LGPS 2014 - Update

LGPS 2014

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

• Letter withdrawn and all LGPS unions come back on-board except Unite

LGPS 2014

LGPS 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 members

• To date no information has been forthcoming [unusually no leaks]

LGPS 2014

LGPS 2014

Pension Scheme

Gross cost ceiling Employers Members

Accrualrate

Revalued

Civil Service 22.5% 16.9% 5.6% 60ths Earnings

NHS Pension 21.9% 12.1% 9.8% 60ths Earnings

Teachers 21.7% 12.1% 9.6% 60ths Earnings

LGPS 20.4% 10.9% 9.5% 60ths Earnings

LGPS 2014

LGPS 2014

 

CONTRIBUTIONINCREASES

2012/2013/2014CARE

AccrualRate

RevaluationRate

Wef

CIVIL SERVICE

43.1ths (2.32%)

CPI 2015

NHS 54ths CPI +1.5% 2015

TEACHERS 57ths CPI + 1.6% 2015

LGPS X? ? 60ths? ??? 2014?

LGPS 2014

LGPS 2014

Annual Allowance and Lifetime Allowance – A Basic Overview

Background

HMRC 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 Regime

HMRC Limits

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

• Previous restrictions removed

• Replaced with:-

• Annual Allowance (AA) £215,000 rising to £255,000• Lifetime 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 £215,000• For 2010/11 was £255,000• But 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!

It’s 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 terms

Annual 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 calculation

Annual Allowance

CV - [OV + CPI]

Annual Allowance calculation

Annual Allowance

Opening Value [OV] is:

(16 x PB) + LSB

Where:

• PB is the annual pension that would have been payable at the end of the last PIP

• LSB 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 calculation

Annual Allowance

Closing Value [CV]is:

(16 x PE) + LSE + AVC

Where:

• PE is the annual pension that would have been payable at the end of this PIP

• LSE is the lump sum that would have been payable at the end of this PIP

• AVC is the AVC contributions paid during this PIP

Example 1 – Active Member

Annual Allowance

Joined 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 = £3,780

Annual 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 IHR

Annual Allowance

Joined LGPS on 1/4/09

Retired 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 = £ 800

Annual pension at 5/11/11 10.6/60 x £25,200= £4,452

Opening value 16 x £800 = £12,800

x 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 Forward

Annual 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 - Example

Annual Allowance

Year Value of benefit accrual

Unused AA to carry forward

Total carry forward

2008/09 £30,000

2009/10 £55,000

2010/11 £40,000

2011/12 £65,000

The £15,000 excess in 2011/12 is offset against the £20,000 carry forward for 2008/09 so there is no tax charge

£20,000 £20,000

£0 £0

£10,000 £30,000

Example 2 – Tier 2 IHR

Annual Allowance

Joined LGPS on 1/4/09

Retired 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 = £ 800

Annual pension at 5/11/11 10.6/60 x £25,200= £4,452

Opening value 16 x £800 = £12,800

x 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 IHR

Annual Allowance

Pension Input Amount for 2011/12 £58,035.20

Excess over the Annual Allowance £ 8,035.20

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

2010/11 £44,565.40

2009/10 £46,223.80

2008/09 £ possible carry over from a previous scheme

Therefore this member would not have an AA charge

Exemptions

Annual Allowance

Deferred 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 Charge

Annual Allowance

If a member is in more than one pension scheme they will need to add their PIA’s 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 Member’s marginal tax rate

Scheme Pays

Annual Allowance

If a member’s 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 member’s 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 Pays

Annual 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 member’s 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 Members

Annual 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 member’s 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 Allowance

Annual Allowance

Implications for Employers

Statutory requirement to get details to Administrator

General reassurance to staff

HR implications on recruitment

HR implications on Ill health retirements

Lifetime Allowance

Lifetime Allowance

A notional capital value of a member’s benefits at a

Benefit Crystallisation Event

When a pension / lump sum / death grant

become(s) payable

Lifetime Allowance

Lifetime 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:

(20 x pension) + lump sum + AVC Fund

•This sets the level at which the maximum lump sum amount without tax is calculated

Lifetime Allowance

Lifetime Allowance

•Members could have applied for “Fixed Protection” by 5/4/12 to retain up to £1.8m LTA

•Fixed protection will be lost if member has “benefit accrual”

•Scheme Pays reduces the level of Allowance

Lifetime Allowance

Thank you for listening!