Annual Allowance Will I exceed my pensions annual allowance? This is the amount your pension savings can increase in any one year before you become liable to an extra tax charge. For most members the annual allowance for the tax year 2016/17 is £40,000. Different rules will affect you if either of the following apply: You have accessed pension benefits from another pension scheme flexibly under the new pension freedoms introduced by the government in April 2016. This triggers what is called the Money Purchase Annual Allowance rules and you must tell us if this applies to you. More information can be found at HMRC website You earn more than £110000 and the value of your pension savings growth together with any other income exceeds £40000. The new Tapered annual allowance may then apply to you. Usually, any pension benefits you have in all tax-registered pension arrangements you’ve paid contributions into during the tax year (or if your employer has paid contributions on your behalf) are included in calculating your pension savings in a year. Because of some changes introduced by the Government in the July 2015 budget, for 2015/16 some transitional arrangements apply. For active members of the Firefighters Pension Scheme, in 2015/16 the year is split into two mini periods as follows: Period 1 (the pre-alignment period): 01/04/2015 to 08/07/2015 = £80000 Period 2 (the post alignment period): 09/07/2015 to 05/04/2016 = £0 (see note below) Note: Up to £40000 you have not used from period 1 may carry forward into period 2. We will write to you if: Your Firefighters Pension Scheme benefits have grown in value by more than £80000 for the two periods; Or Your Firefighters Pension Scheme benefits have grown by more than £40000 in period 2. But if you have other pension benefits, then you need to add up all the values to check if you exceed the Annual allowance. You will only have an annual allowance tax charge if the value of your pension savings for a tax year increases by more than the annual allowance level for that year. However, you may be able to carry forward unused annual allowance from the last three tax years. This means that even if the value of your pension savings increases by more than the annual allowance level in a year you may not be liable to the annual allowance tax charge. For example, if the value of your pension savings in 2015/16 increases by £40000 in period 1 & £60000 in period 2, then this will be £20,000 more than the annual allowance level of £40,000 that would apply to the second period. But, if in the three previous years the increase had been £25,000 (2014/15), £38,000 (2013/14) and £42,000 (2012/13), then the total amount by which each of these previous years fell short of the annual allowance level applicable at the time (i.e. £15,000 + £12,000 + £8,000 = £35,000) would more than offset the £20,000 excess pension saving in 2015/16. There would be no annual allowance tax charge to pay in this case. Please note: To carry forward unused annual allowance from an earlier year you must have been a member of a tax registered pension scheme in that year. Annual allowance thresholds since 2011/12 = £50000 up to 2013/14 reducing to £40000 in 2014/15. Most people won’t be affected by the annual allowance tax charge because the value of their pension savings will not increase in a tax year by more than the annual allowance level or, if it does, they are likely to have unused allowance from previous tax years that they can carry forward. How can I work out if I might be affected by the Annual Allowance? Working out whether you’re affected by the annual allowance is quite complex, but this should help you work out your general position. In general terms, the increase in the value of your pension savings in the Firefighters Pension Scheme in a year is calculated by working out the value of your benefits immediately before the start of the input period (1 April), increasing the value by inflation (as currently measured by the Consumer Prices Index), and comparing this with the value of your benefits at the end of the input period (i.e. the following 31 March). In a defined benefit scheme like the Firefighters Pension Scheme the value of your benefits is calculated by multiplying the amount of your pension by 16 and adding any lump sum you are automatically entitled to from the pension scheme. If the difference between: the value of your benefits immediately before the start of the input period (the opening value) and the value of your benefits at the end of the input period (the closing value) is more than the annual allowance level for the tax year, you may be liable to a tax charge. The method of valuing benefits in other schemes may be different to the method used in the Firefighters Pension Scheme. If you chose to transfer pension rights from another scheme into the Firefighters Pension Scheme, the value of the benefits relating to the transfer doesn’t count towards your pension savings in the Firefighters Pension Scheme in the year the transfer payment is received. If your pension benefits in the Firefighters Pension Scheme are reduced following a Pension Sharing Order (issued as a result of a divorce or dissolution of a civil partnership) then, for the purposes of calculating the value of your pension savings in the Firefighters Pension Scheme, the reduction in your benefits is ignored in the year that the Pension Sharing Order is applied to your benefits. If you retire because of permanent ill health and an independent registered medical practitioner certifies that you are suffering from ill health, which makes it unlikely that you will be able (except to an insignificant extent) to undertake gainful work (in any capacity) before you reach state pension age, there is no annual allowance tax charge on the ill health retirement benefits. Members most likely to be affected by the annual allowance tax charge are those that have a lot of scheme membership and have had a significant pay increase, or who pay high levels of extra contributions. We can tell you how much the value of your Firefighters Pension Scheme benefits has increased during any input period. Also, we’ll tell you if your Firefighters Pension Scheme pension savings are more than the annual allowance in any year, ignoring any carried-forward allowance from the previous three years, not later than 6 October following the end of the relevant tax year. Example Here’s an example showing the calculation of the increase in the value of pension savings for an employee who has been an active member of the Firefighters Pension Scheme throughout 2013/14 Working out the opening value of the member’s benefits for 2013/14 At 31 March 2013 Pensionable pay for the year to 31 March 2013 £60,000 Scheme membership 22 years The Consumer Prices Index (CPI) for September 2012 2.2% Opening value Annual pension 24 / 60 x £60,000 £24,000 Multiply by 16 £384,000 Increase by inflation as measured by CPI x 1.022 To give an opening value of £392,488 Working out the closing value of the member’s benefits for 2013/14 At 31 March 2014 Pensionable pay for the year to 31 March 2014 £63,000 Scheme membership 23 years Closing value Annual pension 26 / 60 x £63,000 £27,300 Multiply by 16 £436,800 To give an closing value of £436,800.00 Working out the increase in value during 2013/14 The increase in the member's benefits over the year to 31 March 2014 is £436,800.00 less £392,488.00 = £44,312.00 As this is less than the annual allowance for 2013/14 of £50,000 there is no annual allowance charge in this example. The member has £5,688.00 unused annual allowance from 2013/14 to carry forward to 2014/15. What happens if my pension savings increase by more than the annual allowance? You will be liable to a tax charge (at your marginal rate) on the amount that the increase in your pension savings for the tax year, less any unused allowance from the previous three years. If you exceed the annual allowance in any year you are responsible for reporting this to HMRC on your self-assessment tax return. A tax charge resulting from a breach (if greater than £2,000) can be paid by the Pension Fund on your behalf providing that your pension savings in the Firefighters Pension Scheme alone breached the AA limit. The tax charge would then be recovered from your pension benefits in retirement. This is known as Scheme Pays. If you intend to ask for scheme pays, you must contact WYPF no later than the 31st July in the year after the breach occurred, you must also do so before claiming your benefits if the breach occurs shortly before then. For more information about the annual allowance please visit Her Majesty’s Revenue & Custom website: Annual-allowance Tapered Annual Allowance The annual allowance for the tax year 2015/16 is unchanged from the previous year at £40,000, but the government has introduced a new tapered allowance for people who have a threshold income above £110,000 and an adjusted income above £150,000 per year. What is threshold and adjusted income? Threshold income is your taxable income not including contributions to a pension scheme. It includes many forms of income including property, savings, dividends, pensions (but not growth on pensions), social security and state pension income. If you have a salary sacrifice arrangement you can’t deduct taxable income from your total income for payments made to it on or after 9 July 2015. These payments are still part of your threshold income. Adjusted income is your taxable income not including contributions to a pension scheme (i.e. your threshold income), plus the growth on your pension savings each year. What does the taper do? If you have threshold income above £110,000 and adjusted income above £150,000, for every £2 your adjusted income exceeds £150,000 your annual allowance is reduced by £1 (to a minimum annual allowance of £10,000). If your threshold income is below £110,000 the taper won’t apply to you, no matter what your adjusted earnings are. Below are two tables showing different pay and growth scenarios. In table 1 the annual allowance remains at £40,000 because either the threshold or adjusted incomes remain below the limits. Table 1 A: Taxable income (£) B: Contributions paid in the year (£) C: Annual growth in pension saving (£) D: Threshold income (£) = A – B E: Adjusted Income (£) = A – B + C F: Annual Allowance (£) 80,000 7,920 (9.9%) 5,000 72,080 77,080 40,000 100,000 10,500 (10.5%) 15,000 89,500 104,500 40,000 120,000 13,680 (11.4%) 25,000 106,320 131,320 40,000 120,000 13,680 (11.4%) 45,000 106,320 151,320 40,000 124,000 14,136 (11.4%) 45,000 109,864 154,864 40,000 135,000 15,390 (11.4%) 20,000 119,610 139,610 40,000 150,000 17,100 (11.4%) 15,000 132,900 147,900 40,000 160,000 20,000 (12.5%) 8,000 140,000 148,000 40,000 In this table, both of the income limits have been breached on most lines, so the tapered annual allowance is calculated using the formula 40,000 – ((E – 150,000) ÷ 2) Table 2 A: Taxable income (£) B: Contributions paid in the year (£) C: Annual growth in pension saving (£) D: Threshold income (£) = A – B E: Adjusted Income (£) = A – B + C F: Annual Allowance (£) 125,000 14,250 (11.4%) 20,000 110,750 130,750 40,000 125,000 14,250 (11.4%) 40,000 110,750 150,750 39,625 135,000 15,390 (11.4%) 20,000 119,610 139,610 40,000 135,000 15,390 (11.4%) 40,000 119,610 159,610 35,195 150,000 17,100 (11.4%) 15,000 132,900 147,900 40,000 150,000 17,100 (11.4%) 25,000 132,900 157,900 36,050 160,000 20,000 (12.5%) 35,000 140,000 175,000 27,500 175,000 21,875 (12.5%) 10,000 153,125 163,125 33,438 183,000 22,875 (12.5%) 50,000 160,125 210,125 10,000 200,000 25,000 (12.5%) 5,000 175,000 180,000 25,000 More information about annual allowance, as well as an online checking tool, can be found on the government website tax-on-your-private-pension/annual allowance Back to annual allowance Lifetime Allowance Will I exceed my pensions lifetime allowance? This is the total value of all the pension benefits you can have without you having to pay a tax charge when you draw them. If the value of your pension benefits when you draw them is more than the lifetime allowance you will have to pay tax on the excess benefits. The lifetime allowance covers any pension benefits you may have in all tax-registered pension arrangements – not just the Firefighters' Pension Scheme. This doesn’t include any state retirement pension, state pension credit or any survivor’s/dependant’s pension you may be entitled to. The lifetime allowance level from 6 April 2016 is £1 million. This has decreased from the £1.25 million level set on 6 April 2014. Despite this reduction, most people will not be affected by the lifetime allowance charge as they will not have pension savings of more than £1 million. How can I work out if I could be affected by the reduced lifetime allowance? To work out the capital value of pension benefits that start to be drawn on or after 6 April 2006, you multiply your pension by 20 and add any lump sum you draw from the pension scheme. As an example, and to give you a general idea, a Firefighters' Pension Scheme pension of £50,000 per year would have a pension saving value of £1 million. For pensions already in payment before 6 April 2006, the capital value of these is calculated by multiplying the current annual rate of the pension, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation. When any Firefighters' Pension Scheme benefit, or any other pension arrangement you have, is put into payment you use up some of your lifetime allowance – so even if your pensions are small you should keep a record of any pensions you receive. What happens if the value of my pension benefits is more than the lifetime allowance? If your Firefighters' Pension Scheme benefits are more than your lifetime allowance you will have to pay tax on the excess. If excess benefits are paid as a pension the charge will be 25%, with income tax deducted on the ongoing pension payments; if the excess benefits are taken as a lump sum they will be taxed once only at 55%. Are there any protections from the lifetime allowance tax charge? Some members may already hold protection certificates relating to the introduction of the lifetime allowance regime at 6 April 2006 or reductions to the lifetime allowance level that occurred on 6 April 2012 and 6 April 2014. More details about these are shown on HMRC’s website (link below). Because the lifetime allowance has reduced to £1 million from 6 April 2016, HMRC will introduce two new forms of protection: Fixed protection 2016 – this protects the lifetime allowance at £1.25 million but is usually lost unless future pension stop after 5 April 2016. Individual Protection 2016 – you can apply for this if your benefits at 5 April 2016* are valued over £1million. This protects your lifetime allowance to the lower of, the value of your benefits at 5 April 2016 or £1.25million. Both will be available online from July 2016 (transitional arrangements are in place if you need to apply before this). * Individual Protection 2014: If your benefits at 5 April 2014 were valued over £1.25 million, you have until 5 April 2017 to apply for this earlier protection certificate. This protects your lifetime allowance to the lower of, the value of your benefits at 5 April 2014 or £1.5million. For more information about the protections, please visit the HMRC website. Please note, there may be conditions attached to retaining some of the protection certificates issued by HMRC. You should ensure you are aware of the conditions as you may be required to let HMRC know if you the protection is lost. Most people will be able to save as much as they wish with full tax relief as their pension savings will be less than the allowances.