LGPS 2014 - Update

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LGPS 2014 - Update. LGPS 2014. Treasury Paper released 1 Dec 2011 Protections for members within 10 yrs of NRD Heads of Agreement 20 DEC Eric Pickles issues letter re Cost ceilings for LG Unions threaten to withdraw as agreement was that this is still to be negotiated - PowerPoint PPT Presentation

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  • LGPS 2014 - Update

  • LGPS 2014LGPS 2014

    Treasury Paper released 1 Dec 2011

    Protections for members within 10 yrs of NRD

    Heads of Agreement 20 DEC

    Eric Pickles issues letter re Cost ceilings for LG Unions threaten to withdraw as agreement was that this is still to be negotiated

    Letter withdrawn and all LGPS unions come back on-board except Unite

  • LGPS 2014LGPS 2014

    Jan 2012 Employers/ Unions/ DCLG Start negotiations set up project

    30th Jan Unite rejoins negotiations

    Other Schemes have formally set out there proposals based on December agreement still Union opposition to member contribution increases

    LGPS timescalesEnd Feb to 20th April Employers /Unions consult with membersTo date no information has been forthcoming [unusually no leaks]

  • LGPS 2014LGPS 2014

    Pension Scheme Gross cost ceiling EmployersMembersAccrualrateRevalued Civil Service22.5% 16.9% 5.6% 60thsEarningsNHS Pension21.9% 12.1% 9.8% 60thsEarningsTeachers21.7% 12.1% 9.6% 60thsEarningsLGPS20.4%10.9%9.5%60thsEarnings

  • LGPS 2014LGPS 2014

    CONTRIBUTIONINCREASES2012/2013/2014CAREAccrualRateRevaluationRateWefCIVIL SERVICE43.1ths (2.32%)CPI2015NHS54thsCPI +1.5%2015TEACHERS57thsCPI + 1.6%2015LGPSX??60ths????2014?

  • LGPS 2014LGPS 2014

  • Annual Allowance and Lifetime Allowance A Basic Overview

  • BackgroundHMRC Limits

    Tax registered pension schemes enjoy tax relief

    Pension contributions are deducted before tax Retirement lump sums are tax free

    Due to these tax advantages, HMRC imposed limits

  • Pre A-Day HMRC Limits

    The HMRC limit on pensions was nice and simple!

    Pension contributions in the LGPS could not exceed 15% of pensionable pay

    Pensions were generally limited to 2/3rds pay

  • A-Day Tax RegimeHMRC Limits

    The Tax regime changed on 6 April 2006 (A-Day)

    Previous restrictions removed

    Replaced with:-

    Annual Allowance (AA) 215,000 rising to 255,000Lifetime Allowance (LTA) 1.5m rising to 1.85m

  • Annual Allowance [AA]Annual Allowance

    The maximum amount of tax exempt pension contributions that an individual can make in one year From A-Day started at 215,000For 2010/11 was 255,000But it was announced in the Oct 10 Comprehensive Spending Review that the level would be significantly reduced from the 2011/12 tax year

  • Annual Allowance [AA]Annual Allowance

    From 2011/12 tax year the AA is 50,000

    Simple to assess for a Defined Contribution scheme!Its what contributions are paid in the year

    But for a Defined Benefit scheme: translate the growth of benefit in the year into a notional contribution

    This is the Pension Input Amount [PIA]

  • Annual Allowance termsAnnual Allowance

    Pension Input Period (PIP) 1st April to 31st March

    Pension Input Amount (PIA) the amount by which the pension savings have increased over a PIP

    Opening Value (OV) value of benefits at start of PIP

    Closing Value (CV) value of benefits at end of PIP

  • Annual Allowance calculationAnnual Allowance

    CV - [OV + CPI]

  • Annual Allowance calculationAnnual Allowance

    Opening Value [OV] is:

    (16 x PB) + LSBWhere:PB is the annual pension that would have been payable at the end of the last PIPLSB is the lump sum that would have been payable at the end of the last PIP

    The OV is increased by CPI % from previous Sept

  • Annual Allowance calculationAnnual Allowance

    Closing Value [CV]is:

    (16 x PE) + LSE + AVCWhere:PE is the annual pension that would have been payable at the end of this PIPLSE is the lump sum that would have been payable at the end of this PIPAVC is the AVC contributions paid during this PIP

  • Example 1 Active MemberAnnual AllowanceJoined LGPS on 1/4/09 Pay for the year to 31/3/11 is 72,000 Pay for the year to 31/3/12 is 75,600, [ 5% rise]CPI for September 2010 is 3.1%

    Annual pension at 31/3/12 3/60 x 75,600= 3,780Annual pension at 31/3/11 2/60 x 72,000= 2,400

    Closing value [CV]16 x 3,780 = 60,480.00

    Opening value [OV]16 x 2,400 = 38,400+ CPI from Sept 2010 (3.1%) = 39,590.40

    Pension Input Amount for 2011/12 [CV OV]= 20,889.60

    Not over 50,000 so only subject to tax if other pensions exceed balance

  • Example 2 Tier 2 IHRAnnual AllowanceJoined LGPS on 1/4/09Retired on Tier 2 ill health on 5/11/11, on the eve of her 33rd birthday Received an 8 year enhancement [2nd tier: (service to age 65 / 4) =(32 /4) ] Annual pension at 31/3/11 2/60 x 24,000= 800Annual pension at 5/11/11 10.6/60 x 25,200= 4,452

    Opening value 16 x 800 = 12,800x CPI from Sept 2010 (3.1%) = 13,196.80

    Closing value 16 x 4,452 = 71,232.00

    Pension Input Amount for 2011/12 (CV OV)= 58,035.20

    Excess over the Annual Allowance= 8,035.20

  • 3 Year Carry ForwardAnnual Allowance

    Unused AA from previous 3 years can be used to offset any Annual Allowance excess

    In the 2011/12 PIP we use a notional AA of 50,000 for each of the previous 3 years

    Any negative accruals will be treated as zero

    CPI is used for all years even though RPI was actually still in force during some years

  • 3 Year Carry Forward - ExampleAnnual AllowanceThe 15,000 excess in 2011/12 is offset against the 20,000 carry forward for 2008/09 so there is no tax charge20,000 20,0000010,000 30,000

    YearValue of benefit accrualUnused AA to carry forwardTotal carry forward

    2008/0930,000

    2009/1055,000

    2010/1140,000

    2011/1265,000

  • Example 2 Tier 2 IHRAnnual AllowanceJoined LGPS on 1/4/09Retired on Tier 2 ill health on 5/11/11, on the eve of her 33rd birthday Received an 8 year enhancement [2nd tier: (service to age 65 / 4) =(32 /4) ] Annual pension at 31/3/11 2/60 x 24,000= 800Annual pension at 5/11/11 10.6/60 x 25,200= 4,452

    Opening value 16 x 800 = 12,800x CPI from Sept 2010 (3.1%) = 13,196.80

    Closing value 16 x 4,452 = 71,232.00

    Pension Input Amount for 2011/12 (CV OV)= 58,035.20

    Excess over the Annual Allowance= 8,035.20

  • Example 3 (revisited) Tier 2 IHRAnnual Allowance

    Pension Input Amount for 2011/12 58,035.20Excess over the Annual Allowance 8,035.20

    However, the member has unused AA for the previous 3 years:-

    2010/1144,565.402009/1046,223.802008/09 possible carry over from a previous scheme

    Therefore this member would not have an AA charge

  • ExemptionsAnnual AllowanceDeferred benefits are not tested for the AA

    Incoming transfer credits are ignored in the PIP in which they are received

    Severe Ill-Health retirements are exempt from the AA test

    Definition:- The individual is suffering from ill-health which makes it unlikely that he/she will be able (otherwise to an insignificant extent) to undertake gainful work (in any capacity) before state retirement age

    N.B. It is imperative that the most up-to-date forms are used by Medical Practitioners when certifying ill health retirements

  • Tax ChargeAnnual Allowance

    If a member is in more than one pension scheme they will need to add their PIAs together and check if the total exceeds the AA

    If the PIA (or PIAs) exceeds 50,000 after allowing for any carry forward, there will be a tax charge

    Any tax charge will be assessed on the Members marginal tax rate

  • Scheme PaysAnnual Allowance

    If a members charge in one PIP exceeds 2,000 they may elect to pay the charge out of their pension benefits

    It will be mandatory for the scheme to offer this facility where the members PIA exceeds the AA for that year

    A member who exceeds the AA by virtue of savings across multiple pension schemes, without exceeding it in any one scheme, may request that one of the schemes operate Scheme Pays. The scheme will not be under any obligation to do so.

  • Scheme PaysAnnual Allowance

    Under Scheme Pays, the pension scheme will pay the tax charge on behalf of the member

    Using a factor supplied by GAD, the scheme will calculate a deduction to the members pension, to be operated when the pension comes into payment

    We are still awaiting GAD guidance on Scheme Pays

    Election to pay under Scheme pays must be made before benefits become payable

  • Notification to MembersAnnual Allowance Annual Allowance is the responsibility of the member but there are obligations on the fund and employers

    Where members exceed the AA in a pension scheme, the scheme must provide details of the members pension input amount within 6 months of the end of the tax year.

    Where members request this information, the scheme must provide details of the members pension input amount by the later of 3 months of the request and 6 months of the end of the tax year.

    Employers must provide information about employees pay and benefits, and length of service to DB schemes by 6th July following the end of the tax year.

  • Annual AllowanceAnnual AllowanceImplications for Employers

    Statutory requirement to get details to Administrator

    General reassurance to staff

    HR implications on recruitment

    HR implications on Ill health retirements

  • Lifetime AllowanceLifetime Allowance

    A notional capital value of a members benefits at a Benefit Crystallisation Event

    When a pension / lump sum / death grant become(s) payable

  • Lifetime AllowanceLifetime Allowance

    Originally set at 1.5m in 2006/07 it rose to 1.8m but as a result of the announcement in the CSR in Oct 2010 it has been reduced back down to 1.5m from 6/4/2012

    Calculation of capital value: