1. Recent changes to Pensions Taxation Jane Briggs, Senior Legal Assistant 29 September 2015

2. 2 squirepattonboggs.com 2 Agenda  Summer Budget – the headlines  Changes to lifetime and annual allowances  Taxation of lump sum death benefits  Consultation on pensions tax relief  End of contracting-out  Public sector exit payment cap

3. 3 squirepattonboggs.com 3 Summer Budget – The Headlines HeadlinesImplementation Date Reduction in LTA from £1.25m to £1m6 April 2016 AA taper for those earning over £150k6 April 2016 All PIPs to be aligned with tax year Transitional AA measures apply for 2015-16 tax year 8 July 2015 – all PIPs close New PIP runs from 9 July 2015 to 5 April 2016 Taxable lump sum death benefits will be taxed at recipient’s marginal rate of income tax (currently taxed at 45%) 6 April 2016 Consultation on pensions tax reliefCloses 30 September 2015

4. 4 squirepattonboggs.com 4 Changes to the Lifetime Allowance  Currently £1.25m  From 6 April 2016 – reduction to £1m  From 6 April 2018 – rise in line with inflation

5. 5 squirepattonboggs.com 5 Changes to the Annual Allowance (1) Currently - tax relief on pension savings up to an annual limit of £40,000. Annual Allowance Taper  Has effect from 6 April 2016  Applies to those with ‘adjusted income’ of over £150,000  AA reduces by £1 for every £2 by which the individual’s income exceeds £150,000 – subject to a maximum reduction of £30,000  Carry forward of unused allowance will still be available, but amount that can be carried forward will be based on unused tapered AA

6. 6 squirepattonboggs.com 6 Changes to the Annual Allowance (2) Pension Input Periods  Pension savings made in a "pension input period" (PIP) assessed against annual allowance.  Until recently, a PIP was usually a period of 12 months and might have been (but did not have to be) aligned with the tax year.  We understand that historically the Teachers’ Pension Scheme’s PIP ran from 1 April to 31 March.

7. 7 squirepattonboggs.com 7 Changes to the Annual Allowance (3)  Government Aim: to align PIPs with the tax year (to ensure the tapered AA “works as intended”)  All PIPs open on 8 July 2015 are closed on that date  The next PIP runs from 9 July 2015 to 5 April 2016  All subsequent PIPs will be aligned with the tax year

8. 8 squirepattonboggs.com 8 Changes to the Annual Allowance (4)  Individuals will have a £80k AA for 2015 to 2016 but subject to an AA of £40k for savings from 9 July 2015 to 5 April 2016.  To prevent retrospective taxation  The 2015 to 2016 tax year will be split into two “mini tax years”  Plus unused AA from the 2012/13, 2013/14, or 2014/15 tax years, which can still be carried forward, as usual The pre-alignment tax year 6 April 2015 – 8 July 2015 Total pension savings for all PIPs ending in this period will be measured against an AA of £80k* The post-alignment tax year 9 July 2015 – 5 April 2016 Pension savings over the PIP covering this period will be measured against the unused AA from the pre-alignment tax year, subject to a £40k cap*

9. 9 squirepattonboggs.com 9 Examples of exceeding the AA  The TPS website highlights a number of scenarios where a person could exceed the AA. These include:  Members who have a large increase in salary during the PIP (especially if they already have significant service accrued).  Members who leave service in the TPS and later return to pensionable employment on a higher salary, as any periods of service are automatically linked together, which will affect the growth in their benefits during that PIP.  Members purchasing a large amount of Additional Pension by way of a single contribution.

10. 10 squirepattonboggs.com 10 squirepattonboggs.com Latest Developments Pension Schemes newsletter 71  Following the announcement that the lifetime allowance for pension savings will be reduced from £1.25 million to £1 million, two protection regimes are to be introduced which will have the same conditions as the previous fixed and individual protection regimes for individuals who want to rely on them.  More detail regarding protection regimes to be published in next pension schemes newsletter (“around September”)  In the meantime, HMRC suggests considering what communications need to be made to remind members that for the new ‘fixed protection’ they must have no benefit accrual after 6 April 2016, and for the new ‘individual protection’ they must have savings of at least £1m on 5 April 2016.

11. 11 squirepattonboggs.com 11 squirepattonboggs.com Taxation of lump sum death benefits  From April 2015 lump sum death benefits payable from registered pension schemes are taxed at 45% if member dies after age 75  If member died before age 75 then the lump sum death benefit is paid tax free (as long as paid within 2 years, otherwise the 45% tax charge applies)  From 2016/17 tax year, the 45% tax charge will in most cases be replaced with marginal-rate taxation  45% tax charge will still apply when the lump sum death benefit is paid to someone other than an individual who is the ultimate beneficiary, e.g. when paid to a trust or a company

12. 12 squirepattonboggs.com 12 squirepattonboggs.com Summer Budget – Consultation on pensions tax relief (1) Strengthening the incentive to save: a consultation on pensions tax relief  Increased longevity and the changing nature of pension provision means that individuals will need to be clear on the support that they receive from government and be incentivised to save more.  The gross cost of pensions tax relief is significant – “Including relief on both income tax and National Insurance contributions, the government forwent nearly £50 billion in 2013-14.”

13. 13 squirepattonboggs.com 13 squirepattonboggs.com Summer Budget – Consultation on pensions tax relief (2)  No specific proposals put forward – the government asks whether “an alternative system that is simple and transparent, in which savers can better understand the benefits and risks, is likely to result in greater engagement with pension saving … or whether it would be better to keep with the current system.”  “Taxed-Exempt-Exempt” system (with a government top up) given as one suggestion for reform.  Question asked whether the government should consider differential treatment for DB and DC pensions.  Deadline for responses is 30 September 2015

14. 14 squirepattonboggs.com 14 squirepattonboggs.com End of contracting - out  The state pension system will undergo major reform in April 2016 with the existing two tier state pension system being replaced with a single-tier flat rate state pension.  Employer and active member NI contributions will increase to standard rate.  No statutory override power for public sector employers.  Prepare for the forthcoming increase in NI contributions.

15. 15 squirepattonboggs.com 15 squirepattonboggs.com Public Sector Exit Payment Cap (1) HM Treasury - Consultation on a Public Sector Exit Payment Cap  Proposes £95,000 cap (before tax) on the total amount of redundancy and other exit payments that an individual leaving the public sector can receive  “The government does not believe that six figure exit payments, which are far in excess of those available to most workers in the public sector or wider economy, are fair or offer value for money to the taxpayer who funds them.”  Wide scope of exit payments caught by the cap – will include the cost to the employer of funding early access to unreduced pensions for employees

16. 16 squirepattonboggs.com 16 squirepattonboggs.com Public Sector Exit Payment Cap (2)  Some bodies may be excluded from the cap (e.g., the Armed Forces), and it will be possible to waive the cap in exceptional cases  It is proposed the following will not be in scope:  compensation payments in respect of death or injury attributable to the employment, serious ill health and ill health retirement  payments made following litigation for breach of contract or unfair dismissal  Ex-public sector employees working in the private sector “The government is currently minded not to include those individuals with protected TUPE terms in scope of the cap.”

17. 17 squirepattonboggs.com 17 squirepattonboggs.com Public Sector Exit Payment Cap (3) HM Treasury - Public Sector Exit Payment Cap: response to consultation  Over 4,000 responses received  “Significant” number of respondents not in favour of cap  Government still proposes to continue to legislate to introduce a cap  Plans to use powers in primary legislation as part of the Enterprise Bill  Detail of the measures will be implemented through secondary legislation

18. 18 squirepattonboggs.com 18 squirepattonboggs.com Questions?

19. 19 squirepattonboggs.com 19 squirepattonboggs.com Contact details Jane Briggs, Senior Legal Assistant 0113 284 7479 jane.briggs@squirepb.com This information has been prepared as a general guide and does not constitute advice on any specific matter. We recommend you seek professional advice before taking action. We accept no liability for any action taken or not taken as a result of this information.

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