Reduced Annual Allowance and the NHS Pension Scheme

1. Reduced Annual Allowance and the NHS Pension Scheme

2. What is the annual allowance The annual allowance is the amount of tax-privileged saving a person can make into a registered pension scheme The annual allowance is £255,000 for 2010/11 but is reducing substantially to £50,000 from 2011/12 The annual allowance was set at a level that was so high that hardly any members were affected by it The reduction in the annual allowance means that more members will be affected by it from 2011/12

3. What is changing? • In the NHS Pension Scheme the £50,000 annual limit is based on the growth in the member’s pension and lump sum over the scheme year • It is NOT based on the contributions paid • Members over the annual allowance may be subject to tax at their highest marginal rate on any excess over the £50,000 • Members subject to tax will need to declare any tax to be paid in their tax returns • The legislation for the annual allowance is in draft and may be subject to change

4. Who in the NHS could be affected? • Members receiving large promotions which mean large increases in pensionable pay, particularly when coupled with long service • Members whose pensionable pay increases significantly • Consultants awarded Clinical Excellence Awards • Those who have increased accrual or a sudden uplift in their pension

5. Who in the NHS could be affected? • Earning under £45,000 unlikely! • Up to £100,000 less than 1% • £100,000 - £150,000 about 1/3 rd of members affected • £150,000 + majority of members affected

6. pension growth above reduced annual allowance pension growth below reduced annual allowance Who in the NHS could be affected? The table shows which employees may be affected if pay increases by 5% and inflation is 3%. Different levels of pay increases and inflation will result in different people being affected.

7. How is the annual allowance calculated? • The annual allowance is calculated as follows for 2011/12 onwards: • (Annual pension x 16) + separate lump sum = Capital Value • This calculation is worked out at both the start and end of the scheme year • CPI inflation is added to the starting value (opening value) • The difference between the two results = the annual allowance used

8. Annual Allowance Example • Scheme Year Start: • Pension £80,000 • Lump Sum £240,000 • AA usage (£80,000 x 16) + £240,000 = £1,520,000 • Increase for inflation = £1,520,000 x 1.03 = £1,565,600 • Opening Value = £1,565,600 • Scheme Year End: • Pension £84,000 • Lump Sum £252,000 • AA usage (£84,000 x 16) + £252,000 = £1,596,000 • Closing Value = £1,596,000 • Annual allowance used = £1,596,000 - £1,565,600 = £31,000

9. Carry Forward • Individuals may be able to ‘carry forward’ up to 3 previous tax years unused allowances • They must be a member of a registered pension scheme for the tax year in question to do so • If they have any unused allowance (£50,000 maximum) they may carry this forward

10. Statutory Deadlines The first year to which this applies is 2011/12 The first deadline is 6 July 2013 for employers to deliver pensionable pay information for 2011/12 and 2012/13 The first deadline for NHS Pensions to produce statements is by 6 October 2013, for 2011/12 and 2012/13 The deadlines annually thereafter are 6 July and 6 October following the end of the scheme year

11. What does this mean for employers? • NHS Pensions plans to produce statements for members over the annual allowance • In order to produce these statements NHS Pensions will need full membership, hours and pensionable pay information • Employers must provide NHS Pensions with pensionable pay information by 6 July following the end of the scheme year • NHS Pensions to produce a statement by 6 October following the end of the scheme year for all those over the annual allowance

12. What does this mean for employers? • If NHS Pensions does not have pensionable salary information from employers, it cannot provide a statement • This is because the calculation is based on pensionable pay at the start and end of the year

13. What does this mean for members • Members to be provided with a Statement if they are over the annual allowance in the NHS Pension Scheme • Members need to notify HMRC if they have tax to pay in respect of the annual allowance via self assessment tax return • Members to declare any tax to pay by 31 January following the tax year end

14. What does this mean for members? • If members pay contributions to other money purchase schemes including the NHS AVC scheme it is the members responsibility to include the value of these contributions when working out their overall annual allowance used • More information can be found at: • www.nhsbsa.nhs.uk/pensions/3126.aspx • www.hmrc.gov.uk/pensionschemes

15. Summary • The responsibilities of employers, NHS Pensions and members are shown below: • NHS Pensions – to provide annual allowance statements in line with statutory requirements • Members – calculating their annual allowance usage and reporting and paying any tax due to HMRC • Employers – providing NHS Pensions with the information it requires within statutory deadlines