Reduced Annual Allowance and the NHS Pension Scheme.

Reduced Annual Allowance and the NHS Pension Scheme

• 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

• 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

What is changing?

• 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

• 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

pension growth above reduced annual allowance

pension growth below reduced annual allowance

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.

Who in the NHS could be affected?

Pensionable salary at start of tax year

100,000 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000

Pens

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10 29,688 32,656 35,625 38,594 41,563 44,531 47,500 50,469 53,438 15 32,063 35,269 38,475 41,681 44,888 48,094 51,300 54,506 57,713 20 34,438 37,881 41,325 44,769 48,213 51,656 55,100 58,544 61,988 25 36,813 40,494 44,175 47,856 51,538 55,219 58,900 62,581 66,263 30 39,188 43,106 47,025 50,944 54,863 58,781 62,700 66,619 70,538 35 41,563 45,719 49,875 54,031 58,188 62,344 66,500 70,656 74,813 40 43,938 48,331 52,725 57,119 61,513 65,906 70,300 74,694 79,088

• 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

• 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

• 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

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

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

• 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

• 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

• 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

• 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