommended that you seek independent financial advice before making any pensions decision Note also that there are other factors which should be taken into account, notably age, eligibility to retire either fully or flexibly, level of other (non-USS) income, etc. These are options for consideration only.

Presentation on pensions tax and USS | information only | February 2016slide 27 Further information USS Scheme information, and the latest news uss.co.uk USS For the Future Dedicated site to the 2016 scheme changes forthefuture.uss.co.uk USS benefit modeller (final salary) Finds the LTA value of your benefits and more uss.co.uk Pensions Advisory Service General guidance on pensions pensionsadvisoryservice.org.uk Money Advice Service For general financial guidance including pensions moneyadviceservice.org.uk Pension Wise New government site focussed on defined contribution pension saving pensionwise.gov.uk Independent Financial Advisers Look for “chartered advisers” only unbiased.co.uk findanadviser.org

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