Changes To Pension Tax Relief from April 2014
Annual Allowance and Lifetime Allowance Changes from April 2014
There are important changes being made to the way pensions savings are taxed, with changes to the tax free limits being introduced from April 2014. The changes affect both the Annual Allowance and the Lifetime Allowance.
Detail about the changes and who is likely to be affected
There are significant tax benefits to saving via a pension arrangement – you receive tax relief on your pension contributions and are able to take part of your retirement benefits as a tax-free lump sum. However, there are limits on the amount of pension benefits that you can build up each year (the Annual Allowance) and also on the total amount of pension benefits that you can build up by retirement (the Lifetime Allowance).
Changes are being made to these limits from 6 April 2014:
The Annual Allowance (AA) is reducing from £50,000 to £40,000, and
The Lifetime Allowance (LTA) is reducing from £1.5million to £1.25million.
The Annual Allowance can affect you at any stage of your career: it depends on your salary level, salary increases, pensionable service and any Additional Voluntary Contributions (AVCs) you’re paying.
With the Annual Allowance reducing, more people will be affected. For example, if a member with a salary of £70,000 and 20 years’ pensionable service receives a 10% salary increase, he/she will be affected by the Annual Allowance.
The Lifetime Allowance needs more intensive thinking as your career progresses and your total benefits build up.
If you’re under 45 years old, the LTA is unlikely to be a concern yet. However, if, for example, you have 30 years’ service and a salary of at least £145,000, then the Lifetime Allowance will affect you eventually. In some cases, action to mitigate the Lifetime Allowance should be considered now as there is a 5 April 2014 deadline for one of the protections available.
After this 5 April 2014 deadline you will no longer be able to apply for ‘Fixed Protection 2014’ introduced by the government to help people who are close to or above the new lifetime allowance of £1.25million.
Fixed Protection 2014 will not be necessary for most people as it is generally only appropriate if you have pensions savings close to or above £1.25m (this is broadly similar to a pension of £50,000 - £60,000 p.a. in the current scheme). However, if you think you may be affected it is important you contact a financial adviser to discuss if it is appropriate for you (details on how to do this are below).
More information relating to Fixed Protection 2014 and Individual Protection 2014 can be found on the HMRC website here.
It is important to ensure you take into consideration not just the pension you are due from the USS/LGPS, but also any AVCs, personal pension arrangements or pension savings from previous employers, as the Lifetime Allowance is measured against your total pension savings.
You should seek financial advice before making any decisions about your benefits. The University is unable to provide financial advice to individual employees on this matter. If you feel you need advice, you should consult your financial adviser. If you do not have one, you can find one in your area by either going online at www.unbiased.co.uk.
If you require any further information, please contact Ben Petty at the University’s pension department by email at email@example.com.