Pensions Tax and USS Eifion Morris Agenda Agenda

Pensions Tax and USS Eifion Morris Agenda Agenda

Pensions Tax and USS Eifion Morris Agenda Agenda Introduction Tax simplification, and 1 relevant context Past membership 2 Annual and Lifetime Future membership 3 Allowance am I affected? Career Revalued Benefits 4 Protections, and USS options Defined contribution The 5 changes for 2016 Otherscenarios considerations Some 6 Q&A Questions 7 Presentation on pensions tax and USS | information only | February 2016 ! d e t a c i l p m o c

s It slide 2 ! e k i l u o y s As much a TAX day e c n a w o l l a Annual e c n a w o l l Lifetime a Presentation on pensions tax and USS | information only | February 2016 slide 3 Lifetime allowance (LTA) 1,800,000 1,800,000 1,750,000 1,650,000 1,600,000 1,500,000

1,500,000 1,500,000 1,250,000 1,250,000 How the lifetime allowance has changed since 2006 06 / 07 07 / 08 08 / 09 09 / 10 10 / 1 1 11/1 2 12 / 1 3 13/1 4 14/1 5 15/1 6 Lifetime allowance (LTA) The LTA will reduce from 1.25 million to 1.0 million from April 2016 Pensionable Salary Years of Pensionable Service 10 15 20 25 30

35 40 150,000 431,250 646,875 862,500 1,078,125 1,293,750 1,509,375 1,725,000 140,000 402,500 603,750 805,000 1,006,250 1,207,500 1,408,750 1,610,000 130,000 373,750 560,625 747,500 934,375 1,121,250

1,308,125 1,495,000 120,000 345,000 517,500 690,000 862,500 1,035,000 1,207,500 1,380,000 110,000 316,250 474,375 632,500 790,625 948,750 1,106,875 1,265,000 100,000 287,500 431,250 575,000 718,750 862,500

1,006,250 1,150,000 90,000 258,750 388,125 517,500 646,875 776,250 905,625 1,035,000 80,000 230,000 345,000 460,000 575,000 690,000 805,000 920,000 70,000 201,250 301,875 402,500 503,125 603,750

704,375 805,000 60,000 172,500 258,750 345,000 431,250 517,500 603,750 690,000 50,000 143,750 215,625 287,500 359,375 431,250 503,125 575,000 40,000 115,000 172,500 230,000 287,500 345,000

402,500 460,000 10 15 20 25 30 35 40 Note that this slide is about accrued rights, and is therefore based on existing (pre April 2016) USS benefit structure Presentation on pensions tax and USS | information only | February 2016 slide 5 USS lifetime allowance x 20+ Pension + MPAVC Savings 56K x 20 + 168K + 50K Presentation on pensions tax and USS | information only | February 2016 slide 6 USS lifetime allowance Total lifetime allowance value of pension saving 1,338,000 Maximum tax free cash of 25% of your LTA

If your benefits from all pension schemes exceed the LTA, then a tax charge of either 25% (on pension) or 55% (on lump sum) applies. USS can adjust your benefits for the tax charge. Presentation on pensions tax and USS | information only | February 2016 slide 7 LTA protections Government has previously introduced protections when the LTA has been lowered it will do so again in 2016 Fixed Protection 2016 Offers protected LTA of 1.25m No minimum LTA value required Benefit accrual must cease on or before 5 April 2016 Not available if taken enhanced or primary protection Individual Protection 2016 Must have pension savings of 1.0m or more at 5 April 2016 Protects actual value of the fund at 5 April 2016, up to maximum of 1.25m Contributions / accrual can continue No deadline (apparently) HMRC is yet to provide the online tool to enable elections will follow from July 2016 (members will need to declare LTA value as at 5 April 2016) Presentation on pensions tax and USS | information only | February 2016 More later slide 8 Annual allowance (AA)

Opening value Presentation on pensions tax and USS | information only | February 2016 Closing value slide 9 Annual allowance (AA) less Pension Input plus Amount Gross MPAVC Annual allowance Opening value Closing value Presentation on pensions tax and USS | information only | February 2016 slide 10 Annual allowance 255,000 245,000 235,000 225,000 215,000 How the annual allowance has changed since 2006 50,000 50,000 50,000 40,000 06 / 07 07 / 08 08 / 09 09 / 10 10 / 1 1 Presentation on pensions tax and USS | information only | February 2016

11/1 2 12 / 1 3 13/1 4 14/1 5 40,000 15/1 6 slide 11 Annual allowance ANNUAL SALARY The traditional AA table for final salary members 150k 140k 49,590 46,284 63,128 58,919 76,665 71,554 90,203 84,189 130k 42,978 54,711 66,443 78,176

120k 39,672 50,502 61,332 72,162 110k 36,366 46,294 56,221 66,149 100k 33,060 42,085 51,110 60,135 90k 29,754 37,877 45,999 54,122 80k 26,448 33,668 40,888

48,108 70k 23,142 29,460 35,777 42,095 60k 19,836 25,251 30,666 36,081 50k 16,530 21,043 25,555 30,068 40k 13,224 16,834 20,444 24,054 10 20 30

40 YEARS OF SERVICE Presentation on pensions tax and USS | information only | February 2016 slide 12 Annual pension input amounts An estimate of how pension inputs will build up in future years, one year basis only Salary 210,000 200,000 180,000 170,000 160,000 150,000 140,000 130,000 120,000 110,000 100,000 80,000 70,000 60,000 50,000 40,000 Pension Input Amount built up in Pension Input Amount built up 2016/17 2017/18 49,000 45,000 47,000 43,000 42,000 39,000 40,000 37,000 38,000 35,000 35,000 33,000 33,000 31,000 31,000 29,000

29,000 27,000 26,000 25,000 24,000 23,000 20,000 19,000 17,000 17,000 15,000 15,000 13,000 13,000 11,000 11,000 Note that numbers are approximate, and rounded, for illustration purposes only Presentation on pensions tax and USS | information only | February 2016 slide 13 Working out your AA Opening value x 1 80th x x CPI x 19 Salary Service 35 x 1/80 x 130K x 2.7% x 19 1,109,801 Presentation on pensions tax and USS | information only | February 2016 slide 14 Working out your AA

Closing value x 1 Service 80th x x 19 Salary 36 x 1/80 x 136.5K x 19 1,167,075 Presentation on pensions tax and USS | information only | February 2016 slide 15 Working out your AA 1,167,075 Closing value less 1,109,801 Opening value plus MPAVC 10,000 67,274 Presentation on pensions tax and USS | information only | February 2016 slide 16 Using Carry Forward PIP Period 2012 / 13

2013 / 14 2014 / 15 Annual allowance 50,000 50,000 40,000 Less PIP amount 20,000 25,000 67,274 Carry forward 30,000 ( 27,274) 25,000 + + 55,000 30,000 55,000 Presentation on pensions tax and USS | information only | February 2016 27,726 slide 17 The latest changes Alignment of pension assessment periods The government introduced new assessment periods for the annual contributions to pension schemes aligned with tax years

Special split year in 2015/16 into mini tax years, before and after the 2015 Budget. Foresight needed to have taken any material advantage in 2015/16 The Money Purchase Annual Allowance A new reduced allowance, the MPAA, applies once a member chooses to draw flexible DC benefits ... to prevent recycling The 10,000 MPAA runs alongside the annual allowance Affects the highest earners and those making significant AVCs, and key point is that once you access flexible DC benefits further DC saving is restricted Future DC contributions permanently restricted Presentation on pensions tax and USS | information only | February 2016 slide 18 AA Tapering key details An individuals AA will be reduced by 1 for every for every 2 of adjusted income that exceeds 150,000, up to a maximum reduction of 30,000 Threshold Income Your taxable income (salary, other earned income, rent, dividends) Plus employer contributions to any new* salary sacrifice arrangement Adjusted Income is threshold income plus The value of the employer contributions to a DC scheme, and for DB schemes the Pension Input Amount less member contributions Generally speaking if threshold income is below 110,000 no tapered AA can apply (special cases can apply, eg large one-off employer contribution) * entered into on or after 9 July 2015 Presentation on pensions tax and USS | information only | February 2016

slide 19 AA Tapering The following allows you in simple terms to assess if you will be affected by the AA taper Note that the taper can apply if a member benefits from a large, one-off pension contribution (even if threshold income is less than 110,000) Presentation on pensions tax and USS | information only | February 2016 slide 20 AA Tapering what is the effect? ANALYSIS OF ANNUAL ALLOWANCE CHARGE FOR THE YEAR 2016/2017 Threshold Net cost Adjusted Annual Pension Input Income Income Allowance Amount Excess pension saving AA tax charge DC fund DB Net DC pension DB lump fund* sum pa 210,000 200,000 190,000 180,000 170,000 160,000 150,000 140,000 130,000 120,000 110,000

39,000 37,000 35,000 31,000 23,000 15,500 6,500 0 0 0 0 0 18,000 17,000 16,000 14,000 10,000 7,000 3,000 0 0 0 0 0 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 -2,000 -2,000 -2,000 -1,000 2,000 4,000 7,000 9,000 8,000

7,000 6,000 5,000 9,000 242,000 10,000 9,000 231,000 10,000 8,000 219,000 10,000 8,000 208,000 11,000 7,000 196,000 17,000 7,000 185,000 22,500 7,000 173,000 28,500 6,000 162,000 34,000 6,000 151,000 39,500 5,000 139,000 40,000 5,000 128,000 40,000 100,000 4,000 116,000 40,000 * after the AA charge has been paid 49,000 47,000 45,000 42,000 40,000 38,000 35,000 33,000 31,000 29,000 26,000 24,000 1,800 1,700 1,600 1,600 1,500 1,400 1,400 1,300 1,200 1,200 1,100 1,000 5,400 5,100 4,800 4,800

4,500 4,200 4,200 3,900 3,600 3,600 3,300 3,000 Note these are estimated calculations based on a number of broad assumptions. They are not intended to be definitive. In particular, assumes: no other income, USS salary = threshold income, marginal tax rate of 45% applies, no carry forward, no matching contribution, tax upon drawing benefits not taken into account Presentation on pensions tax and USS | information only | February 2016 slide 21 AA Tapering what is the effect? ANALYSIS OF ANNUAL ALLOWANCE CHARGE POST 2016/2017 Threshold Net cost Adjusted Annual Pension Input Income Income Allowance Amount Excess pension saving AA tax charge DC fund DB Net DC pension DB lump fund* sum pa 210,000 200,000 190,000 180,000 170,000 160,000 150,000 140,000

130,000 120,000 110,000 35,000 33,000 31,000 26,500 18,500 11,000 3,500 0 0 0 0 0 16,000 15,000 14,000 12,000 8,000 5,000 2,000 0 0 0 0 0 31,000 29,000 27,000 25,000 23,000 21,000 19,000 17,000 15,000 13,000 11,000 9,000 15,000 14,000 13,000 13,000 15,000

16,000 17,000 17,000 15,000 13,000 11,000 9,000 9,000 238,000 10,000 9,000 227,000 10,000 8,000 216,000 10,000 8,000 205,000 12,500 7,000 193,000 18,500 7,000 182,000 24,000 7,000 171,000 29,500 6,000 160,000 35,000 6,000 149,000 40,000 5,000 137,000 40,000 5,000 126,000 40,000 100,000 4,000 115,000 40,000 * after the AA charge has been paid 45,000 43,000 41,000 39,000 37,000 35,000 33,000 31,000 29,000 27,000 25,000 23,000 750 750 750 750 750 750 750 750 750 750 750 750

2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 Note these are estimated calculations based on a number of broad assumptions. They are not intended to be definitive. In particular, assumes: no other income, USS salary = threshold income, marginal tax rate of 45% applies, no carry forward, no matching contribution, tax upon drawing benefits not taken into account Presentation on pensions tax and USS | information only | February 2016 slide 22 Mitigating tax charges Previous USS options The new USS options for the 2016 regime Making sense of the options ! d e t a c i l p m o c s t I Presentation on pensions tax and USS | information only | February 2016 slide 23 Previous USS options

For some years USS has made available specific options to members affected by the AA and LTA The most used option has been enhanced opting out, which has allowed a member to opt out of the scheme whilst retaining death in service and incapacity cover (with special member contribution) Two other options have been available, used in very specific circumstances Temporary cessation of accrual Salary capping and past service deferral Options no longer available (from 1 April 2016), but may still apply to existing members Presentation on pensions tax and USS | information only | February 2016 slide 24 USS options from 2016 The scheme has new options in the light of the 2016 tax regime Can be used alongside, or separate to, HMRC options Enhanced opt-out Allows opting out of scheme with continued death in service and incapacity cover its value varies for each individual Special member contribution of 2.5% of salary Note that prohibits accessing flexible retirement Available from April 2016, election must run for 12 months, can only be made once Voluntary Salary Cap Available from 1 October 2016 at the earliest Level of salary for pension purposes can be set individually at a minimum of 55,000 No change to effect of taper, and note effect on death / IH benefits Presentation on pensions tax and USS | information only | February 2016 slide 25

Options for consideration Some general scenarios, and options that might be considered: Pension savings are already above 1.25 million Pension savings are between 1 million and 1.25 million Pension savings are below 1 million but are nearing that amount Individual protection should be considered, as cannot be lost and protects at 1.25 million Other options can then be considered, for example full opting-out, enhanced opting-out A difficult decision, with either (i) individual protection on its own, or (ii) both individual protection and fixed protection, deserving consideration Full-opting out or enhanced opting-out needed with fixed protection A difficult decision, with (i) no protection or (ii) fixed protection, deserving consideration Individual protection not applicable Note also that there are other factors which should be taken into account, notably age, eligibility to retire either fully or flexibly, level of other (non-USS) income, etc. These are options for consideration only. Note that these are not exhaustive, and it is recommended that you seek independent financial advice before making any pensions decision Presentation on pensions tax and USS | information only | February 2016 slide 26 Further information USS uss.co.uk

USS For the Future forthefuture.uss.co.uk USS benefit modeller (final salary) uss.co.uk Pensions Advisory Service pensionsadvisoryservice.org.uk Money Advice Service moneyadviceservice.org.uk Pension Wise pensionwise.gov.uk Independent Financial Advisers unbiased.co.uk findanadviser.org Scheme information, and the latest news Dedicated site to the 2016 scheme changes Finds the LTA value of your benefits and more General guidance on pensions For general financial guidance including pensions New government site focussed on defined contribution pension saving Look for chartered advisers only Presentation on pensions tax and USS | information only | February 2016 slide 27 Your Questions Presentation on pensions tax and USS | information only | February 2016 slide 28

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