Technical Issues

8 June 2009

Budget – The impact on high earners

The Chancellor’s Budget 2009 has introduced a number of measures which will impact on the tax relief available to high earners.  From 6 April 2011, HM Revenue and Customs (HMRC) will taper the tax relief on member and employer contributions for those members with earnings of £150,000 or more. 

In the run up to 6 April 2011, there are transitional measures that HMRC have put in place to prevent any tax avoidance measures by high earners.  High earners will be subject to a "special annual allowance charge” (SAA) if:

  • The member has had total adjusted taxable income of £150,000 or more in any tax year from 6 April 2007 to 5 April 2011. Interestingly, the calculation of total income includes income from savings and investments as well as other things.  Therefore, it may not be clear to employers which staff may be affected.

If a person has an adjusted net income of £150,000 or more:

  • Any extra benefit purchased after 22 April 2009 in the TPS (e.g. Additional Pension) over and above that member’s standard benefit accrual [and other regular pension savings] will be assessed against the SAA.

And then only if,

  • The value of the member’s standard pension accrual and the extra benefit purchased, increases by more than £20,000 in any tax year from 22 April 2009.

The value of accrued benefits at the beginning and the end of the tax year is calculated in line with HMRC’s draft guidance.

The full draft guidance can be viewed at www.hmrc.gov.uk/budget2009/tax-relief-pen-cont.htm .

Please note that this guidance is based on draft legislation in the current Finance Bill.

For example, Abigail is 45 years old and was made redundant on 5 April 2010.  She had an adjusted annual income in excess of £150,000 in that tax year and therefore is potentially affected.  The increase in Abigail’s standard TPS benefits between 6 April 2009 and 5 April 2010 already exceeds £20,000.  Hence, the extra benefit Abigail purchased using her redundancy money to purchase £1,000 of Additional Pension on 28 February 2010 will be subject to an additional tax charge (the SAA).  The HMRC valuation factor of 10:1 is applied to the £1,000 per annum of Additional Pension purchased as a lump sum, giving rise to an additional tax charge of (£10,000 x 20%) £2,000 on the member, assessed via her Self Assessment Tax Return.

NOTE The SAA test does not apply in any tax year where a member takes all of their benefits from a Defined Benefits Scheme (such as the TPS) or dies, provided the scheme has more than 20 members.

Potential action for employers

If any member of the TPS has had earnings in excess of £150,000 in the period from 6 April 2007, the member and the employer may wish to take specialist tax advice before increasing a person’s benefits in the TPS via Additional Pension or paying extra contributions to another registered pension arrangement.

 

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Minimum age for premature retirement

Employers are reminded that, from 6 April 2010, the Teachers’ Pensions Regulations will only allow employers to award premature retirement benefits to scheme members who have attained age 55. 

Scheme members who joined the TPS on or after 6 April 2006 are already precluded from being awarded premature retirement before age 55. 

From 6 April 2010, in all cases, premature retirement benefits can only be awarded if the scheme member has attained age 55 on the date the pensionable or excluded employment terminates. 

 

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Submission of a leaver notification (TR8) where sick pay is less than half pay

A reminder that where a member’s sick pay reduces to less than half pay, the employer should send in a TR8.  Under the previous procedure where member’s unpaid sick leave was treated as “days out”, there were cases where a member’s beneficiaries expected to receive an in-service death grant, as the member’s Annual Benefit Statement shows the member in service.  An out-of-service death grant is payable where the member dies having been out of pensionable employment for more than 365 days.

The Scheme will, based on the facts of each individual case, assess entitlement to:

  • An in-service death grant, where the member dies within 12 months of leaving pensionable employment while incapacitated or,
  • An Ill-health pension with enhancement where application is made
    • whilst there is an ongoing relationship between the member or the employer or
    • where the application is made within 6 months of the member leaving pensionable employment

 

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Employers responsibility regarding re-employment

Employers have a responsibility to notify Teachers’ Pensions immediately:

  • Where a member in receipt of ill health benefits comes back into re-employment.  (For members who retired on ill-health pensions prior to 1 April 1997, although members are allowed under the 1988 Regulations to do limited part-time service, TP should still be informed).
  • Where a retired member comes back into re-employment.  This is because the member’s pension may be affected by the abatement provision if their salary and pension exceeds the index-linked salary of reference.

It is important that employers check a person’s status in the TPS at the point that a person is engaged to prevent any overpayment of pension.

 

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Additional Pension

The Miscellaneous Amendments to the TPS which took effect from 1 April 2008 allowed employers to purchase Additional Pension for members with a Normal Pension Age (NPA) of 60, after their 60th birthday.  If documentation is received after age 60 for these individuals, Additional Pension can only be purchased using factors applicable to members with a NPA of 65.

Employers should be aware that to purchase benefits with a NPA of 60, the application, together with verification of the member’s age, should be sent at least 2 months before the member’s 60th birthday to allow the cost of the Additional Pension to be invoiced and paid before the member’s 60th birthday.

 

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