Pensions tax changes

1. [ managing the impact ] Pensions tax changes 18 November 2010

2. Pensions tax relief will be restricted post April 2011 • Labour Government proposed raising £3.5bn to £4bn by restricting pension tax relief • Coalition Government proposing to raise similar amount, but using a very different approach

3. Tax relief – different impacts

4. Valuing accrual

5. Valuing accrual

6. Simple defined benefit example – 20% pay rise Salary x Service x Accrual x Inflation = Pension £20,600£20,000 Beginning of year position £100,000 x 12 years x 1/60th x 103% = £20,000 End of year position £120,000 x 13 years x 1/60th = £26,000 Increase over year £26,000 - £20,600 = £5,400 Value of increase £5,400 x 16 = £86,400 Tax charge £50,000£30,000£6,400 x 0%40%50% = £15,200

7. Paying the tax • Accrual for pensions input period ending in 2011/12 to be entered onto self-assessment tax return by 31 January 2013 (if submitted on-line) • Underpaid tax of up to £2,000 can be collected via PAYE over 2013/14 • Underpaid tax of over £2,000 has to be paid by 31 January 2013 • Government consulting on alternative ways for paying large tax bills(e.g. “scheme pays”)

8. Lifetime Allowance (“LTA”) • Lifetime Allowance being reduced to £1.5m from 6 April 2012 • 25% tax if excess taken as pension – 55% tax if excess taken as cash • maximum tax free cash of £375,000 (i.e. 25% of LTA) • Government currently consulting on transitional protections • Expected issues • individuals with pension value already in excess of £1.5m • individuals with current pension pots that will grow to over £1.5m

9. Special cases • Death • full pension tax relief * on benefits granted due to death • Serious ill-health • full pension tax relief * on benefits granted due to serious ill-health • but what happens if the scheme is more generous than the Government definition of serious ill-health? • Redundancy • no special treatment on redundancy • risk of high tax charge if extra benefits granted on redundancy • limits scope to divert redundancy payment to pension scheme • Salary sacrifice – Not impacted * Provided benefits are within registered pension scheme usual tax allowance limits

10. Points of detail #1 • Deferred benefits can be ignored • as long as no salary or service linkage and ‘reasonable’ revaluation • Pension Input Period • pension accrual measured over Pension Input Period ending in a tax year • Transitional protections • where Pension Input Period ending in the tax year 2011/12 has already started • for those impacted by the reduction in the Lifetime Allowance

11. Points of detail #2 • Removal of anti-forestalling • can use any remaining £50,000 allowances from previous years • Carry forward may only apply if in a pension plan in the earlier year • Monitoring fiscal risk on • all EFRBS; and • all Employee Benefit Trusts • Additional tax being introduced on • funded EFRBS; and • Employee Benefit Trusts

12. Comment For defined contribution • Restricts one year contributions to £50,000 (or up to £200,000 allowing for carry forward of allowances) • No impact for vast majority • Only likely to impact on individuals looking to make sizeable contributions • - business owners on business sale • - very high earners • - SSAS / SIPS For defined benefit • No impact for plans with an “earnings cap”, except for: • large one-off accruals, e.g. promotions or high accrual rates • In plans without an “earnings cap”, individuals on salaries over circa £180k will be impacted, even if their accrued benefits only increase in line with inflation

13. Percentage salary rise needed to be impacted – one-off increase

14. Percentage salary rise needed to be impacted – (no carry forward available)

15. An example – promotion

16. Possible solutions

17. A variety of solutions are available • Target £50,000 of pension accrual per annum • Improve value of each £1 pension • reduce retirement age • increases / spouse’s benefits / cash factor etc • EFRBS – NOTE tax risks Pension planning Cash • Cash instead of pension accrual over £50,000 • Timing of pay rises for 2010/11 • Bonus deferral / employee loans Senior management, earning £150,000+ Equity planning • Employee share plans • Maximise use of capital gains tax rate (18% / 28%) • Employee Benefit Trust (EBT) - NOTE tax risks Salary and benefits • Salary sacrifice • Tax efficient benefits • Broaden the savings platform Wider employee population

18. Pension Planning • Cap annual accrual at £50,000 (plus unused prior year allowance) • Career Average Revalued Earnings • Salary cap • Spread salary increases • Reduce pension accrual, but increase attaching benefits • normal retirement age • death benefits • increases in payment • Stop / start if high scheme deferred revaluation

19. Implementing change • Employment contracts • do they have specific terms? • can they be amended? • Statutory consultation • pension consultation minimum 60 days • Engagement and involvement of parent company • Power of amendment • Section 67 Pensions Act 1995 • Role of scheme trustees • is their consent needed? • if so, will it be given?

20. Way forward Employers • Identify individuals impacted: • current high accrual • salary rises still to feed into pension • future salary rises • those impacted by £1.5m Lifetime Allowance • Change pension accrual to avoid penal tax • but remember anti-forestalling • Offer alternative remuneration in lieu (or just cut costs) • Remember to keep the trustees on board Trustees • Understand employer’s position • Clarify PIP • Information to members

21. Questions

22. Pensions tax changes Kevin LeGrand Principal and Head of Technical Services Buck Consultants Limited 160 Queen Victoria Street London EC4V 4AN Tel: 020 7429 1000 Fax: 020 7429 1010 www.buckconsultants.co.uk