This page provides pension and tax information for all staff and may be of particular interest to high earners.
The tax relief applicable to pensions has changed during 2011/12. Please see the member notices we issued in November 2010, and updated in November 2011, for further information. These include a Q&A and some examples:
2011 – Tax changes affecting your Civil Service pension
2010 – Briefing for Civil Servants
HM Revenue & Customs provide guidance for individuals on their website: www.hmrc.gov.uk/pensionschemes
Annual Allowance – £50,000 from tax year 2011/12
The Annual Allowance sets the maximum amount of pension saving that you can build up in any one year before incurring a tax charge. This includes actual employer and employee contributions to defined contribution schemes (such as an AVC scheme), as well as benefits built up in defined benefit schemes such as classic, classic plus, premium and nuvos.
For full details of how the Annual Allowance works, please see the HMRC website (www.hmrc.gov.uk/pensionschemes). The Q&A in the member briefing also explains how the Annual Allowance works in relation to defined benefit schemes, but in basic terms the value of the benefits you have built up is worked out as 16 times the increase in the value of your pension during the year, plus the increase in value of any automatic lump sum (classic/classic plus only). A measure for inflation is included in the calculation (see 2011 – Tax changes affecting your Civil Service pension for more details)
Please be aware that this doesn’t just affect high earners. Any of the following actions or processes could also have an impact on the amount of Annual Allowance you use:
- Buying added pension (especially lump sum purchases)
- Contributing towards other pensions savings such as AVCs
- Getting a promotion that includes a significant pay rise
- Leaving on ill health retirement with an enhancement to your service (Please see separate fact sheet on this specific issue - Impact of Annual Allowance on ill health retirement)
- Transferring in service from another pension scheme under the preferential Club Transfer terms
- Aggregating or linking a previous period of employment from the Civil Service
If you do incur an Annual Allowance tax bill in relation to your Civil Service pension and it is more than £2,000, then you will have the option of requesting to use the Scheme Pays facility. Scheme Pays is where the pension scheme will pay an amount of tax for you in exchange for a permanent reduction to your pension. Contact your Pension Service Centre if you do wish to use Scheme Pays.
Lifetime Allowance – will reduce from £1.8m to £1.5m from 6 April 2012.
From 6 April 2012 the Lifetime Allowance will reduce from £1.8 million to £1.5 million. This will mean potentially higher tax bills for some people retiring with a pension of £75,000 or more (premium or nuvos) or £65,200 (plus lump sum) for members of classic.
Fixed Protection
HMRC has introduced a new form of protection called Fixed Protection. Members can apply to HMRC for Fixed Protection to keep the current Lifetime Allowance of £1.8 million. The member notices linked at the top give more details, as well as an example showing the potential effect of applying for fixed protection (with the 2011 notice).
You need to apply to HMRC for Fixed Protection by 5th April 2012 at the latest. However, you will lose your Fixed Protection if you build up any future pension (other than normal indexation increases) after 5 April 2012. This effectively means that you would have to opt out of the Civil Service pension scheme.
If you already have Primary Protection you cannot also apply for Fixed Protection (but your Primary Protection will continue to be linked to a Lifetime Allowance of £1.8m).
If you already have Enhanced Protection (but not Primary Protection) you will have to surrender your Enhanced Protection (by writing to HMRC) before being able to apply for Fixed Protection. The HMRC website gives further details, and also has a link to the Fixed Protection application form.
You should consider matters carefully before deciding to opt out and apply for Fixed Protection and may wish to consult an independent financial adviser.
For more information on Annual Allowance and Lifetime Allowance, visit www.hmrc.gov.uk/pensionschemes
Nothing in this communication should be interpreted as constituting financial advice. You should obtain independent advice on any specific issues concerning you.