Government Pension Reform Information
In 2004 the Government pressed on with its pension reform programme, passing legislation which has a significant impact on pension schemes. They have also introduced new pension rights for registered civil partners.
The Scheme is approved by HM Revenue & Customs (the new name for the Inland Revenue). This brings important tax advantages for members but, at the same time, sets certain limits on the benefits that can be paid from the Scheme and the contributions members can pay to the Scheme.
On 6 April 2006 the Government's new tax regime for pensions came into force. It is a major reform, allowing pension schemes more flexibility in providing benefits, and individuals more choice - for example the ability to join any number of pension schemes at the same time.
The current Revenue limits are withdrawn, and replaced by new allowances.
- A "Lifetime Allowance" for the maximum amount of all your tax favoured pension savings, initially £1,500,000 (equivalent for the purposes of the Lifetime Allowance to an annual pension of £75,000).
- An "Annual Allowance" for the maximum value of benefits that you can earn (or contributions that can be made on a money purchase basis) in any year under all your pension arrangements, initially £215,000. For the purposes of the Scheme, the year over which you will be assessed for the purposes of the Annual Allowance will be the Scheme year starting on 1st April. However if you pay any contributions to the Scheme on a money purchase basis eg as additional voluntary contributions, they will be assessed in each tax year for this purpose.
Organisations and pension scheme trustees have some flexibility as to how they approach these changes. Although the reform is designed to make saving for pensions simpler and more flexible, for many people the changes will not make much difference.
Below we show the changes that will be made to the Scheme. The changes apply from 6 April 2006 unless another date is stated, and will only come into force when a formal document to change the Scheme rules is put in place.
The lowest age at which the Revenue currently allows you to draw a pension from the Scheme is age 50 (except in cases of ill health retirement) subject to the rules of the Scheme. In April 2010 the Government is increasing the lowest age to age 55 for all pension schemes. This will be reflected in the Scheme rules.
In some circumstances you may be able to defer taking your benefits. However, you should note that the latest date at which your benefits can come into payment is your 75th birthday.
Death after Retirement
If you die up to five years after your retirement, a lump sum is paid to take account of the fact your pension has not been paid for five years.
If you retire after age 70 and die after age 75 it will not be possible to pay this benefit as a lump sum. Instead your pension will continue to be paid until the end of the five year period as if you continued to receive it. It will be taxed as income in the normal way.
The Trustees use their discretion to decide who receives these payments, so they are usually free of inheritance tax.
Other Pension Schemes
There has been a significant increase in the awareness of the methods available to save for retirement. Prior to 6 April 2006 you could only pay into a personal or stakeholder pension at the same time as being a member of the Scheme if you earned less than £30,000 a year (or have done since 6 April 2000). You can now pay into as many pension schemes outside the University Scheme as you like. The new allowances will apply to all of your schemes combined. If you wish to consider pension arrangements in addition to the Scheme, you should take independent financial advice.
Additional Voluntary Contributions (AVCs)
The Government has decided that there is no need for a pension scheme to have to provide a facility for additional pension savings. The Scheme will however continue to provide the facility for members to pay AVCs.
When benefits become payable from AVCs, there will be an opportunity to select the insurance company to provide them.
The Government has removed the limit on the amount of contributions that can be paid into pension arrangements like the Scheme (previously 15% of taxable pay). As a result you will be able to pay more AVCs than previously allowed. You can make unlimited pension scheme contributions. However, if your contributions are more than 100% of your taxable pay, the excess will not benefit from tax relief. There would also be a tax charge if your total contributions in any year, together with the value of any other benefits earned in that year, result in benefits earned in excess of the Annual Allowance.
Cash Sum Payments
The Government has changed the amount of cash that members can take when benefits become payable. For most people, this means that the amount that can be taken tax-free has gone up. We have decided to take advantage of this by changing the amount of cash sum you can ask for subject to the HMRC limits.
However, the existing formula may be taken into account for the period before 6 April 2006 if a larger cash sum would result.
The Government is removing the restriction that additional voluntary contributions ("AVCs") which a member started to pay after 7 April 1987 must be used to provide a pension and not a cash sum. We have decided to take advantage of this relaxation so that all members may ask to take any of their AVCs as cash, subject to the overall limit on cash referred to above.
Transfer of benefits instead of refund of contributions on early leaving
Members who leave pensionable service before Normal Retiring Date with less than two years' membership (and who did not transfer any benefits into the Scheme from other pension arrangements), currently receive a refund of the member's own contributions and the value of any AVCs. The refund is subject to tax (currently at the rate of 20%) and a charge to re-instate you into the State Pension System.
This is changing so that by law, if a member has at least 3 months' membership, a transfer of benefits earned to the date of leaving can be taken outside the Scheme instead. If a transfer is not taken, and a member has between 3 and 24 months membership, then a refund will automatically be paid.
The tax on any refund will normally be 20% for the first £10,800 and 40% on the rest.
Paid paternity and adoption leave
The law was changed from 6 April 2003 to the way maternity, paternity and adoption leave is pensioned; the changes are explained in the appendix to this announcement. Further changes have been introduced from 6 April 2005 so that during any period of paid paternity leave and paid adoption leave your pension benefits will continue and death in service benefits will continue to apply as if you were working normally. You will be required to contribute to the Scheme during this paid leave but you cannot be asked to pay more contributions than those based on the pay you actually receive.
Your employer pays its own contributions in respect of you.
With effect from 5 December 2005, death benefits payable from the Scheme to spouses are also payable to registered civil partners.
If you are in a registered civil partnership at the date of your death, the Scheme provides all of the benefits your spouse would have received (had you been married) to your civil partner.
If a registered civil partnership comes to an end, the ex-civil partner is treated in the same way for pension sharing as an ex-spouse would be for pension sharing on divorce.
The Government made changes to the rate of increase that needs to be applied to pensions in payment earned from 6 April 2005. From this date, schemes were only required to pay annual increases at the rate of inflation up to a maximum of 2.5%. Previously, schemes had been required to provide increases on any pension built up after 5 April 1997 at the rate of inflation, up to a maximum of 5% each year.
However, the University has no current intention to change the Scheme rules in this way and the Scheme will continue to provide increases based on the rate of inflation (up to a maximum of 10% p.a.).
Prior to 6 April 2006 your earnings for contributions and benefits may ultimately have been subject to an Earnings Cap, set by the Government. For the tax year 2005/2006 the Earnings Cap was set at £105,600. Normally this only applied if you joined the Scheme on or after 1 June 1989.
As a result of replacement of the Earnings Cap (and other Revenue limits - see below) with the Lifetime Allowance, schemes are no longer required to limit contributions and final benefits by reference to the Earnings Cap. The Scheme will therefore not operate any earnings-related limits in future.
The Scheme was designed to stay within the Revenue limits that applied before 6 April 2006 and so normally benefits were paid without any Revenue restrictions. However, some limits, for example the maximum pension of 2/3rds of final remuneration, or the 40 year rule, were sometimes triggered.
The Government's new "simplified" approach will allow pension arrangements that are registered with HM Revenue & Customs to pay any level of benefits. There will be very few benefit limits and, in particular, the 40 year rule (limit) will no longer apply. Where the value of benefits is in excess of the Lifetime Allowance (see above) additional tax will be payable. In reality, the Lifetime Allowance has been set so that very few people will be affected by it. The tax treatment of benefits will be much as it is now as long as the benefits meet certain criteria and the overall value of them does not exceed the Lifetime Allowance.