1. Pension Tax Relief November 2011 Presentation By: Gillian MacKenzie www.sppa.gov.uk

2. Aims of Presentation Overview of Pensions Tax Relief –Annual Allowance –Lifetime Allowance Outline of SPPA Work to Date Next Steps

3. Pension Tax Relief Background UK Government Announcement 14 October 2010 Finance Act 2011 received Royal Assent 19 July 2011 Annual Allowance reduced from £255,000 to £50,000 from April 2011 for all pension savings Lifetime Allowance reduced from £1.8m to £1.5m from April 2012

4. Annual Allowance Introduced from April 2011 Reduced to £50,000 (from £255,000) Factor of 16 to value increase in Defined Benefit accrual 3 year carry forward of unused allowance Pension Input Period (PIP)

5. Exemptions Deferred members Benefits in year of death Terminal ill-health Severe ill-health retirement

6. Who will it affect? Primarily high earners Commonly those earning £150,000 + Can affect members much lower down salary scales Could affect members who purchase Additional Pension

8. SPPA Annual Process Receive Annual Returns from employers by 6 July Issue personal statements to members affected by Annual Allowance by 5 October Member carries out HMRC Self Assessment by 31 January Receive “Scheme Pays” requests by 31 July Pay tax liability to HMRC by 31 December

9. Self Assessment Member to notify HMRC If tax is due, will be payable at the members personal rate. Options to pay Tax Charges are – Member pays HMRC direct – Scheme pays

10. Scheme Pays Member can elect for “Scheme Pays” if total tax charge is > £2,000 by 31 July of following year Benefits are reduced using PSOD model and member notified SPPA pay tax liability to HMRC by 31 Dec of following year HMRC undertakes compliance checks to match elections with scheme payments

11. Pension Input Period (PIP) Accrued Pension at end of previous PIP: Based on Final Salary and Pensionable Service at that date (include CPI) Accrued Pension at end of current PIP: Based on new Final Salary and Pensionable Service at that date Increase in pension growth x 16 = “Pension Input Amount” StartEnd “Pension Input Period”

12. Example 80th Accrual Scheme + Lump Sum Member Pensionable service of 25 years at March 2011 Salary of £25,000 Promotion to £40,000 CPI @ 3.1%

13. Period 2011-2012 Start of PIPPension(£25,000 x 25/80) + 3.1% = £8,054.69 Lump Sum £8,055 x 3 = £24,164.07 End of PIPPension£40,000 x 26/80 = £13,000 Lump Sum £13,000 x 3 = £39,000 Growth in Pension(£13,000 – £8,055) x 16 = £79,124.96 Lump Sum £39,000 - £24,164 = £14,835.93 Total = £93,960.89 AA exceeded (£50,000) by £43,960.89 AA Charge Liability = £43,960.89 As this member has exceeded the AA we can look back at their previous 3 years to determine if there is any unused Annual Allowance that can be carried forward. A deemed AA limit of £50k has also been applied to the previous 3 years for this purpose.

14. Previous Year 1 (smoothing) 2010-2011 Pensionable service of 24 years at March 2010 Salary of £18,000 Promotion to £25,000 CPI @ 1.1%

15. Period 2010-2011 Start of PIPPension (£18,000 x 24/80) + 1.1% Lump Sum £5,459.40 x 3 End of PIPPension £25,000 x 25/80 Lump Sum £7,812.50 x 3 Growth in Pension (£7,812.50 – £5,459.40) x 16 Lump Sum £23,437.50 - £16,378.20 Total Unused AA (£50,000 - £44,708.90) = £ 5,459.40 = £16,378.20 = £ 7,812.50 = £23,437.50 = £37,649.60 = £ 7,059.30 = £44,708.90 = £ 5,291.10

16. Previous Year 2 (smoothing) 2009/2010 Pensionable service of 23 years at March 2009 Salary of £15,750 Increment to £18,000 CPI @ 5.2%

17. Period 2009/2010 Start of PIPPension (£15,750 x 23/80) + 5.2% Lump Sum £4,763.59 x 3 End of PIPPension £18,000 x 24/80 Lump Sum £5,400 x 3 Growth in Pension (£5,400 – £4,763.59) x 16 Lump Sum£16,200 - £14,290.77 Total Unused AA (£50,000 - £12,091.79) = £ 4,763.59 = £14,290.77 = £ 5,400 = £16,200 = £10,182.56 = £ 1,909.23 = £12,091.79 = £37,908.21

18. Previous Year 3 (smoothing) 2008/2009 Pensionable service of 22 years at March 2008 Salary of £15,000 Increment to £15,750 CPI @ 1.8%

19. Period 2008/2009 Start of PIPPension (£15,000 x 22/80) + 1.8% Lump Sum £4,199.25 x 3 End of PIPPension £15,750 x 23/80 Lump Sum £4,528 x 3 Growth in Pension (£4,528.13 – £4,19925) x 16 Lump Sum £13,584.39 - £12,597.75 Total Unused AA (£50,000 - £6,248.72) = £ 4,199.25 = £12,597.75 = £ 4,528.13 = £13,584.39 = £ 5,262.08 = £ 986.64 = £ 6,248.72 = £43,751.28

20. Applying the Three Year Carry Forward Rule There is a strict order in which available Annual Allowance must be used-up: AA for the current tax year should be used first; Unused AA from the three earlier years is then used – beginning with the available AA from the earliest tax year first – as shown below: (£43,960.89)AA Charge Liability 2011/12 £43,751.28Unused AA 2008/09 (£ 209.61) £37,908.21Unused AA 2009/10 £37,698.60 £ 5,291.10Unused AA 2010/11 £42,989.70Unused and Available AA 2012/13 The ‘smoothing effect’ of the 3 year carry forward is clearly in evidence, i.e. the potential AA charge of £43,960.89 in 2011/12 has been negated as a result of the carry forward facility. The member does not now have a tax liability for 2011/12 and has £42,989.70 unused and available Annual Allowance to carry forward to 2012/13.

21. Life Time Allowance LTA reduced to £1.5million from April 2012 Factor of 20 used in calculation Fixed Protection

22. Who will be affected by reduced LTA ? Pension of £65,217 + Lump Sum Pension of £75k + No Lump Sum

23. Calculation of Benefits for LTA Salary= £150,000 Service= 25 yrs Pension = £150,000 x 25/80 = £46,875 Lump sum=£46,875 x 3 = £140,625 (£46,875 x 20) + £140,625 = £1,078,125 This is < LTA £1,500,000

24. Fixed Protection for LTA Anyone can apply for fixed protection but they are only likely to need it if they expect their benefits from all schemes to exceed £1.5m. Must apply to HMRC by 5 April 2012 Conditions cannot start a new arrangement other than to accept a transfer of existing pension rights cannot have benefit accrual will be subject to restrictions on where and how you can transfer benefits

25. SPPA Work to Date Communication Personal notification letters to 1431 members who may be affected by the AA 779 Practitioners 641 NHS Officers 11 STSS Members Identified and issued 296 letters to members who may be at risk of exceeding new LTA limit 36 Practitioners 255 NHS Officers 5 STSS Members

26. SPPA Work to Date cont Issued details of potentially affected members to Health Board HR Directors for workforce planning purposes Agreed process of dealing with Practitioners, as earnings can only be at the “estimated stage” by legislative dates Agreed development of Pension Admin system with supplier Currently identifying Ill Health cases and other awards who may be at risk of exceeding AA Rolled out training to key SPPA staff

27. NEXT STEPS Scottish Public Pensions Agency 7 Tweedside Park Galashiels TD1 3TE www.sppa.gov.uk Communication Staff: - Intranet updates - Staff awareness Employers: - Circulars - SPG,TWG & MAGS meetings - Seminars - Internet Develop and test Pension Admin System process Training for all SPPA staff (by March 2012)