Pension Horror - Annual Allowance

[Easy Street]

Look out! At least the Treasury can’t feign ignorance of the impact of such a change after the publicity around the effect of pension taxes on ‘our NHS’...

Sajid Javid contemplates raiding high earners’ pensions in March Budget

... Mr Javid is considering cutting the [pension tax relief] rate, from 40 per cent to 20 per cent, which would raise more than £10bn annually for the Treasury.

[downsizer]

Originally Posted by Easy Street

Look out! At least the Treasury can’t feign ignorance of the impact of such a change after the publicity around the effect of pension taxes on ‘our NHS’...

Sajid Javid contemplates raiding high earners’ pensions in March Budget

Pretend I'm thick, how would this impact me?

[Easy Street]

Originally Posted by downsizer

Pretend I'm thick, how would this impact me?

If you are already drawing your pension then it won’t. If you are still serving it would double the in-year tax charge levied on you every time a pay increment or promotion added more than £40k to your notional pension pot in one year. When this first became a ‘thing’ a few years ago it only affected gp capts and above (and medics/dentists/lawyers), but it’s already crept down to catch wg cdrs by the threshold not keeping pace with pay. The direction of travel on this looks to be one way so it wouldn’t be a surprise if PA sqn ldrs got caught eventually.

[downsizer]

Originally Posted by Easy Street

If you are already drawing your pension then it won’t. If you are still serving it would double the in-year tax charge levied on you every time a pay increment or promotion added more than £40k to your notional pension pot in one year. When this first became a ‘thing’ a few years ago it only affected gp capts and above (and medics/dentists/lawyers), but it’s already crept down to catch wg cdrs by the threshold not keeping pace with pay. The direction of travel on this looks to be one way so it wouldn’t be a surprise if PA sqn ldrs got caught eventually.

Thanks. How do you work out this notional addition to the pension pot?

[Melchett01]

Originally Posted by Easy Street

If you are already drawing your pension then it won’t. If you are still serving it would double the in-year tax charge levied on you every time a pay increment or promotion added more than £40k to your notional pension pot in one year. When this first became a ‘thing’ a few years ago it only affected gp capts and above (and medics/dentists/lawyers), but it’s already crept down to catch wg cdrs by the threshold not keeping pace with pay. The direction of travel on this looks to be one way so it wouldn’t be a surprise if PA sqn ldrs got caught eventually.

Not sure about that. The tax charge is related to input amounts not tax relief. As we don’t receive tax relief on our pensions I think this affects private sector and SIPPs more. Where it will create an issue is the perceived increase in pensions apartheid between public and private sector, which will leave your average Torygraph reader frothing at the mouth more than usual.

[finningleyprince]

I will be glad to leave. It's all stacking up against 'average Joe' that doesn't want * rank fame, just a decent pension to retire on, and the sooner the better before waiting for it gets me killed.#

I am guessing that the year you get the letter, which will start to eat up previous years allowances, you have 3 years before that cloud really is over you. It makes my option point a no-brainer. It will be time for the Reserves or a total break!

[finningleyprince]

Originally Posted by Easy Street

If you are already drawing your pension then it won’t. If you are still serving it would double the in-year tax charge levied on you every time a pay increment or promotion added more than £40k to your notional pension pot in one year. When this first became a ‘thing’ a few years ago it only affected gp capts and above (and medics/dentists/lawyers), but it’s already crept down to catch wg cdrs by the threshold not keeping pace with pay. The direction of travel on this looks to be one way so it wouldn’t be a surprise if PA sqn ldrs got caught eventually.

PAS Sqn Ldrs are very susceptible to it, as PAS MAcr are thought to be well within the catchment zone. It needs an explanation from the PensPol people now, as it is just not going away and is definitely a push factor.

[Melchett01]

Originally Posted by finningleyprince

I will be glad to leave. It's all stacking up against 'average Joe' that doesn't want * rank fame, just a decent pension to retire on, and the sooner the better before waiting for it gets me killed.#

I am guessing that the year you get the letter, which will start to eat up previous years allowances, you have 3 years before that cloud really is over you. It makes my option point a no-brainer. It will be time for the Reserves or a total break!

I, along with a couple of friends, have all just received those letters and been faced with 5-figure bills for no reason other than going to work and being reasonably competent over the years.

If that wasn’t bad enough, the advice received was that if we elected to use Scheme Pays, it would be treated like a loan and our pensions would be reduced in perpetuity. Now forgive me if I’m wrong, but that sounds little more than theft. If I take a loan out with my bank, I pay the amount back plus interest and we go out separate ways once the business is concluded. How the Government can legally take money off you for a debt repaid in full years earlier is frankly staggering. So be aware - unless you really do have no choice, look hard at all the options before electing for the legalised theft route.

[Easy Street]

Originally Posted by Melchett01

Not sure about that. The tax charge is related to input amounts not tax relief. As we don’t receive tax relief on our pensions I think this affects private sector and SIPPs more. Where it will create an issue is the perceived increase in pensions apartheid between public and private sector, which will leave your average Torygraph reader frothing at the mouth more than usual.

My understanding of the current situation is that we receive relief at 40% for notional pension inputs of up to £40k pa. Logic suggests this is how the Treasury views it because if you exceed the £40k then you incur a tax charge on your surplus inputs, as you have recently discovered with your letter. If the relief rate is halved then I assume that all higher-rate taxpaying service personnel are at risk of tax charges of 20% on their notional input amounts up to the allowance limit, and charges at their marginal tax rate beyond it. (Disclaimer: I’m not an accountant, seek professional advice!) By the way, I think it helps to understand Scheme Pays as an advance, not a loan; if you use it you will have less in your ‘pot’ and so get less pension. I’d still use it, though, as my need for cash is much greater now than it will be in retirement.

The following is aimed at downsizer but hopefully useful to others:

The pension tax charge under discussion on this thread is related to the amount input to a pension each year. As we don’t actually input anything, the Government calculates the notional pension ‘pot’ which a civilian would need to purchase an equivalent pension and raises a charge at your marginal tax rate if the increase in that ‘pot’ during one tax year exceeds the annual allowance. So the calculated ‘input amount’ is not directly related to your current salary. Promotions for people with AFPS75 credit cause large spikes in their future pension benefits when they reach two years in rank, which are turned into large notional annual inputs and attract tax charges.

This is not a change to your pension but a change to the tax regime (which actually dates back several years, but is only now dawning on many). High middle income earners are *squarely* in the taxman’s sights and the reasons why we don’t hear so much about these charges in the private sector are that 1) their pensions are generally rubbish by comparison, or 2) they’ve chosen to take more of their compensation as salary or other benefits (in which case they pay higher- or even top-rate income tax on it).

I think we service personnel (and judges and doctors) have a legitimate grievance in that we cannot choose to take salary instead of pension growth, so are effectively forced into taking interest-bearing ‘Scheme Pays’ advances against our future pension benefits to pay the tax bills. But we are in a weak position politically: people only get a tax charge because they are better off than people who don’t get a tax charge, and they can never be left worse off for it. That means that sympathy is likely to be in short supply in the Treasury and getting ‘Scheme Pays’ made interest-free may be about the best we can hope for - pure speculation on my part.

[Countdown begins]

Originally Posted by Melchett01

I, along with a couple of friends, have all just received those letters and been faced with 5-figure bills for no reason other than going to work and being reasonably competent over the years.

If that wasn’t bad enough, the advice received was that if we elected to use Scheme Pays, it would be treated like a loan and our pensions would be reduced in perpetuity. Now forgive me if I’m wrong, but that sounds little more than theft. If I take a loan out with my bank, I pay the amount back plus interest and we go out separate ways once the business is concluded. How the Government can legally take money off you for a debt repaid in full years earlier is frankly staggering. So be aware - unless you really do have no choice, look hard at all the options before electing for the legalised theft route.

Melchett, could I be cheeky and ask a question or two?
Are you on a 75 or 75/15 pension? Have you just gone up a band on PAS?
Easy Street sets out below that it’s not necessarily about the salary but about the rate of increase in pension?
I have heard that several times so I can get my head round that, but not why 05 or 05/15 isn’t too badly hit, if at all. perhaps because it’s not a pension but an EDP? Maybe at the age 55 point people on that will be hit then?
it is a mess, and a 5 digit tax hit is something that will make people think twice.
As an aside the new RRP for pilots, paid after 7 years- is that going to hit guys getting to that point?

[VinRouge]

Originally Posted by Countdown begins

As an aside the new RRP for pilots, paid after 7 years- is that going to hit guys getting to that point?

RRP, like flying pay, is not pensionable, so no. I suppose if you look at where guys will be entering the Professional Aviator Spine now, then potentially, but immediately there is no effect as RRP is not included in pensionable salary.

[Easy Street]

Originally Posted by Countdown begins

Easy Street sets out below that it’s not necessarily about the salary but about the rate of increase in pension?
I have heard that several times so I can get my head round that, but not why 05 or 05/15 isn’t too badly hit, if at all. perhaps because it’s not a pension but an EDP? Maybe at the age 55 point people on that will be hit then?

My first thought is that 05 and 15 both work on the principle that your pension is proportional to the average pensionable salary received across your career. A promotion will not make an immediate difference and the value of the pension increases relatively smoothly as your salary increases. Compare that to 75, where your pension is based on your rank at retirement (with a minimum requirement of 2 years in that rank). The effect is that the value of the pension increases significantly 2 years after each promotion. The ability to roll over up to 3 years'-worth of unused allowance helps to smooth this out a little but the liability for tax charges is clearly much greater under 75 or 75/15 than 05 or 05/15.

If we'd known back in 2005 that the annual allowance was going to be slashed just a few years later, many more of us might have taken the offer to switch to 05. That could turn out to have been a very expensive decision in my particular circumstances. I have no idea whether AFPS05/15 'EDPs' are exempted from the calculation, but it would really be twisting the knife if they were!!

[Door Slider]

Originally Posted by Easy Street

My first thought is that 05 and 15 both work on the principle that your pension is proportional to the average pensionable salary received across your career

AFPS15 is not a career average salary pension like 15. It’s more aligned with 75 and a final salary pension.

From the JSP: “Your benefits are based on your final pensionable earnings – that is the greatest
amount of pensionable earnings you received
for 365 consecutive days over the last three years of reckonable service.

[Easy Street]

Originally Posted by Door Slider

AFPS05 is not a career average salary pension like 15. It’s more aligned with 75 and a final salary pension.

Thanks for the correction DS (and I have taken the liberty of correcting a typo in your quote!). Poor choice of words by me.

Having seen this doc a couple of years ago at work I’ve just re-found it online... very useful for those new to this.

[Sandy Parts]

As I understand it (might be wrong - has happened ) the Budget increased the Annual Allowance? (https://www.gov.uk/government/public...licy-decisions) - this section:
Tapered annual allowance for pensions – The pensions annual allowance is the maximum amount of tax-relieved pension savings that can be accrued in a year. For those on the highest incomes, the annual allowance tapers down from £40,000. HM Treasury has reviewed the tapered annual allowance and its impact on the NHS, as well as on public service delivery more widely.

To support the delivery of public services, particularly in the NHS, the two tapered annual allowance thresholds will each be raised by £90,000. This means that from 2020-21 the “threshold income” will be £200,000, so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an “adjusted income” above £240,000. (7)

Am I reading it correctly that this will get rid of the Oct letters and retrospective tax charges for most military (up to those earning enough for 63% pension 'virtual annual contribution' to be more than £90k)?

Edit - NOTE - see my later post below as I think my assumption here is wrong - leaving post for thread clarity.

[Bob Viking]

SP

I hope you’re right. If true, this is a significant good news story. Although, maybe a little late for some.

BV

[Sandy Parts]

Originally Posted by Bob Viking

I hope you’re right. If true, this is a significant good news story. Although, maybe a little late for some.

BV

Hmm - not sure I am. Reading into is a bit more and along with the current guidance on HMRC pages (https://www.gov.uk/tax-on-your-priva...nual-allowance), I think all he has done is increased the amount you can earn before the £40k limit gets reduced.
So previously, we all have £40K annual allowance BUT those then earning over £110K would have that £40K allowance reduced accordingly.
I think all he has done is raised that limit?
Therefore, we are all still limited to the £40K annual pension allowance but now only those earning over £200K will get the allowance reduced.
If so, we are still going to be hit with additional tax bill when NET earnings hit about £65K (using the 63% of earnings used for MOD pension 'contribution' figure).
Bummer.

[Easy Street]

SP,

1) The Budget announcement definitely doesn't help the majority of HM Forces personnel affected by the annual allowance. As your second post correctly identifies, the change is only to the thresholds which define the taper of annual allowance down from £40,000. Great news for 2*, 3* and 4* but no help for the rest of us. The reason why the Government has done it is to address the crisis among senior doctors, where salary top-ups resulting from overtime and private work triggered tapering, massive annual allowance breaches, and led some senior doctors to refuse all overtime and even retire early. A salutary tale of how taxing thin air had immediate and negative effects. The £40,000 still applies and reaches further down the rank scale (in the NHS, too).

2) The AFPS15 final pension accrues at 1/47 of annual pensionable salary. Multiply that fraction by 16 to find the notional uplift in your pension pot. So to achieve an annual input of £40k you'd need a pensionable salary of (40,000)*(47/16) = £117,500. [Health warning: it's a lot more complicated than that in reality. Promotions and time served will add AFPS75 benefits, increases in salary will add AFPS05 benefits, and your pre-existing AFPS15 pot grows in line with average earnings. All this eats into the £40k allowance before you start adding your AFPS15 input, although permitted CPI growth offsets some of it. Then you can carry forward unused allowance from the preceding 3 years...].

[Sandy Parts]

Originally Posted by Easy Street

SP,

1) The Budget announcement definitely doesn't help the majority of HM Forces personnel affected by the annual allowance. As your second post correctly identifies, the change is only to the thresholds which define the taper of annual allowance down from £40,000. Great news for 2*, 3* and 4* but no help for the rest of us. The reason why the Government has done it is to address the crisis among senior doctors, where salary top-ups resulting from overtime and private work triggered tapering, massive annual allowance breaches, and led some senior doctors to refuse all overtime and even retire early. A salutary tale of how taxing thin air had immediate and negative effects. The £40,000 still applies and reaches further down the rank scale (in the NHS, too).

2) The AFPS15 final pension accrues at 1/47 of annual pensionable salary. Multiply that fraction by 16 to find the notional uplift in your pension pot. So to achieve an annual input of £40k you'd need a pensionable salary of (40,000)*(47/16) = £117,500. [Health warning: it's a lot more complicated than that in reality. Promotions and time served will add AFPS75 benefits, increases in salary will add AFPS05 benefits, and your pre-existing AFPS15 pot grows in line with average earnings. All this eats into the £40k allowance before you start adding your AFPS15 input, although permitted CPI growth offsets some of it. Then you can carry forward unused allowance from the preceding 3 years...].

Hi Easy - fully agree with your para 1.
Not sure about your para 2 - The guidance I've seen elsewhere gives the 63% figure (also earlier in this thread) based on a representative pension with equivalent benefits. I also think there was some guidance on the Forces Pension society pages so will try and link to that later. I certainly know guys on less than £117k who have received the letter from Veterans UK. For me, I've only got my AFPS15 'contributions' to calculate and I managed to obtain a figure for 2018/2019 by requesting one from them. I'll do the same for 2019/2020 and provide the figures once supplied.

[ForcesPensionSociety]

A link to our update on pensions implications of the Budget:

https://forcespensionsociety.org/202...rces-pensions/