Welcome to: A New Tax - Changes to the Annual Allowance and Life Time Allowance from 6th April 2011

1. UCL Pension Services Welcome to: A New Tax - Changes to the Annual Allowance and Life Time Allowance from 6th April 2011 UCL Pension Services

2. A New Tax - Changes to the Annual Allowance and Life Time Allowance from 6th April 2011 Today’s presenters: • Jon Everard - Head of Pay & Operations Annual Allowance and Life Time Allowance • Jonathan Kempson – Retirement Education Consultant - Prudential AVC’s - run for the line! • Gary O’Neill – Austin Chapel Independent Financial Advisers Will you need financial advice?

3. Overview for today • What is the Annual Allowance (AA) and Life Time Allowance (LTA)? • Why are they changing? • How are the AA and LTA calculated and what might be the potential tax implications for you • Impact of any future pay increase or payment of any future AVC’s • Can I maximise this years AA under the old regime? • Continued unknowns in the consultation • Actions you need to consider going forward • Consider independent financial advice

4. Outcomes for today • You have a good understanding of the AA & LTA tax changes being implemented in April 2011 • You are aware of the potential tax impact caused by future pay increases, continued accrual of pension benefits whilst in a final salary pension scheme and paying AVCs • You know when & from whom to get the required information necessary for you to calculate the AA and assess whether any tax charge may be due • You are aware of the possibility of applying for transitional or personal protection from the April 2012 LTA change • You know where to get future pensions and independent financial advice

5. Terminology • Important! • Please see Pension Terms Glossary

6. Current Pre April 2011 position • AA and LTA were introduced in 2006 • Limits are currently high enough (AA is £255,000 per annum until 5th April 2011; LTA is £1.8M – until 5th April 2012) such that few people at UCL have ever or, in the future, would have been affected • Labour government brought in changes in 2009, effective from April 2011, which would reduce the amount of tax relief of those earning over £134,000 (so called ‘Fat Cats’) they received on pension contributions. Aim was to bring in over £3.4B additional or new tax revenue • Interim measures known as ‘Anti-Forestalling’ legislation introduced to stop any run for the line by employees earning over £130k paying high amounts of AVCs into pensions funds or AVC accounts before April 2011

7. 2010 General Election and Coalition Governments proposals • Labour proposals deemed too cumbersome to administer • Proposals targeted main sponsors of employer schemes (directors and senior manager of companies/organisations) – baby out with the bathwater • Conservative-Lib Dem wanted a simplified regime which would still bring in same amount of revenue but have a less specific audience and would allow more than modest growth in pension benefits year on year without penalisation

8. Timeline - Consultation, report, implementation date • Conservative-Lib Dem Budget 22nd June 2010 • July 2010 consultation document on alternatives to reducing tax relief for high earners • October 2010 – report published (some loose ends though)

9. Timeline- Further consultation, awaiting updated report! • November 2010 – further consultation document issued by HM Treasury on who, how and when to pay AA Charge • Consultation ended 7th January 2011 • Awaiting report

10. Annual Allowance – what is it? • An annual threshold or value by which your pension benefits may increase without any personal tax liability • Any excess over the AA of £50,000 pa is subject to tax at your marginal (highest) rate of tax. • Ability to use any unused AA from previous three tax years to offset any excess of AA ina Pension Input Period (PIP)

11. Annual Allowance – how is it calculated? • Pension Input Period (PIP) - USS and NHS schemes both 1st April to 31st March • Capital Value of pension, lump sum, AVCs at end of PIP • Accrual factor of 16 • Consumer Price Index (CPI)

12. Annual Allowance – Example 1 • Earnings increase from £100,000 to £115,000 on 1st August 2011 • PIP pay figure for 2011/12 = ((4/12 x £100k)+(8/12 x £115k)) = £110,000 • 28 years service at 31/3/2011 – 29 years service at 31/3/2012 • CPI (not known which month but presuming September prior) = 3% • Accrual factor of 16

13. Annual Allowance - Example 1 continued Total Benefits for PIP to 31/3/2011 • 28 years/80 x £100,000 = £35,000 + lump sum of 3 x pension = £105,000 • £ 35,000 x 16 = £560,000 + £105,000 = £665,000 • £ 665,000 + 3% CPI = £684,950 Total Benefits for PIP to 31/3/2012 • 29 years/80 x £110,000 = £39,875 + lump sum of 3 x pension = £119,625 • £39,875 x 16 = £638,000 + £119,625 = £757,625 Annual Allowance Charge calculation • £ 757,625 - £ 684,950 = £72,675 • £ 72,675 - £50,000 = £22,675 * 40% = £9,070

14. Annual Allowance - Example 2 • Total Benefits for PIP to 31/3/2011 • 18 years/60 x £160,000 = £48,000 • £ 48,000 x 16 = £768,000 • £ 768,000 + 2% CPI = £783,360 • Total Benefits for PIP to 31/3/2012 • 19 years/60 x £165,000(3.125% pay increase) = £52,250 • £52,250 x 16 = £836,000 • Annual Allowance Charge calculation • £836,000 - £ 783,360 = £52,640 • £52,640 - £50,000 = £2,640 x 50% = £1,320

15. Annual Allowance - Example 3 • Total Benefits for PIP to 31/3/2011 • 31 years/80 x £35,000 = £13,562.50 + lump sum of 3 x pension = £40,687.50 • £ 13,562.50 x 16 = £217,000 + £40,687.50 = £257,687.50 • £ 257,687.50 + 2% CPI = £262,841.25 • Total Benefits for PIP to 31/3/2012 (new job in London) • 32/80 x £48,000 = £19,200 + lump sum of 3 x pension = £57,600 • £ 19,200 x 16 = £307,200 + £57,600 = £364,800 • Annual Allowance Charge calculation • £ 364,800 - £ £262,841.25 = £101,958.75 • £ 101,958.75 - £50,000 = £51,958.75 x 40% = £20,783.50

16. Annual Allowance - Example 4 • Total Benefits for PIP to 31/3/2011 • 0/60 x £189.000 = £0.00 • Total Benefits for PIP to 31/3/2012 • 1/60 x £189,000 = £3,150 • £ 3,150 * 16 = £50,400 • Annual Allowance Charge calculation • £ 50,400 - £0.00 = £50,4000 • £ 50,400 - £50,000 = £400 * 50% = £200

17. Offset of previous years unused Annual Allowance to reduce tax liability • It is assumed by HMRC for this exercise that prior to April 2011 the AA is £50,000 and not £255,000 • AA in 2011/12 was £ 72,675AA excess = £ 22,675 • AA for PIP 10/11 = £43,628.75 based on a £5,000 pay rise and 28 years • AA for PIP 09/10 = £42,322.50 based on a £5,000 pay rise and 27 years • AA for PIP 08/09 = £10,687.50 based on nil pay rise and 26 years • Unused allowances from previous three PIP years • £150,000 – (£43,628.75 + £42,322.50 + £10,687.50) = £53,361.25 • (96,638.75) • New adjusted Annual Allowance excess calculation • £ 53,361.25 - £22,675 = £30,686.25 AA still unused – no AA Charge due

18. How do you pay the tax ? • From July 2013 pension schemes must provide you on request, by no later than the 6th October proceeding the PIP year, the AA for their schemes PIP • If you earn in excess of £100,000, HMRC will require you to enter on your annual Self Assessment Tax Return (SATR) the AA value, if in excess of the AA allowance (even if estimated). Currently scheme does not have to advise HMRC of AA value • HMRC consultation document has options on ways to pay AAC: • HMRC favour a de minimus ‘in time’ payment of tax of upto £6K, with any excess AAC, paid as follows: • Scheme pays tax and reduces your benefits actuarially or • You defer excess tax until BCE (‘retirement’ or transfer), scheme then pays and reduces benefits (interest payable)

19. Things to consider - Annual Allowance • Moving job in the sector, pay increase, promotion (becoming Director, Dean, Vice Provost or Provost!) and remaining in the same pension scheme • Annual professorial, clinical and appraisal pay awards • Pay awards in excess of CPI • Receiving a regrading or regrading a member of your staff • Employing someone from within the sector may give them a tax bill • Paying AVCs or contributions into another scheme • Redundancy

20. Your responsibilities • Ignorance is no excuse! • Ask scheme for your AA for each PIP (October 6th) • Inform HMRC via SATR (SA101) • HMRC suggest in consultation you pay first £6K of any tax immediately • Depending on consultation outcome, ask scheme what benefit reduction will apply if they pay any excess tax immediately or if deferred until ‘retirement’

21. Ways to reduce your AA tax liability • AA tax is a reality but might not be a bad thing • Additional allowances could be non pensionable • Smooth large pay awards over more than 1 year • Limit pensionable pay to circa £189K plus CPI (another cap!) • Scheme rules might change to reduce growth to AA in any PIP • USS are currently looking at ways to mitigate AA tax • HMRC are banking on getting more PAYE tax as individuals and schemes identify mitigation methods to pay AA tax –both are at your marginal rate!

22. Who might want to consider making the most of the current tax relief available? • Employees approaching retirement • Those considering early retirement • Higher earners (£60,000 - £130,000) • Those who wish to maximise tax free cash 22

23. A helping hand from the taxman 23

24. Life Time Allowance (LTA) – what is it? • A threshold on the total value of all your pension benefits before any tax liability • Around since 2006 and has increased each year from £1.5M to £1.8M in tax year 2010/2011 (equal to a pension of £74k and a lump sum of £450k) • New regime will reduce this to £1.5M from 2012/2013 (£0.5B pa new revenue expected on top of current £4B) • Value determined on a Benefit Crystallisation Event (BCE) (retirement) • Any excess over the LTA of £1.5M is subject to tax (55% if taken as a lump sum and additional 25% if taken as pension) • Some type of protection for those who have already exceeded the new LTA figure or have been planning to realise the £1.8M limit

25. Life Time Allowance – how is it calculated On a BCE your LTA equals total of: • Any pre 2006 pension in payment = per annum value x 25 • New pension per annum x 20 • Lump sum due • Lump sum received from a previous BCE • Fund value of Defined Contribution (DC) schemes (personal/group pensions) • Fund value of any AVC, FSAVC or other registered plans

26. Life Time Allowance – Example 1 Pension £53,166.67 pa, aged 54 on 30/6/2011 Current LTA value = £ 53,166.67 x 20 = £1,063,333.40 Lower than £1.5M therefore LTA not exceeded and growth not a problem In 10 years time retires with 39 years service earning £135,000 Pension = 39/60 x £135,000 = £87,750 x 20 = £1,755,000 Higher than the current known LTA of £1.5M therefore a LTA Charge due £1.5M - £1.755M = £255,000 subject to charge at rate of 55% or 25% Options • Apply for new pension protection – details not known – refused? • Opt out of scheme once LTA achieved • Retire once LTA achieved! • Pay tax on excess over LTA at known rates

27. Life Time Allowance – Example 2 • Pre 2006 Pension in payment equal to £45,000 per annum • Lump sum previously received of £135,000 • Second BCE on 30/6/2013 with new USS pension of £14,000 pa (£45,000 x 25) + (£14,000 x 20) + £135,000 = £1,540,000 Higher than £1.5M therefore LTA exceeded and LTA Charge due Taken as a lump sum: LTAC due = £40,000 x 55% = £22,000 Taken as a pension: LTAC due = £40,000 x 25% = £10,000 (but excess pension would be taxed ongoing at marginal rate of 40%) • Tax is paid over to HMRC by the scheme

28. Life Time Allowance – Example 3 Pension £53,166.67, aged 51 on 30/6/2011, AVC fund of £150,000 LTA value = £ 53,166.67 x 20 = £1,063,333.40 + £150,000 = £1,213.33.34 Lower than £1.5M therefore LTA not exceeded and growth not a problem In 10 years time retires aged 61 with 39 years service on £135,000 pa Pension = 39 years/60 x £135,000 = £87,750 x 20 = £1,755,000 £1,755,000 + AVC £200,000 (assume growth) = £1,955,000 Higher than LTA = excess over £1,955,000 = £455,000 subject to LTAC NRA is 65 so benefits taken early subject to a % actuarial reduction of 4% for each year prior to NRA £87,750 – 16% = £73,710 x 20 = £1,474,200 + £200,000 = £1,674,200 Excess subject to LTAC now £174,200

29. Life Time Allowance – transitional arrangements • Anyone who has 2006 LTA protection is (re)protected! • Anyone whose LTA now exceeds £1.5M can apply for transitional protection (upto ‘old’ LTA of £1.8M) – details yet to be released • Anyone who was planning to maximise LTA of £1.8M can apply for ‘pension growth protection’ – presumably of £1.8M – no details reported yet • Option favoured by HMRC is that, if you have exceeded £1.5M, you apply for a ‘personalised LTA’ of £1.8M but must no longer be contributing to a registered scheme

30. Things to consider – Life Time Allowance • What is my current notional LTA? • What are the values of my other pension scheme pots? • Have I exceeded current LTA of £1.8M? • Have I exceeded new £1.5M LTA ? • Do I need to apply for some type of protection? • If I’ve not exceeded the LTA, when might I? • Is exceeding the LTA okay? • Impact of a new post in the sector = increased pay = AA impact and LTA impact • Financial advice?

31. Going forward - Run for the line, AA or LTA • Watch out for further news on Governments plans for payment of AA tax charge and LTA protection • Probable last tax year to maximise tax relief through AVC’s if earning under £130k – see Prudential asap • Find out what your notional LTA value is - if over £1M then look to get financial advice on future impact of pay increases, continued accrual, value of other pension pots, probable retirement date – see Austin Chapel Independent Financial Advisers • Ask your scheme each year for your AA growth • Identify impact on your benefits if the scheme pay any of the AAC on your behalf

32. Things to consider – Financial advice • Over 15 years experience of advising higher education professionals. • Provide a ‘financial advice in the workplace programme’ for Queen Mary, University of London and The University of Northampton • Pre and post retirement advice for individuals in order to maximise pension benefits and mitigate taxation. • Investment advice and management service which includes a review of existing investments held and also recommendation of suitable future investments. • Individual meetings can be held at the work place or at your home. Austin-Chapel Independent Financial Advisers LLP

33. Further information • Pension Services Website www.ucl.ac.uk/hr/pensions • HM Treasury website (for all consultation documents) www.hm-treasury.gov.uk/consult_pensionsrelief.htm • USS website - factsheets www.uss.co.uk/Factsheet%20List/FS16x.pdf www.uss.co.uk/Factsheet%20List/FS24%2003_2010.pdf • NHS website – factsheet www.nhsbsa.nhs.uk/Pensions/Documents/Pensions/High_Earners_Factsheet_-_10.2010_(V4).pdf • HMRC – Self Assessment Tax Return www.hmrc.gov.uk/forms/sa101.pdf • Prudential - Jonathan.Kempson@prudential.co.uk Mobile 07818 458104 • Austin Chapel Independent Financial Advisers gary.oneill@austinchapel.co.uk – Mobile 07860 240855

34. Questions