Members of staff who join one of the College’s pension schemes benefit from part of their contribution which would normally automatically go to the Government in tax going into their pension instead.  There is no restriction on the amount that can go into individuals’ pensions, but there are annual and lifetime limits on how much tax relief individuals receive on their pension contributions.

Tax relief on your annual pension contributions

Members of staff who are UK taxpayers, in the tax year 2017-18 will receive tax relief on pension contributions of up to 100% of their earnings or a £40,000 annual allowance (AA), whichever is lower.

    • For example, if you earn £20,000 but put £25,000 into your pension pot (perhaps by topping up earnings with some savings), you will only get tax relief on  £20,000.
    • Similarly, if you earn £60,000 and want to put that amount in your pension scheme in a single year, tax rules mean you will normally only get tax relief on £40,000.  Any contributions you make over £40,000 will be subject to Income Tax at the highest rate you pay, unless you have carry forward unused allowances from the previous three years, and were a member of a pension scheme during those years.

There are exceptions to the above rule and further information can be obtained initially from Pensions.  Alternatively, consult with a regulated financial adviser for advice on how to proceed.

The Tapered Annual Allowance (TAA)

HMRC introduced a lower annual allowance for individuals with higher incomes, which applied from the tax year 2016-17 onwards. HMRC describes this as ‘tapering’. Tapering will only apply if you have both a ‘threshold income’ over £110,000 and an ‘adjusted income’ of over £150,000.

 The effect of the taper is to reduce your AA (and therefore increase your tax if you accrue benefits/make contributions above the rate of your reduced AA) as your salary increases. The AA is reduced by £1 for every £2 of adjusted income above £150,000, down to a minimum AA of £10,000.

The USS benefit modeller will help you identify if you will be required to pay additional tax at your highest rate.

USS AA Factsheet [pdf]

NHS AA Fact Sheet [PDF]

Lifetime allowance for Pension savings

The lifetime allowance (LTA) is a limit on the value of money individuals receive from their pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge.

FAQs

How much is the Lifetime Allowance?

The LTA for most people is £1 million in the tax year 2017-18.

It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.

From 6 April 2018, the government intends to index the standard LTA annually in line with the Consumer Prices Index (CPI).

Does it apply to me?

Every time a payout from your pension schemes starts, its value is compared against your remaining lifetime allowance to see if there is additional tax to pay.

You can work out whether you are likely to be affected by adding up the expected value of your payouts.

You work out the value of pensions differently depending on the type of scheme you are in:

    • For defined contribution pension schemes, including all personal pensions, the value of your benefits will be the value of your pension pot used to fund your retirement income and any lump sum
    • For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension. So you are likely to be affected by the lifetime allowance in 2017-18 if you are on track for a final salary pension (with no separate lump sum) of more than £50,000 a year or a salary-related pension over £37,500 plus the maximum tax-free cash lump sum.

What are the charges if I exceed the Lifetime Allowance?

If the cumulative value of the payouts from your pension pots, including the value of the payouts from any defined benefit schemes, exceeds the LTA, there will be tax on the excess – called the LTA charge.

The way the charge applies depends on whether you receive the money from your pension as a lump sum or as part of regular retirement income.

What if I take a lump sum?

Any amount over your LTA that you take as a lump sum is taxed at 55%.

Your pension scheme administrator should deduct the tax and pay it over to HMRC, paying the balance to you.

What is my allowance for regular retirement income?

Any amount over your LTA that you take as a regular retirement income – for instance by buying an annuity – attracts a lifetime allowance charge of 25%.

This is on top of any tax payable on the income in the usual way.

For example, suppose someone who pays tax at the higher rate had expected to get £1,000 a year as income but the 25% lifetime allowance charge reduced this to £750 a year. After Income Tax at 40%, the person would be left with £450 a year.

This means the LTA charge and Income Tax combined have reduced the income by 55% – the same as the LTA charge had the benefits been taken as a lump sum instead of income.

What are my options to manage Lifetime Allowance?

For defined benefit pension schemes, your pension scheme might decide to pay the tax on your behalf and recover it from you by reducing your pension.

If you wish to avoid the lifetime allowance charge it’s important to monitor the value of your pensions, and especially the value of changes to any defined benefit pensions as these can be surprisingly large.

You might also wish to consider applying for protection if your pension savings is expected to exceed the lifetime allowance threshold.

What protections are there for Lifetime Allowance?

As a result of the recent reduction to the lifetime allowance (LTA), two forms of protection have been made available by HMRC. Eligibility for the new protections depends, amongst other things, on which previous protections you may already have in place.

The new protections are known as fixed protection 2016 (FP2016) and individual protection 2016 (IP2016).

How am I protected under Fixed Protection 2016 (FP2016)?

Under FP2016, you will be given a protected LTA of £1.25million, provided you meet certain conditions, the main condition being that you must stop building up any further pension benefits, either in USS or elsewhere. If you build up any further pension benefits after 5 April 2016 (regardless of when you applied for FP2016) your protection will be lost, and the standard £1million LTA will apply. Anyone without previous protections (except IP2014) can consider applying to HMRC for FP2016.

How am I protected under Individual Protection 2016 (IP2016)?

Under IP2016 you are given your own personal LTA amount, which is equivalent to the LTA value of your pension benefits built up to 5 April 2016, subject to a maximum of £1.25million. Although the amount protected may be less than under FP2016, the main difference is that you can continue to build up further pension benefits without the loss of this protection. Any benefits in excess of the protected amount will be subject to the LTA excess tax charge when put into payment.

Only those without primary protection, or IP2014, and with pension savings over £1million can apply to HMRC for IP2016.

Note that, under both FP2016 and IP2016, should the standard LTA increase in future to an amount greater than your protected LTA under FP2016 or IP2016, then the standard LTA will apply to your benefits instead (i.e. you will not end up with a lower LTA by having a protection in place).

An online application process for both forms of protection is available from HMRC Website

If you are affected by any of these allowances, you may feel you need some extra help and advice to help you decide whether you wish to take protection or even whether you wish to remain a member of a pension scheme.

To help with this the College has signed contracts with a range of Independent Financial Advisors (IFA’s)) who are available to assist in reviewing your options.