Changes in Tax Relief for Pensions

For information issued by the Universities Superannuation Scheme, see the USS website.

Guidance on completing the annual allowance calculator 2011/12

Introduction
This calculator takes a number of inputs and estimates how much of the Annual Allowance (AA) you have used up in tax year 2011/12. The calculator requires you to input certain data about your pensionable service and pensionable salary which allow the calculation of the value of your pension benefits within the USS (or pre-2008 NHS Pension Scheme). Compulsory inputs are coloured darker green.

There are also optional inputs - coloured lighter green - which you can fill in if you want to know if you have any unused AA from previous years in respect of these pension arrangements.

Further optional inputs allow you to specify additional years bought with DB Additional Voluntary Contribution (AVC) Added Years or transferred in from another scheme or the amounts of DC AVCs.

Please read these notes and disclaimer before using the calculator.

The key inputs

Pensionable Service and DB AVCs

Step 1 – select whether you are inputting your pensionable service (Pen Service) at 31 March 2010 or the date you joined the pension scheme (DJS). It will usually be easier to select your pensionable service as 31 March 2010 as this information is given on the annual USS service statement you were sent in September 2010.

Step 2 – enter your “total pensionable service” as 31 March 2010, as stated on the March 2010 USS service statement. This figure will include any transferred-in service and additional year AVC service to 31 March 2010. If you have selected Date Joined Scheme (DJS) enter the date you joined the USS (or NHS) pension scheme.

If you choose 'Pen Service' you must enter the amount of service you will have at 31 March 2010 (see your USS benefit statement from last year or the Director of HR’s letter of 1 March 2011). If you are paying DB AVCs for Added Years you can enter an optional amount of added days you are accruing each year. You can calculate this by subtraction if you have your last two benefit statements (or seethe Director of HR’s letter of 1 March 2011).
If you choose 'DJS' then you must enter the date you joined the pension scheme (this may be before you joined the University of Exeter.) You can optionally input an amount of added service that you have transferred in from another scheme.

Unless you are paying AVCs for Added Years the calculator assumes that you accrue one year of service in the pension scheme per year

Pensionable Salary and DC AVCs

For each year you wish to estimate potential AA liability or unused AA capacity the calculator needs to know how much pensionable salary you had at the start and end of the year.

Step 3 – enter your pensionable salary at March 2011 and March 2012. Inputs for 31 March 2011 and 31 March 2012 are compulsory as these are either end of the first year in which the tax charge will be payable. Clearly the figure you enter for March 2012 will be an estimate given this date is in the future.

If the calculator shows you have an AA liability in Financial Year 2011/12 you may be able to make use of unused AA from previous years. To calculate this, you can enter your pensionable salary for March 2008, March 2009 and March 2010 as well. The calculator will assess if you have additional capacity that can be used to offset any liability. (The calculator will work using data for 2011 and 2012 only – but will be limited.)

Your pensionable salary is the amount of pensionable pay during the tax year, which will not be the same as your actual salary at the end of the tax year, as your salary may have increased part-way through the year (e.g. because of a pay award in August). For example, if you were paid at the rate of £80,000 p.a. between April and September 2010, and received an increase to £90,000 p.a. in October 2010, your pensionable salary for the 2010/11 tax year would be £80,000/12 x 6 months + £90,000/12 x 6 months = £40,000 + £45,000 = £85,000.

However, in most cases, you will get a reasonable approximation by entering your salary at March each year, but this will give a less accurate result. (You can view your gross salary for each month since April 2008 in Trent Self Service – multiply this figure by 12 to get an estimate of your annual salary.)

Note: the way the USS pension scheme works out pensionable salary is more complicated than in this simplified model. This involves looking at the last 13 years of earnings and applies averaging techniques to find the highest salary to use. This calculator uses a simplified approach assuming your latest salary is the highest. For accurate AA figures, you will need to contact the scheme administrators.

Step 4 – enter the cash value of any money purchase (defined contribution) AVCs paid in each tax year, whether to USS or to Prudential. For example, if you paid £5,000 AVCs in the year to March 2010, you should enter this figure under DVC AVCs against March 2010. (You should not enter here the amount paid for any AVC additional years of service.)

Interpreting the calculator's outputs

The output section, in blue, shows a number of figures for each financial year including the size of the pension accrued and the size of the lump sum accrued at the end of that year. If these figures are shown for two consecutive years then the calculator works out the value of the pension savings over the year and estimates whether this would give rise to unused AA or whether there is an excess over the AA of £50,000.

If data is entered for previous years the calculator will keep track of any unused AA from up to three prior years to decide if you are likely to be subject to the AA Charge.
Any amounts 'Subject to AA Charge' will be taxed at the member's marginal tax rate. This charge may be paid by the member or, as per the announcement from the Government dated 3 March 2011, if the charge is greater than £2,000 the member will have the right to ask the scheme to pay, with a reduction in member benefits. There has been no comment yet from USS or the NHS as to how they would respond to this type of request or calculate the reduced benefits.

The value of the DB benefits for Lifetime Allowance (LTA) purposes is also estimated. Note this only takes account of the DB pension and lump sum and not of any DC AVC fund built up. If this is above £1.5m then the pension may be subject to LTA charges if drawn after April 2012. The actual amount tested against the LTA will depend on the form and amount of benefits taken at retirement, it might be that the amount tested could be reduced if an early retirement factors was applied or benefits were converted from pension to cash for additional lump sums.

The column headings mean:

Pensionable Salary – this is the figure input in Step 3.
DC AVCs – this is the figure input in Step 4.
Pensionable Service – you will note that this increases from one year to the next, based on the figure you have input in Step 2.
Accrued Pension – this is the pension which has been earnt so far based on your pensionable service and pensionable salary, ie 1/80 x pensionable service x pensionable salary.
Accrued Lump Sum - this is the tax free lump which has been earnt so far based on your pensionable service and pensionable salary, ie 3/80 x pensionable service x pensionable salary.
Pension Saving over the tax year – this is an estimate of the figure HM Revenue and Customs will use to assess whether you have a tax liability. It is the difference between the value of your pension saving at the end of the last tax year (ie pension accrued over the tax year x factor of 16 + lump sum accrued over the tax year) adjusted for inflation. The calculator uses the actual rates of inflation – ie 1.8% for 2008/09, 5.2% for 2009/10 1.1% for 2010/01 and 3.1% for 2011/12 – which will be used by HM Revenue and Customs.
Unused AA – If the value of Pension Saving over the tax year is less than the AA of £50,000 in any year, you may be able to offset this unused allowance against any excess pensions savings in future years. This column shows any unused AA which will be carried forward to the next tax year.
Excess over AA – If the value of Pension Saving over the tax year is greater than the AA of £50,000, this column shows if the excess over the AA.
Rolling unused AA– This column shows how much unused allowance you have built up over the three previous tax years which you may offset against any excess pensions savings shown in the previous column.
Subject to AA charge – this column show the amount you will have to pay tax on. The actual amount of tax you will have to pay will be at your marginal rate of tax. For example, if you are a 40% tax payer, the tax liability will be 40% of the figure in this column. The government has not yet confirmed how and when this tax will be collected.
DB LTA – This column shows how close you are to the revised Lifetime Allowance of £1.5 million. You should note that it only takes account of defined benefits accrued in the scheme (ie based on your pensionable service and pensionable salary). It does not take account of any money purchase (defined contribution) AVCs. (If your benefits are close to or above the LTA you may wish to take independent financial advice.)

What to do next

If you play around with the calculator, you will see the effect of a big increase in pensionable pay or putting large sums into money purchase (defined contribution) AVCs. Either of these could cause you to exceed the AA. High earning staff with a longer period of pensionable service may also notice that the simple accrual of an extra year of pensionable service may take them close to the AA.

The purpose of the calculator is to give you an indication of how the tax changes introduced in April 2011 may affect you. The calculator includes a number of assumptions and approximations, so it can only give an indication of whether you should consider taking further advice. If you consider that you may be affected by the changes, you are encouraged to seek independent financial advice from an independent financial adviser who is registered with the Financial Services Authority (FSA – see http://www.fsa.gov.uk/). For accurate AA figures, you will need to contact the scheme administrators.

Disclaimer

The output from this calculator is based on our understanding of the draft legislation published by the Government for the Finance Bill 2011. This legislation has not been enacted and could be subject to amendment prior to becoming law.

This calculator is intended to help estimate the likely impact on individuals of the pension tax changes being introduced from April 2011. The output from the calculator depends upon the inputs. A number of simplifying assumptions need to be made in order to make the calculator workable for individuals. These simplifications, for example using current salary rather than the correctly averaged pensionable salary, could give rise to material differences between the output and accurate individual calculations taking account of all relevant information.

This calculator is not intended to produce outputs for members’ tax returns. Exact figures should be obtained from the pension scheme administrators for the purposes of tax reporting.

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