Personal Taxpayer Series IR2

Occupational Pension Schemes A guide for members of tax approved schemes

Contents Page

Chapter 1 Introduction

1

Chapter 2 General

2

Chapter 3 Joining an occupational pension scheme

6

Chapter 4 Contributing to an occupational pension scheme

10

Chapter 5 Refund of your own contributions

15

Chapter 6 Maximum benefits - general

17

Chapter 7 Exchanging your pension for cash (commutation)

23

Chapter 8 Retiring at the normal age

26

Chapter 9 Late retirement

28

Chapter 10 Early retirement

30

Chapter 11 Leaving your scheme before retirement

32

Page

Chapter 12 Death benefits

34

Chapter 13 Pension payments

36

Chapter 14 Pension scheme surpluses

37

Chapter 15 Further help and information

39

Chapter 16 Examples

42

Index

45

Chapter 1 - Introduction For further guidance on personal pension schemes, please see the booklet IR3 ‘Personal pension schemes (including stakeholder pension schemes): A guide for members of tax approved schemes’. Chapter 15 advises you where you can obtain copies of these booklets.

Who is this booklet for? It is for people who want to know more about the tax rules that apply to tax approved occupational pension schemes and their benefits, but who do not have a working knowledge of the requirements. This booklet was produced by Inland Revenue Savings, Pensions, Share Schemes (IR SPSS). If you think that we have failed to cover an important area please let us know by writing to our Customer Relations Manager at the address given in Chapter 15 so that we can consider it for a future edition. Please note: Occupational pension schemes are complex arrangements and this booklet deals only broadly with the tax aspects of approved schemes and their benefits. It does not cover all the special rules which apply to directors who have a controlling (20%) interest in their companies or the further restrictions which apply to very high earners (those earning more than £100,000). Nor does it deal with Department for Work and Pensions (DWP) matters in any detail. Chapter 15 tells you where you can get further information about other aspects of occupational pension schemes and about other types of pension arrangements.

1

Chapter 2 - General Are the maximum benefits permitted by the tax rules the same for all occupational pension schemes? Yes, the tax rules are the same for all types of scheme. In a final salary scheme, your benefits are stated in the scheme rules as a fraction of your earnings (see page 17) when you retire. In a money purchase scheme, your benefits depend on how much you have paid into your scheme and how the invested funds have grown. There is no guarantee of the level of benefits that you will receive at retirement. So the benefits actually payable depend on the type of scheme, your period of service and the rules of the scheme. However, the maximum benefits on retirement permitted by the tax rules are the same whether your occupational pension scheme is a final salary scheme or a money purchase scheme.

Must my employer provide a pension scheme? No. An occupational pension scheme is a voluntary arrangement by your employer to provide retirement and/or death benefits for you and your dependants. Please see Chapter 3, which explains different types of pension arrangements. Although the provision of an occupational scheme is a voluntary arrangement by the employer, there is a statutory requirement (Welfare, Reform and Pensions Act 1999) for an employer with five or more relevant employees to provide access to a Stakeholder Pension, unless they already offer a suitable pension scheme. An occupational pension scheme may be set up for a large number of employees or it may be a scheme just for one employee. If an occupational scheme is set up it will usually be in the form of a trust with legally appointed trustees and will be quite separate from your employer’s business. It will have its own scheme rules and will be subject to trust law. The trustees may delegate the day-to-day management of the scheme to an administrator. The administrator will be named in the scheme documentation and may be the employer or the scheme trustees.

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What is the purpose of tax approval? The Government encourages employers to provide occupational pension schemes for their employees and offers incentives through tax reliefs. If your scheme is approved the following tax reliefs will be given. • Relief from income tax on your contributions (if you pay any). • Relief from corporation tax on your employer’s contributions. • Exemption from income tax and capital gains tax on the income and growth of the scheme investments. • Part of your benefits may be paid as a tax-free cash lump sum on retirement or death. • Although your employer’s contribution is of benefit to you, you will not be charged tax on that benefit.

How does approval work? The administrator of your scheme or the professional pensions practitioner acting for the administrator will arrange to obtain tax approval from IR SPSS. It is the job of IR SPSS to decide whether schemes can be approved and to confirm that they can continue to be approved as various changes are made over the years. Essentially, IR SPSS will give tax approval provided that the contributions paid into the scheme, the money held by the scheme and the benefits paid out of the scheme in the form of pension benefits, etc, do not exceed certain upper levels. These are the Inland Revenue maximum limits; they ensure that the tax reliefs cost no more than is intended by Parliament.

Does my scheme have to pay maximum benefits? No. Your employer is under no obligation to pay benefits as high as those allowed by the tax rules. In fact, very few schemes do. It is important to understand this and to remember it as you read through this booklet. IR SPSS is concerned only with the maximum limits on contributions, on money held by the scheme and on benefits which can be paid under the tax rules. These limits must be written into the formal rules of every approved occupational scheme. This is often done by placing them together in an appendix to the rules.

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What benefits can I actually get? When you join your employer’s occupational pension scheme you will be told what benefits the scheme will provide for you. You will be given a membership booklet or an announcement letter, which will explain the main features of your particular scheme. It should tell you who to contact if you have any queries and where you can see a full copy of the scheme rules.

Are the tax rules written down somewhere? Some of the tax rules are contained in legislation; starting at Section 590 of the Income and Corporation Taxes Act 1988. You can find a copy of this Act in the reference section of larger public libraries and on the Internet. Please see Chapter 15 for the Internet address. Most occupational pension schemes are approved under Section 591 which gives some discretion to IR SPSS in considering the wide range of aspects involved. The way in which we normally exercise that discretion is set out in our document: ‘Occupational Pension Schemes, Practice Notes (IR12)’, often simply referred to as ‘Practice Notes’. This is a detailed publication written for people who are professionally involved with pensions and who have regular dealings with us. Your scheme administrator - or the pensions practitioner acting for the administrator - will have access to it. Practice Notes are also available on the Internet. Our web site address can be found in Chapter 15 of this booklet. If you have a problem which concerns the tax rules, your administrator will probably be able to deal with it. If not, he or she can contact IR SPSS for advice on your behalf. It is our aim under our Service Commitment to treat all cases fairly and consistently.

What happens to my pension benefits if I get divorced? If you divorce, the court will take the value of the pension rights of both parties into account in determining the financial settlement. Under present legislation there are three methods of dealing with pension rights. • Offsetting - other assets are used to compensate the ex-spouse for the loss of pension benefits. • Earmarking - the court can order the pension arrangement to pay maintenance or a lump sum out of the member’s pension directly to the ex-spouse when the member retires. However, earmarking does not allow a clean break since title to the pension rights remains with the spouse in whose name the rights accrued. For example, this means that the ex-spouse will lose the intended pension income if the member dies first.

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• Pension Sharing - a court order must be obtained at the time of the divorce. The pension scheme will reduce the value of the member’s pension rights by the percentage specified in the pension sharing order (‘pension debit’) and an amount equivalent to the reduction (‘pension credit’) will be transferred to the ex-spouse. If the ex-spouse is a member of an occupational pension scheme, the pension credit will not restrict the benefits she or he is accruing in her or his own right. Because the benefits from a ‘pension credit’ belong to the ex-spouse, they cannot be lost if, for example, the spouse who was the original member dies first.

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Chapter 3 - Joining an occupational pension scheme Do I have to join my employer’s occupational pension scheme? No, the rules of the scheme will say who may join, but membership cannot be made compulsory. You may also opt out of a scheme at any time.

Are there any alternatives? If you prefer, you can join a personal or stakeholder pension scheme, or remain in the additional state pension, commonly known as SERPS or State Second Pension if you do not want an additional pension - see below for further information. If you are in doubt about which method is better for you, you may wish to seek the advice of a financial adviser. Neither the Inland Revenue nor IR SPSS are authorised to offer any advice on planning for your retirement. The Department for Work and Pensions (DWP) publishes two leaflets, entitled ‘Personal Pensions - your guide’ (PM 4) and ‘Stakeholder Pensions - your guide’ (PM8) which you may find helpful. Please see Chapter 15 of this booklet for a contact number. The tax reliefs which are available to personal and stakeholder pension schemes are explained in another booklet, IR3, which is available from IR SPSS (see Chapter 15 for our address), or from any Inland Revenue office.

What is a stakeholder pension scheme? A stakeholder pension scheme is a new type of personal pension scheme, which has been available since 6 April 2001. Stakeholder pension schemes must meet strict standards set by the Government, for example, on cost, flexibility, and the way the scheme is run. It is not the same as an occupational pension scheme. Since October 2001, all employers with five or more employees must offer access to a stakeholder pension scheme, unless they already offer a suitable pension scheme. Please see the leaflet: ‘Stakeholder pensions - your guide’ (PM 8) for further details. A copy of this can be obtained from DWP; their telephone number is listed in Chapter 15 of this booklet.

Can I be in both an occupational and a personal or stakeholder pension scheme? Yes. For example, if you have two jobs, and one is pensioned through a personal pension scheme and you are a member of the employer’s occupational pension scheme for the other, you may have both pensions. The personal pension will not affect the occupational pension. 6

Also, you may join a personal or stakeholder pension even though you are a member of occupational pension schemes for all your jobs if • you are joining the personal or stakeholder pension scheme solely to contract out of the additional state pension, commonly known as SERPS or State Second Pension, or • your occupational pension scheme(s) only give(s) benefits if you die while in service. Even if you are a member of an employer’s occupational pension scheme(s) throughout the tax year for all your jobs, but the paragraph above does not apply to you, you may be able to make contributions to the occupational pension scheme(s) and a personal or stakeholder pension scheme at the same time under ‘concurrency’. You can do this if one of the following applies in the tax year in question. You are • resident and ordinarily resident in the United Kingdom (UK), (if you are not sure of your residence status, you should contact your Tax Office), or • not resident and ordinarily resident in the UK, but you were resident and ordinarily resident in the UK in one of the previous five tax years, and you set up your personal or stakeholder pension arrangement while you were resident and ordinarily resident in the UK, or • a Crown Servant serving overseas, or married to someone who is and all of the following further requirements also apply to you in the tax year in question. • You are not a controlling director of a company at any time in that tax year, or in any tax year in the last five years (only count years from 2000-2001 onwards). AND • In at least one of the last five tax years (only count years from 2000-2001 onwards) preceding the year in question, you held a job or jobs on 5 April in that tax year. AND • Your pay from that job or jobs that tax year was £30,000 or less. 7

(For this purpose, ‘pay’ means types of and amounts of earnings subject to PAYE, so benefits in kind and self-employed earnings are not included, and for jobs held for only part of a tax year, the amount of pay must be converted to an annual figure.) You may also qualify to make contributions to a personal or stakeholder pension scheme if your occupational scheme(s) membership does not cover the whole tax year. If this applies to you, ask the personal or stakeholder pension scheme administrator whether you qualify.

I worked for my employer for several years before joining the occupational pension scheme. Will this affect my pension? It will depend upon the rules of your particular scheme and you should find the answer in your membership booklet or from your scheme administrator. So far as the tax rules are concerned, all the time spent working for your employer may be taken into account. So the pensionable service used to calculate your pension could be based upon your service with the employer rather than your years in the pension scheme, but if you have already been earning pension benefits in that time, by contributing to a personal or stakeholder pension scheme, those other benefits may have to be taken into account in calculating the maximum benefits you are allowed see Chapter 6.

What is meant by ‘contracting-out’? The term ‘contracting-out’ refers to opting out of the additional state pension, commonly known as SERPS or State Second Pension. The state pension is made up of two parts. • The basic state retirement pension. Everyone who pays National Insurance Contributions (at a certain rate and level and over a minimum number of years) or is ‘credited’ with contributions to their record can get this pension, regardless of whether or not they have another pension. • Additional Pension from the additional state pension, commonly known as SERPS or State Second Pension. Additional Pension is based on your earnings and is paid with your basic retirement pension. You can contract-out of the additional state pension, commonly known as SERPS or State Second Pension, by either • joining your employer’s contracted-out pension scheme where both you and your employer pay a lower rate of National Insurance contributions (NICs) to make up 8

for the additional state pension, commonly known as SERPS or State Second Pension, you have given up or • joining a contracted-out personal or stakeholder pension scheme. This is called an Appropriate Personal Pension Plan (APP) or Appropriate Personal Pension Stakeholder Pension Scheme (APPSHP). This is a contract set up between you and a pension provider. During membership of an APP scheme, you pay full rate NICs and payments known as ‘Minimum Contributions’ are made on your behalf by the Inland Revenue to your plan. Joining either an occupational scheme or an APP scheme has an effect on your Additional Pension. From the date of joining the scheme and paying NICs, you will no longer qualify for Additional Pension from the state. Your pension for the period you were contracted-out will be paid by your pension scheme. If you are already contributing to a pension your employer or scheme administrator will be able to tell you if you are contracted-out of the additional state pension, commonly known as SERPS or State Second Pension. If not you can contact the Contracted Out Pensions Helpline on 0845 9150150. The DWP produce a leaflet called ‘Contracted-out pensions - your guide’ (PM7). Please see Chapter 15 for details of how to obtain a copy.

What is meant by ‘protected rights’? ‘Protected rights’ is the term used to describe the money in an appropriate personal pension, appropriate stakeholder pension or contracted-out money purchase fund. Protected rights can be used to purchase a pension from age 60 until your 75th birthday.

What is meant by ‘Guaranteed Minimum Pension (GMP) /Post ’97 ContractedOut Salary Related (COSR) rights’? • Rights accrued in a Contracted-Out Salary Related (COSR) scheme before 6 April 1997 are referred to as the Guaranteed Minimum Pension (GMP). The GMP is broadly equal to the Additional Pension payable under the state scheme and is payable at age 60 for a woman and age 65 for a man. • ‘Post ’97 COSR rights’ is a term used to describe rights built up on or after 6 April 1997 in a COSR scheme. These rights are also payable at the scheme’s normal pension age, which must be equal for men and women. 9

Chapter 4 - Contributing to an occupational pension scheme Your employer must pay contributions to your occupational pension scheme if it is to be approved, but whether you have to pay contributions or not depends upon the rules of your particular scheme. If you are required to pay regular contributions your membership booklet and the scheme rules will say how much you must pay. This is usually expressed as a percentage of your earnings.

Is there a limit on how much I can pay? Yes, your contributions each tax year cannot exceed 15% of your annual earnings that tax year before deductions (tax and National Insurance). For example, if your earnings in the tax year are £20,000 your contribution cannot exceed £3,000 (£20,000 x 15%). The types of earnings which are taken into account in your particular scheme will be set out in your membership booklet and in the scheme rules (for example, salary, wages, overtime pay, bonus, commission, benefits-in-kind, etc.). So far as the tax rules are concerned, nearly all forms of earnings can be included, provided they are taxable (the main exceptions are share option gains, golden handshakes and redundancy payments). If you joined an approved occupational scheme after May 1989, then the earnings from which you can pay contributions are themselves subject to a limit. This limit is known as the ‘earnings cap’ - see Chapter 6.

How is tax relief given? Your tax relief is automatically given through the PAYE system and you do not need to take any action. Your employer will deduct your contributions from your earnings before income tax is calculated on the balance. If you are a higher rate taxpayer you also get higher rate tax relief in this way. Example Gross earnings Pension contribution at (say) 6% Net earnings

£15,000 £ 900 £14,100

Subject to your other allowances or reliefs, your income tax will be calculated on £14,100.

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Can I pay more than the regular amount required by the scheme rules? Yes. All active members of occupational pension schemes must be allowed to pay additional voluntary contributions, ‘AVCs’, to improve their pension benefits. However, there are a few important points to note. • The total of your regular contributions plus your AVCs must not exceed 15% of your earnings. For example, if you already pay a regular contribution of 6% of your gross earnings, then the maximum you could pay in AVCs would be 9% of your full gross earnings. • AVCs and regular contributions can be accepted by your scheme only if the increased benefits they will secure will remain within the maximum limits allowed by the tax rules. Your scheme administrator or your pensions department will let you know how much you can pay. • If you started paying AVCs for the first time after 7 April 1987 they must buy extra pension or death benefits; they cannot be used directly to buy a larger tax free cash lump sum on retirement. • The AVC scheme may be part of your employer’s main scheme or it may be a separate scheme of your employer. Either way, the maximum limits are the same.

If I get a bonus at the end of the year, can I pay all or part of it as an AVC? Yes, provided the rules of your particular scheme allow you to do so and provided your total contributions in any tax year do not exceed the 15% limit. Your employer should deduct the contribution in the normal way and calculate income tax on the balance. Tax is deducted from your earnings as they are paid to you, so if your bonus is paid in the next tax year your contribution is deducted and your tax relief is given then.

What is a FSAVCS? This means a Free-Standing Additional Voluntary Contribution Scheme. As the name suggests it is a separate (or ‘free-standing’) pension plan of your own. This can give you more choice about the way your contributions are invested, but it will be looked at together with your main scheme for tax purposes.

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Can I join a FSAVCS? Yes. Provided you are a member of your employer’s occupational pension scheme you can arrange a separate pension plan of your own for your additional voluntary contributions. You can pay both AVCs and FSAVCS contributions at the same time if you wish, so long as the total does not exceed the 15% limit, but you can contribute to only one FSAVCS in any tax year.

How do I get tax relief on the contributions to my FSAVCS? Contribution to be paid

£2,000

You pay (£2,000 less £440 tax at 22%) £1,560 Your administrator reclaims from the IR £ 440 Total received by FSAVCS £2,000 If you are a higher rate taxpayer you must use your annual tax return to claim relief above the basic rate.

Do I have to tell my local Tax Office about my FSAVCS? Your Tax Office may ask for proof that you contribute to a FSAVCS. If so, send them the Voluntary Contribution Certificate (VCC) which should have been given to you by your FSAVCS shortly after you paid your first contribution. You should also remember to enter details on your Self Assessment form SA100.

When can I take the AVC Benefits? Before 30 June 1999, your AVC benefits always had to be taken at the same time as you took the employer’s main scheme benefits. From 30 June 1999, if your scheme rules allow it, AVC benefits from the types of arrangements listed below may start at any time between the ages of 50 and 75, regardless of whether you retire or leave pensionable service. If you have left employment due to incapacity, the benefits may begin at any time, even before the age of 50. If you are in an occupation with an agreed low normal retirement age then your benefits may begin from that agreed lower age rather than age 50. You will need to check with your scheme administrator whether these new options are allowed in your scheme.

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• AVCs paid to the employer’s main scheme. • AVCs paid to a separate scheme of the employer. • AVCs which, although part of an employer’s scheme, were originally paid to secure added years of pensionable service. • Free Standing Additional Voluntary Contributions (FSAVCs). If the AVC benefits are taken before the main scheme benefits. • The AVC benefits must be in the form of a pension only, i.e. no tax-free lump sum. • When you later take your main benefits, if the AVC fund is a pre 8 April 1987 arrangement, a lump sum may be taken from it. If it is a post 8 April 1987 arrangement, then, if the scheme rules allow it, the pension from the AVC fund can be included in the calculation of your maximum allowable lump sum from the main scheme. If the AVC benefits are taken with the main scheme benefits. Providing the scheme rules allow it, you may have • one annuity purchased with both AVC and main scheme funds • an annuity purchased with the main scheme funds and income drawn directly from the AVC funds • an annuity purchased with the AVC funds and income drawn directly from the main scheme fund, or • income drawn directly from the main scheme and AVC funds. Income drawn directly from a fund may be any amount from 35% to 100% of the amount of pension you are entitled to. Any lump sum would have to be taken when benefits commenced and be based on the actual income drawn down (i.e. 2.25 times initial pension drawn down) which would include the pension payable from the AVC fund. No part of the lump sum could actually be paid from the AVC fund. It would come from the main scheme. (Unless the AVC scheme was set up prior to 8 April 1987. In that case, a lump sum could be paid from the AVC fund at the time the pension first began to be drawn.)

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If the main scheme benefits are paid before AVC benefits. If the main scheme benefits have already been taken, you will not be able to have a tax-free lump sum from the AVC fund at a later date. The AVC will only be able to provide a regular pension. If the AVC arrangement was set up before 8 April 1987, you may have a lump sum benefit from it, and leave the pension benefits in the fund until later, but only if the lump sum is taken at the time the main scheme benefits begin.

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Chapter 5 - Refund of your own contributions The tax reliefs which are given to occupational pension schemes are given on the understanding that contributions are used to provide an income in retirement or death benefits. You cannot therefore get your contributions back except as explained in the following paragraphs.

Can I get my contributions back when I leave the scheme? If you leave a scheme, your benefits should be preserved to provide you with a pension at normal retirement age. If you retire before your normal retirement age (e.g. early retirement, incapacity etc), your benefits will be calculated in accordance with the scheme rules. It is a requirement under DWP legislation that if you have been in a scheme for two years or more your pension rights must be protected in this way. If you have not been in your scheme for two years, and your scheme rules allow it, you may receive a refund of the contributions you have paid. Once you have taken a refund, you will not receive any benefits for the working period to which the refund relates. If the scheme rules do not allow this, again your pension must, by law, be preserved. If you have transferred in benefits from a previous scheme, a refund may not be possible.

Will my refund of contributions be taxed? Yes. A special tax rate of 20% is charged on refunds of contributions within two years. The administrator will deduct the income tax from your refund and pay you the balance. This applies whether or not you normally pay income tax and it cannot be reclaimed.

Can I get my AVCs back? Not normally. However, investments sometimes do better than expected and there may be more money in your AVC ‘fund’ at the end of the day than can be used. This is because there are limits on the amount of benefits which can be paid from tax approved occupational pension schemes - see Chapter 2. If this happens you can get a refund when your benefits are paid or are transferred out of the scheme. The refund is, however, subject to tax. 15

What rate of tax is charged on refunded surplus AVCs? Tax is charged at a special rate. It is 10% higher than the basic rate of tax, so at present the amount is 32% which is taxed on the gross amount refunded (you should bear in mind that the basic rate of tax may change in the future). This rate broadly reflects both the tax relief given for your contributions and the tax-free buildup of your fund. For example Basic rate taxpayers Refund from AVC scheme or FSAVCS less tax at 32% Net refund receivable

£1,000 £ 320 £ 680

Higher rate taxpayers The net amount received is treated as though it had suffered basic rate income tax and the notional gross amount is taxed at the higher level, for example: Net refund (as above) grossed up at basic rate of income tax

£ 680 = £ 871.79

If the member is a basic rate taxpayer, there is no further liability If the member is a higher rate taxpayer he or she will be chargeable at the higher rate on the grossed-up repayment. Further tax due £871.79 @ 18% (40%-22%)

£ 156

Your scheme administrator will give you a statement showing the amount to be entered on your Self Assessment return. You will then be asked to pay any further tax due. As with refunds of regular contributions, the tax deducted from your refunded surplus AVCs cannot be reclaimed.

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Chapter 6 - Maximum benefits - general As explained in Chapter 2, the benefits that can be paid to you from a tax approved occupational pension scheme are restricted to upper or ‘maximum’ limits. This and the following Chapters of this booklet deal with the maximum benefits which can be paid under the tax rules. Remember that most schemes provide benefits which are below the maximum that the tax rules allow. If you are unsure what benefits your scheme provides, ask your scheme administrator.

Does the type of occupational pension scheme affect the maximum benefits that can be paid? No. Most larger occupational pension schemes are final salary schemes where your promised benefits are known and are expressed as a fraction of your earnings when you retire. The other type of scheme is a money purchase scheme where there is no set promise or guarantee about the level of benefits you will receive at retirement you will simply get what can be purchased with the money which has been accumulated for you. Whichever type of scheme you belong to, the maximum benefits on retirement at the normal time permitted by the tax rules are the same.

How are the Inland Revenue limits calculated? The maximum benefits that can be paid are expressed as a fraction of your final remuneration for each year spent working for your employer, for example ‘Accrual Rate’ x ‘Service’ x ‘Final Remuneration’. This applies to both your pension and your lump sum benefits. These expressions are explained in this Chapter, together with what is meant by ‘Retained Benefits’.

What is meant by ‘service’? All the time you have spent working for your employer may count, but again, the service that counts in your case will depend upon what your membership booklet says. (It may include credits if you have had a transfer from another pension scheme - see Chapter 11).

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What is an Accrual Rate? This means the rate at which your pension builds up under the rules of your pension scheme. If your scheme has an accrual rate of 1/60th for each year of service then you will receive a maximum pension of 2/3rds of your final remuneration for a career of 40 years, i.e. 1/ th 60

=

40/ x 60

FR

=

2/ 3

FR

Of course, most people do not stay with their employer for so long. The tax rules therefore allow an accrual rate which is much higher than 1/60th x FR, but, in general, the maximum pension which can be paid under the tax rules is 40/60ths or 2/ rds x FR. 3

What does the term ‘Final Remuneration’ mean? Remuneration is simply another word for your earnings in whatever form they might take, for example, salary, wages, overtime pay, bonus, commission, benefits-in-kind, etc. So far as the tax rules are concerned, nearly all forms of earnings can be pensionable provided they are taxable. The main exceptions are share option gains, golden handshakes and redundancy payments. The types of earnings which are taken into account (that is, pensionable) in your particular scheme will be set out in your membership booklet and in the scheme rules. Final Remuneration means your earnings at or near to retirement (or leaving the scheme) on which your benefits are calculated. Again, precisely what it means in your case will be fully explained in your membership booklet or in the scheme rules. It could be the earnings of your best year in the last three years or the average of three or more consecutive years in any period ending in the last ten years. Types of earnings that vary such as overtime and bonus must be averaged over three consecutive years. If you are a controlling (20%) director of your company your final remuneration must be calculated by averaging all the earnings received in at least three consecutive years ending in the last ten years.

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What happens if I don’t retire when I expect to? The tax limits also depend upon the circumstances of your retirement. They are therefore dealt with in the following Chapters. Chapter Chapter Chapter Chapter

8 9 10 11

-

If If If If

you you you you

retire at the ‘normal’ date. retire later than ‘normal’. retire early. leave your pension scheme before you retire.

Are all members of occupational pension schemes subject to the same tax rules? No. The tax legislation changed in both 1987 and 1989 and this can make a difference to the maximum limits which apply. These differences are mentioned in Chapters 8 to 11 as necessary. Generally speaking, you are a pre-1987 member if you joined your pension scheme before 17 March 1987. You are a post-1989 member if you joined your pension scheme on or after 1 June 1989 (or 14 March 1989 if the scheme was a new scheme at that time). If you joined between those dates you are a post-1987 member.

What if I am not sure about the basis which applies to me? If you are not sure about the basis which applies to you contact your scheme administrator or your pensions department for assistance. It can be rather complicated because some people have ‘continued rights’. This means that some people have an entitlement to take benefits on an earlier basis, for example, if there was a company take-over and pension scheme members opted to join a new scheme. If necessary, your administrator - or the pensions practitioner acting for the administrator - can contact IR SPSS for you for clarification.

What about the effect of inflation? Whenever the final remuneration selected for the calculation of your pension is not the earnings of the last year, the tax rules allow it to be increased in line with the cost of living, as measured by the Retail Prices Index, up to retirement or leaving service.

What is the earnings cap? For post-1989 members only, the final remuneration that can be used for calculating benefits is capped at an amount set yearly by Parliament. The limit for the year ended 5 April 2003 is £97,200. Earnings in excess of the cap cannot be pensioned through a tax approved scheme. 19

What is the best possible accrual rate? For pre-1987 members, a maximum pension on retirement at the normal time can build up, or ‘accrue’, in ten years, based upon the following table. Up to

5 years 6‘ 7‘ 8‘ 9‘ 10 ‘

1/ 60 8/ 60 16/ 60 24/ 60 32/ 60 40/ 60

x x x x x

for each year x FR FR FR FR FR FR (= 2/3 rds = maximum)

(Pro rata for part years) For post-1987 and post-1989 members the maximum accrual rate is 1/30th for each year of service from the outset. This means that it will take 20 years to earn a maximum pension on retirement at the normal time of 2/3rds, i.e. 20/30ths.

What is the best possible accrual rate for the lump sum? The principle is the same. The maximum lump sum retirement benefit which can be paid under the tax rules, is 11/2 x final remuneration or 120/80ths. For a career, which spanned 40 years, this represents an accrual rate of 3/80ths, i.e. 3/ 80

x 40 x FR

=

120/ 80

x FR

=

11/2 x FR

As with pension benefits, the tax rules allow an accrual rate which is much higher than the basic 3/80ths of final remuneration. For pre-1987 members, a maximum lump sum on retirement at the normal time can build up or accrue over 20 years, based upon the following table. Up to

8 years 9‘ 10 ‘ 11 ‘ 12 ‘ 13 ‘ 14 ‘ 15 ‘ 16 ‘ 17 ‘

3/ 80 30/ 80 36/ 80 42/ 80 48/ 80 54/ 80 63/ 80 72/ 80 81/ 80 90/ 80

x x x x x x x x x

for each year x final remuneration FR FR FR FR FR FR FR FR FR

20

18 ‘ 19 ‘ 20 ‘

99/ 80 x 108/ x 80 120/ x 80

FR FR FR

(= 11/2 = maximum)

(Pro rata for part years) For post-1989 members the maximum lump sum retirement benefit is directly related to your pension. It is 2.25 times the initial annual amount of pension payable to you (before commutation - see Chapter 7). Similarly, if you are a post-1987 member, your maximum lump sum will be proportionate to the pension you receive. This is calculated under a complicated formula, but you may be able to be treated instead as a post-1989 member. Your scheme administrator should be able to give you more information.

What are ‘Retained Benefits’? Retained benefits are your benefits from previous employments or occupations whether under occupational pension schemes, personal or stakeholder pension schemes or retirement annuity contracts. Benefits from contributions made to personal or stakeholder pension schemes under ‘concurrency’ (see page 7) are not retained benefits.

Why do they have to be taken into account? If the pension benefits from your scheme represent a rate of accrual that is better than 1/60th per year, your other benefits may have to be taken into account so that, taken together, your pension benefits do not exceed 2/3rds of your final remuneration. This is the maximum that can be provided from a tax approved scheme - see Example 2 in Chapter 16.

Do Retained Benefits also affect my lump sum? Yes. If you are a pre-1987 member, the same principle applies to the maximum lump sum which can be paid to you. If the lump sum benefit from your final scheme represents a rate of accrual which is better than 3/80ths a year, then any retained lump sums to which you are entitled may have to be taken into account so that, taken together, the maximum lump sum benefits do not exceed 11/2 x your final remuneration - see Example 2 in Chapter 16.

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If you are a post-1987 member or a post-1989 member, any retained lump sums to which you are entitled may be ignored. This is because your maximum lump sum benefit will generally be calculated as a proportion of your pension and your retained benefits will have been taken into account already, if necessary, when calculating your maximum pension.

Do Retained Benefits always have to be taken into account? No, not always. It depends when you joined your pension scheme. There was a relaxation in the tax rules in August 1991. If you joined your occupational pension scheme after that time and your earnings in the first year of membership were less than 1/4 of the earnings cap (see page 18) (£97,200 x 1/4 = £24,300 for 2002/03) your retained benefits may be ignored.

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Chapter 7 - Exchanging your pension for cash (commutation) You cannot have both the maximum pension and the maximum lump sum benefit described in Chapter 6, but the tax rules and most occupational pension schemes allow you to have part of your benefits paid as a cash lump sum when you retire. This lump sum is tax-free.

What is meant by commutation? This means giving up part of your pension in exchange for a lump sum; you ‘commute’ part of your pension. Many occupational pension schemes have this feature and the rules of your scheme will say how much lump sum you can have for every £1 of pension you give up. Your membership booklet should also tell you about this. The rate of exchange may apply to everyone in your scheme or it might be a rate that is special to you. The rate is referred to as a ‘commutation factor’ and is usually expressed as a ratio. Divide the cash lump sum by the commutation factor to work out the pension to be given up. Example If the commutation factor in your scheme is a ratio of 12:1 you will get £12 cash for every £1 per annum of pension which you give up in exchange. Lump sum taken Commutation factor Pension given up

£10,000 12:1 £833 per annum.

What if my scheme doesn’t seem to offer commutation? Some occupational pension schemes - especially those for employees in the public services - operate differently and automatically provide a pension and a separate lump sum for everyone. The maximum pension benefit allowed is smaller, commonly 1/ th of FR for each year of service, but the lump sum benefit is paid in addition. 80 This means that the process of commutation doesn’t take place. Your pension and lump sum are worked out separately under your rules.

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Example Final remuneration (£18,000, service 40 years) Accrual rates:

Pension Plus Lump sum

Pension

1/ th 80

Lump sum

3/ ths 80

40/80 11/2

x x

£18,000 £18,000

= =

£ 9,000 £27,000

(A scheme providing pension benefits of 1/80th plus a separate lump sum is broadly equivalent to a scheme providing commutable pension benefits of 1/60th.)

Can I take my lump sum in instalments? Under the tax rules, you generally have the opportunity to take a cash sum only once, but there are some limited exceptions which are explained in the ‘Practice Notes’ (see page 4 of this booklet). You must take your lump sum at the time you retire and your pension becomes payable, subject to an exception for late retirement - see Chapter 9.

The rules of my occupational pension scheme refer to commutation on the grounds of ‘Serious ill health’. What does this mean? If, unfortunately, you are so very seriously ill that your life expectancy is severely shortened (if it is a matter of months), the whole of your retirement benefits may be commuted for a lump sum. Your administrator will need to see medical evidence and will decide whether or not this course is appropriate. The lump sum which you could have commuted on incapacity grounds, see page 31, will be free of income tax, but there may be a tax charge of 20% on the balance.

As my pension is only very small can I commute it to one lump sum? If the aggregate of total benefits payable to the employee under all schemes providing benefits in respect of the employment does not exceed the value of a pension of £260 per annum, the pensions, including any arising from the payment of AVCs (including FSAVCs) may be commuted. This is referred to as ‘commutation of trivial pensions’.

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Payments in commutation of trivial pensions may give rise to tax charges on the scheme administrator. The scheme rules may allow the administrator to collect this tax out of the commutation payment to the member and the member receives the residual sum. Commutation of a trivial pension should take place at the time the scheme becomes payable, however if the scheme winds up, trivial pensions which are not yet payable may be commuted.

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Chapter 8 - Retiring at the normal age What is meant by a Normal Retirement Date (NRD)? Because pensions cost a lot of money to provide, that money is usually built up for you over your working life, but you need to know when you will get your pension and your scheme administrator needs to know so that the cost can be properly planned. Your pension scheme will, therefore, state the age at which you are expected to start to receive your occupational pension. This is your Normal Retirement Age - often abbreviated to NRA. It is the age at which you are most likely to retire from work, say, at age 60 or 65. Similarly, your Normal Retirement Date (NRD) is the date on which you are expected to retire and start receiving your pension from the scheme. It is an important factor in the calculation of the Inland Revenue maximum limits.

How are my benefits calculated if I retire at my NRD? Your benefits on retirement at your NRD will be set out in your membership booklet. They will be expressed either as fractions of your final remuneration for each year of service if you are in a final salary scheme, or as the benefits which can be purchased from your own individual fund if you are in a money purchase scheme - see Chapter 6.

What is the maximum that the tax rules would allow at NRD? The maximum levels of benefit are set out in Chapter 6 and see the example in Chapter 16.

What if I have Retained Benefits to consider? The way retained benefits have to be taken into account under the tax rules was also explained in Chapter 6. See Example 2 in Chapter 16.

New options from 30 June 1999 If your employer’s scheme’s rules allow it, you may take only a proportion of your pension on retirement if you wish. The minimum would be 35% of the pension you were entitled to and the maximum is 100%. Once started, the pension payment cannot be stopped, but you can change the amount of pension payable each year within the specified ranges. Only money purchase schemes may offer this option called ‘income drawdown’. Please see Chapter 6. 26

Depending on your scheme rules, if your lump sum is not based on the pension payable and you decide to take only a percentage of your pension, the amount of your lump sum you are entitled to will not alter. However, if your lump sum is affected by the amount of pension payable, then your lump sum must be based on the actual amount of pension drawn before commutation and any allocation.

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Chapter 9 - Late retirement When can I take my retirement benefits if I keep on working past my Normal Retirement Date (NRD)? This depends on your scheme rules and whether or not you are a post-1989 member - see Chapter 6. Generally, if you are a post-1989 member you cannot take any benefits until you actually retire or until you reach 75 years of age if earlier. You will simply continue to accrue benefits in accordance with the rules of your scheme. The rest of this Chapter therefore deals only with pre-1989 members. For contracted-out members and those with protected rights, please see Chapter 3. If you are not a post-1989 member, you may have several choices. Depending upon your scheme rules, you may • take all your benefits at your NRD • take either your lump sum or your pension benefit at your NRD (or at any time after that) and take the remainder at any time up to your retirement, or • leave all your benefits to be taken when you actually retire.

If I take all or part of my benefits at my NRD, can I still earn more pension if I continue to work? No. Once you take any of your benefits you will be regarded as retired so far as your occupational pension scheme is concerned.

If I don’t take any of my benefits at my NRD, will my eventual retirement benefits be increased? Yes and, again, there are several possibilities. a. Your actual date of retirement may be substituted for your NRD so that you can earn more benefits (up to the maximum limits explained in Chapter 6). b.If you have been with your employer for more than 40 years, you may get an extra 1/ th for every extra year you work after your NRD, up to 5/ ths. In this case you 60 60 may also get an extra 3/80ths lump sum for every extra year you work after your NRD up to 15/80ths. 28

c. Your pension at your NRD may be increased in line with the cost of living, as measured by the Retail Prices Index. d.Your pension at your NRD may be increased ‘actuarially’. This means taking account of the investment income your pension ‘fund’ can earn in the meantime and the fact that when you eventually start to receive it, it will be paid for a shorter period of time. The options which are available to you should be explained in your membership booklet. If not, you should ask your scheme administrator or your pensions department for more information. (Some of the above options will not be available to you if you are a controlling (20%) director of your company. In this case, your actual date of retirement between the ages of 60 and 70 will be treated as your NRD).

I have decided to take my lump sum, but to postpone taking my pension. What will happen to my pension now? The date on which you take your lump sum benefit sets a limit on the service which can be counted for calculating your maximum pension, but your pension can be increased to the maximum allowed at that date and then as in c. or d. above.

Can I get a further lump sum later? No, as explained in Chapter 7 you can generally only take your tax-free lump sum once.

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Chapter 10 - Early retirement What is meant by ‘Early Retirement’ This means leaving your job and taking your retirement benefits before your Normal Retirement Date (NRD) - see Chapter 8.

How soon can I take my retirement benefits? In general, the tax rules allow you to retire and take your retirement benefits as soon as you reach 50 years of age, except for a member with protected rights - see Chapter 3, page 9.

Do I have to take my retirement benefits if I retire early from my job? You may either take your benefits (early retirement benefits) or defer them (in which case see Chapter 11). You may also (if your employer’s scheme rules allow it) take only a proportion of your pension on retirement if you wish (see Chapter 8 - under ‘New options from 30 June 1999’).

What are the maximum benefits normally allowed on early retirement? This depends upon whether or not you are a post-1989 member. If you are a post-1989 member the position is very simple. Your actual date of retirement replaces your NRD and your benefits are calculated accordingly under your scheme rules - see Example 3 in Chapter 16. If you are a pre-1989 member, you can have a pension of 1/60th of final remuneration for each year of service. If it is more favourable you can have the benefits you would have received at your NRD, but proportionately reduced for early retirement. This is done by applying a special formula, NxP NS where

N means the number of years of actual service, NS means the number of years of potential service to NRD, P means the pension you could have received at NRD based on your final remuneration at retirement.

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Similarly, your lump sum may be 3/80ths of final remuneration for each year of service, but if it is more favourable it may be calculated by the formula N x LS NS where LS means the lump sum you could have received at NRD based on your final remuneration at retirement. See Example 4 in Chapter 16. If you are a post-1987 member - see Chapter 6 - the N/NS formula applies for calculating pension. The maximum lump sum benefit will be proportionate to the amount of pension you receive but, for simplicity, it may be appropriate for you to elect for a lump sum of 2.25 times your initial pension payable (before commutation). See Example 3 in Chapter 16. Note If your scheme is a money purchase scheme and your fund could buy benefits which are greater than the Inland Revenue maximum limits on early retirement, DWP legislation may mean that more can be paid. You should ask your scheme administrator about this.

Will there be any further restriction for early payment? Not under the tax rules, but a final salary scheme, see Chapter 6, will probably make an actuarial reduction to compensate for having to pay your pension for a longer period than originally anticipated. Your scheme administrator or your pensions department will give you full details.

Are there any concessions if I have to retire early because of ill health? If you are unable to continue working because of your state of health, you may be entitled, under your particular scheme rules, to an immediate pension on grounds of incapacity. If so, the benefit limits are more generous than for voluntary early retirement because the further period which you would normally have worked up to your NRD can be taken into account. See Example 5 in Chapter 16.

Is there any minimum age qualification for incapacity benefits? No. They may be paid immediately, whatever your age.

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Chapter 11 - Leaving your scheme before retirement What happens when I leave my employer and my occupational pension scheme? The maximum limits on your benefits will be calculated when you leave in the same way as for early retirement described in Chapter 10, but based on your final remuneration on leaving. (If your scheme is a money purchase scheme and your fund could buy benefits which are greater than the Inland Revenue maximum limits on leaving service, DWP legislation may mean that more can be paid. You should ask your scheme administrator about this.)

What if I leave the scheme, but continue to work for my employer? Your maximum benefits on leaving the scheme will be calculated using the N NS formula described in Chapter 10 (whether or not you are a post-1989 member) but based on your final remuneration when you leave the scheme.

Can I get my benefits straightaway? Yes, if you are 50 years of age or over and you have left the employment. If you are a post-1989 member, the tax rules allow you to take your pension at any time between the ages of 50 and 75. If you are not a post-1989 member, the tax rules allow a number of options. You may take your pension • • • • •

at your Normal Retirement Date (NRD) under the scheme at your NRD under your final employer’s scheme earlier in the case of incapacity - see Chapter 10 earlier, from the date on which an early retirement pension could be taken, or later provided you are still working at any time up to age 75.

Whether all these options are open to you will depend upon the rules of your particular scheme. Consult your membership booklet or ask your scheme administrator for further information. Benefits which are not taken immediately are usually referred to as ‘deferred benefits’. For contracted-out members and those with protected rights please see Chapter 3.

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If I cannot take my pension immediately, will it be eroded by inflation? DWP law protects occupational pension scheme benefits. Not only must your benefits be ‘preserved’ for you, they must also be increased in the meantime, by a set percentage each year, to help compensate for rises in the cost of living.

Can I take my benefits away from my old employer’s scheme? Yes, you can transfer your benefits to your new employer’s occupational pension scheme, if it is approved for tax purposes and is prepared to accept transfers, or to a personal or stakeholder pension scheme. Or you can purchase a deferred annuity often referred to as a Section 32 Policy - from an insurance company. The Section 32 Policy will have certain conditions about what can be paid, broadly in line with what could be given by your old scheme. It is too late to make a transfer once you have started to receive your benefits.

What happens to my transferred benefits in a new occupational pension scheme? They will be treated in one of two ways. • They will most likely be kept in a separate fund and be invested for you within your new scheme. At retirement you will get whatever benefits can be bought with your fund plus the benefits in respect of your new employment. (However, the latter may have to be restricted because your transferred benefits are ‘Retained Benefits’ - see Chapter 6.) You have the right to take part of your transferred benefits as a tax-free cash lump sum. • Alternatively, your transfer payment may be used to buy ‘Added Years’ of credit in your new scheme. This feature is more usual in the large public sector schemes and is not always on offer in private sector schemes. If ‘Added Years’ are available to you, your new scheme administrator or your new pensions department should be able to give you full details about the terms.

33

Chapter 12 - Death benefits Tax approved occupational pension schemes can also give benefits on your death indeed some schemes provide only death benefits. ‘Death in Service’ benefits are paid if you die before you reach your Normal Retirement Date (NRD) - see Chapter 8. ‘Death in Retirement’ benefits are paid if you have already retired and are receiving a pension at the time of your death.

Are the amounts of death benefits limited? Yes. As for pension and lump sum benefits on retirement, the tax rules place a limit on what can be paid to your dependants from a tax approved occupational pension scheme. As before, remember that your pension scheme is under no obligation to pay the maximum benefits allowed by the tax rules. Your membership booklet should tell you what is paid by your scheme.

What death benefits can be paid before I retire? There are two Death in Service benefits allowed by the tax rules. Firstly, a lump sum of up to four times your earnings may be offered. If your scheme administrator or your scheme trustees have discretion regarding whom this can be paid to, then it will not be taxed as part of your estate. However, they will usually take account of your wishes and you will have been asked to nominate the person(s) to whom you want the benefits paid. There are fewer rules about how your earnings are calculated for death benefits purposes. It may, for example, be your final annual rate of pay. Your membership booklet will say how it is calculated in your scheme. Please note: if you have any retained lump sum Death in Service benefits they may have to be taken into account in calculating the lump sum from your last scheme. The second benefit is a pension which can be paid to your widow (er) and/or to your dependants. In general, this pension may be 2/3rds of the pension you would have received if you had retired on incapacity grounds on the date of your death. If a pension is payable to more than one person neither pension can be greater than the 2/ rds incapacity pension mentioned above, and together they cannot exceed what 3 your own incapacity pension would have been. The tax rules for calculating these pensions are quite complex and it would be advisable to check your membership booklet if you want more precise details.

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Will my contributions be refunded if I don’t live to draw my pension? Your scheme may refund your contributions and may add interest. If it does so, the refund will not be taxed as explained in Chapter 5, but will be regarded as a death benefit. It may be paid tax-free in addition to the lump sum described above.

What is meant by a pension guarantee? Once you start to receive your pension, payment will usually be guaranteed for five or ten years. A five year guarantee is the most common. If you die within that time then your pension can continue to be paid to your widow (er) or dependants for the rest of the guarantee period. Alternatively, if the guarantee period was five years or less at the outset, the future instalments of pension from the date of death up to the end of the guaranteed period can be added together and paid as a tax-free lump sum.

What pension can my widow (er) receive if I die after I have retired? Your widow (er) or dependants will usually get a proportion of the pension you have been receiving. The tax rules allow this to be 2/3rds of the maximum pension which could have been paid to you. (If a pension is payable to more than one person, neither can exceed 2/3rds and together they cannot exceed the maximum which could have been paid to you.) The pension can start from your date of death (unless your own pension was guaranteed for five years, in which case it may only start at the end of the guarantee period). An unmarried partner, whether of the same or opposite sex, can qualify for a survivor’s pension if he or she was financially dependent on the employee, for example if the partner relied upon the second income prior to the employee’s death. Decisions on whether or not a person is a dependant are a matter for the scheme trustees. IR SPSS would not challenge the trustees’ judgement provided they had acted in accordance with the scheme rules.

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Chapter 13 - Pension payments Will my pension be increased annually? Once your occupational pension is being paid, the tax rules allow it to be increased up to the level of the maximum (residual) pension the tax rules would have allowed to have been paid at retirement. It may also then be increased on a year to year basis by the greater of 3% or the increase in the cost of living as measured by the Retail Prices Index. This also applies to any widow (er)’s or dependants’ pensions. Your scheme may give you a right to a percentage increase each year, to increases only at the discretion of the administrator or trustees, or a combination of the two. If you have contracted-out of the additional state pension, commonly known as SERPS or State Second Pension - see Chapter 3 - DWP legislation provides for part of your pension, known as the Guaranteed Minimum Pension, to be increased by a set percentage each year.

Can my pension be increased retrospectively? Your pension can be increased at any time up to the maximum that could have been given under the tax rules at retirement, plus cost of living increases since that time. The increases must take the form of pension and cannot be commuted. However, if a pension increase is backdated, the ‘arrears’ may be paid in the form of a lump sum, but as this is really a payment of pension, it is taxable in the normal way (see below).

Will my pension be taxed? Occupational pensions are taxable. Whoever pays your pension will be responsible for deducting tax under PAYE and paying it to the Inland Revenue. You should remember to enter your occupational pension on Self Assessment form SA100.

Can I have my pension paid to someone else? The tax rules allow you to allocate part of your pension to your widow (er) or a dependant, to commence after your death. Your scheme booklet may tell you if this facility is available to you and you should seek further information from your scheme administrator or pensions department.

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Chapter 14 - Pension scheme surpluses An occupational pension scheme may find that it holds surplus funds. This Chapter deals with the role of IR SPSS in these situations.

How does a surplus arise? We explained in Chapter 4 that there is a limit on the contributions that you can pay into a tax approved occupational pension scheme. There is no percentage limit on what your employer can pay, but under the tax rules it must be no more than is needed to pay for the benefits as and when they become due. The administrator will arrange to have the pension fund valued professionally from time to time to see how much money is there and how much more has to be contributed. Sometimes the fund increases in value by more than was expected, for example because of a good investment return. There can be many reasons why surplus funds arise.

How does the IR SPSS deal with it? IR SPSS has a duty to ensure that no more tax relief is given to a tax approved scheme than is necessary. This means that the scheme should hold no more money than it really needs. Under tax legislation, the administrator must take steps to reduce a surplus otherwise the excess will become taxable, or the scheme may lose its tax approval. If the scheme holds a surplus of more than 5% over what it needs, the reduction of the surplus must be done on a special basis set out in the legislation.

How should a surplus be reduced? There are a number of ways in which this may be done. • • • •

New or improved benefits may be provided for scheme members. Your employer’s contribution rate may be reduced for up to five years. Your regular contribution rate may be reduced for up to five years. A refund may be paid to your employer and taxed at 40%.

If the employer actually stops making contributions for a period, this is known as a ‘contribution holiday’. If the administrator decides to refund an amount to your employer, the tax rules restrict the amount refunded so that it reduces the fund to 105% of what the

37

scheme needs to meet all pension entitlements. The valuation of the amount the scheme needs must be carried out by a qualified actuary on a special basis set out in the tax legislation.

Can IR SPSS influence the administrator? No. The way in which a surplus is dealt with is a matter for the trustees and administrator of the scheme to decide, normally in conjunction with your employer. The administrator will obtain the prior approval of IR SPSS to proposals, but they cannot enter into any discussion with you, or with your representatives about what you consider should or should not be done.

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Chapter 15 - Further help and information You can get more information about occupational pension schemes from a variety of places. • You can find out about your own scheme by looking at the booklets given to you when you joined your scheme or by contacting the scheme administrator. If you are not sure who to contact, ask your employer. Your scheme administrator is legally bound to give you regular information about your scheme and about your benefits. • You can find out more about the tax rules by • ringing the IR SPSS Customer Helpline on 0115 974 1600 • looking at our website www.inlandrevenue.gov.uk, or • writing to IR SPSS Yorke House, PO Box 62, Castle Meadow Road, Nottingham, NG2 1BG. Other Inland Revenue pensions booklets, such as IR3 and our customer service leaflet COP1 ‘Putting things right. How to complain’ are available free • from the IR SPSS stationery orderline on 0115 974 1670 • from our website www.inlandrevenue.gov.uk, or • by writing to IR SPSS Stationery Unit, Yorke House, PO Box 62, Yorke House, Castle Meadow Road, Nottingham, NG2 1BG or from any Tax Office or Inland Revenue Enquiry Centre. A copy of the Income and Corporation Taxes Act 1988 and other Statutory Instruments can be found by looking at HMSO website www.hmso.gov.uk/stat.htm Please note that IR SPSS cannot become involved in any dispute between you and your pension scheme. Tax approval is primarily a matter for your scheme administrator and we are bound by rules of confidentiality in our dealings with him or her.

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• Enquiries about income tax relief on your contributions or about the taxation of your pension should be taken up with your local Inland Revenue Enquiry Centre or Tax Office. You can find your nearest office by looking in the telephone book under ‘Inland Revenue’. Offices are open to the public from 8.30 am to 4.30 pm, Monday to Friday. Some are also open outside these hours. • If you have a problem or dispute concerning your occupational, personal or stakeholder pension which you have been unable to resolve after writing to the scheme authorities, you can seek free help and advice from the Pensions Advisory Service (OPAS). OPAS helps individual members of schemes or others with rights to benefits under schemes. OPAS has a nation-wide network of volunteer advisers. • If you write to OPAS they will try to find a local adviser to help you. If a local adviser is not available someone else will be assigned to assist you. The OPAS address is 11 Belgrave Road London SW1V 1RB OPAS also operates a telephone helpline which is open Monday to Friday from 9am to 5pm. The helpline number is 0845 601 2923, or you can e-mail OPAS on [email protected] • If you have lost touch and are trying to trace a pension scheme to which you once belonged, the Pension Schemes Registry may be able to help you. Write to The Pension Schemes Registry PO Box 1NN Newcastle-upon-Tyne NE99 1NN Tel: 0191-225-6316 There is also an online tracing request form which can be accessed at www.opra.gov.uk • Enquiries about the state pension scheme and about ‘contracting out’ of the additional state pension, commonly known as SERPS or State Second Pension can be made to the Contracted Out Pensions1 Helpline on 0845 91 50150. 1The Contracted-Out Pensions Helpline is run by IR National Insurance Services to Pension Industry (previously known as COEG)

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• The DWP (Department for Work and Pensions) produce the following guides. -

A guide to your pension options (PM 1) State pension options - your guide (PM 2) Occupational pensions - your guide (PM 3) Personal pensions - your guide (PM 4) Pensions for the self-employed - your guide (PM 5) Pensions for women - your guide (PM 6) Contracted-out pensions - your guide (PM 7) Stakeholder pensions - your guide (PM 8)

To get copies of these free guides contact the Pensions Info-Line on 0845 7 313233. Calls are charged at a local rate and the line is open 24 hours a day. These leaflets are also available on the DWP website www.dwp.gov.uk

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Chapter 16 - Examples Examples of the maximum pension and lump sum benefits which can be given by a tax approved scheme. Example 1 At normal retirement date (pre-1987 member) - see Chapter 8. Sarah’s occupational pension scheme provides the maximum pension and lump sum allowed under Inland Revenue rules. She has been with her employer for 14 years and her final remuneration is £15,000. She is a pre-1987 member and her commutation factor is 11 : 1. Pension (before commutation) Lump sum

40/ 60

= 2/3 x £15,000 = £10,000 pa 63/ x £15,000 = £11,812 80

If Sarah decides to commute part of her pension for a lump sum of £11,812, her pension will be reduced to £10,000 - (£11,812 ÷ 11) £1,074

= £ 8,926

Example 2 At normal retirement date with retained benefit (post-1987 member) - see Chapter 8. David joined his present employer and occupational pension scheme 18 years ago and is retiring on final remuneration of £24,000. The rates of accrual in his scheme, both for his pension and his lump sum, are the best allowed under the tax rules - see Chapter 6. He also has a pension of £3,000 per annum from his previous employer’s scheme and he has decided to commute part of it for a lump sum of £10,000. He is a pre-1987 member and his commutation factor is 9 : 1. Pension (total before commutation Retained pension benefit

40/ 60

= 2/3 x £24,000 = £16,000pa £ 3,000pa £19,000pa

[David’s rate of accrual exceeds 1/60th. A restriction is therefore necessary so that his total pension benefits do not exceed 2/3rds x final remuneration, i.e. 2/3 x £24,000 = £16,000.]

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Less restriction Total pensions (£3,000 + £13,000) Lump sum Retained lump sum benefit

£ 3,000 £16,000pa 99/ 80

x £24,000 =

£29,700 £10,000 £39,700

[David’s rate of accrual exceeds 3/80ths. A restriction is therefore necessary so that his total lump sums do not exceed 11/2 x £24,000 = £36,000.] Less restriction Total lump sums (£10,000 + £26,000)

£ 3,700 £36,000

Therefore, under his present scheme David may take £26,000 as a cash lump sum, reducing his pension (if his commutation factor is 9:1) to £13,000 - (26,000 ÷ 9) £2,889

=

£10,110 pa

=

£1,889 pa

Under his previous scheme he takes £3,000 - (£10,000 ÷ 9) £1,111 (Total lump sums £36,000) (Total pensions after commutation £12,000 pa)

Example 3 On early retirement (post-1989 member) - see Chapter 10. Karen joined her occupational pension scheme after 31 May 1989 so she is a post1989 member. She has worked for her employer for eight years. Her pension is accruing at the maximum of 1/30th of her final remuneration for each year she has worked for her employer. She was to have retired at 60, but has decided to go early at age 57. Her final remuneration is £15,000. 8/ 30

Pension (before commutation) Lump sum

x £15,000 = £ 4,000 pa 2.25 x £4,000 = £ 9,000

If Karen decides to take as much as she can as a lump sum, then her pension will be reduced to £4,000 - (£9,000 ÷ 12) £750

= £3,250 pa

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Example 4 On early retirement (pre-1987 member) - see Chapter 10 Chris joined his occupational pension scheme before 17 March 1987 and is therefore a pre-1987 member. He worked for his employer for eight years and his pension and lump sum benefits accrued at the maximum rates allowed by the tax rules - see Chapter 6. He was to have retired at 60, but he decided to go early at age 57. His final remuneration was £15,000. Pension (before commutation) 8 x £10,000 (i.e., 2/3 x £15,000) = £7,272 11 (N x P) ( NS ) Lump sum 8 x £7,875 (i.e., 11 (N x LS) ( NS )

42/ 80

x £15,000)

= £5,727

Example 5 On early retirement on incapacity grounds (pre-1987 member) - see Chapter 10. Lesley retired due to ill health at age 55 after nine years with her employer. She was not due to retire until age 60 by which time she would have been with her employer for 14 years. Her final remuneration was £21,000. She is a pre-1987 member. Incapacity pension (before commutation) Incapacity lump sum

2/ x 3 63/ x 80

44

£21,000 £21,000

= £14,000 = £16,538

Index Accrual rate 18, 20 Added years 33 Additional state pension 8, 9 Additional Voluntary Contributions (AVCs) 10, 11, 12, 13, 14, 15, 16 Administrator 24 Commutation 23, 24,25 Concurrency 7 Contracting-out 8, 9 Contracting-out Pensions Helpline 9, 40 Contracted-out Salary Related rights (COSR) 9 Contributions - by employees 10, 11, 12, 13, 14, 15 - by employers 10 Death benefits - in retirement 34, 35, 36 - in service 34 Deferred benefits 30, 32 Department for Work and Pensions 1, 6, 9, 41 Dependants’ pension 34, 35 Early retirement 30, 31 Earnings cap 19 Final remuneration (FR) 17, 18, 19, 20, 21, 22 Final Salary Scheme 2, 17 Free Standing Additional Voluntary Contribution Scheme (FSAVCS) 11, 12, 13 Help and Information 39, 40, 41 Guaranteed Minimum Pension (GMP) 9, 36 Increases to pensions 36 Inland Revenue approval 1, 3 Late retirement 28, 29 Leaving before retirement 31, 32, 33 Membership 6, 7, 8 Money purchase scheme 17, 26 National Insurance Services to Pensions Industry 40 Normal Retirement Age (NRA) 26 Normal Retirement Date (NRD) 26 Pensions Advisory Service (OPAS) 40 Pensions on Divorce 4, 5 Pension Schemes Registry 40 Personal Pensions 6 Post - 1987 members 19, 20, 21, 31 Post - 1989 members 19, 20, 28, 30 Pre - 1987 members 19, 20, 21 45

Pre - 1989 members Protected Rights Refunds of members’ contributions Retained benefits Section 32 Policy Self Assessment return Service Stakeholder pension scheme State pension scheme Surpluses Tax Offices Tax reliefs Transfers Widow(er)s’ pensions

21, 12,

16, 12, 20, 34,

46

28, 29 9 15, 16 22, 26 33 16, 36 17 6, 7 8, 9 37, 38 39 39, 40 32, 33 35, 36

We produce a wide range of leaflets, booklets and Helpsheets each designed to explain different aspects of your tax or National Insurance in plain English, and to assist with the completion of tax returns. Most of them are free, and most are also available in Welsh. Some you might find useful are COP1 Putting things right. How to complain IR3 Personal Pension Schemes (including Stakeholder Pension Schemes)

We have a full range of services for people with disabilities, including leaflets in Braille, audio and large print. For details, please ask your local Inland Revenue office or Enquiry Centre. Our IR List ‘Catalogue of leaflets and booklets’ gives further information about our publications, most of which you can get from any Inland Revenue Enquiry Centre, Tax Office or National Insurance Contributions office. Addresses are in your local telephone book under ‘Inland Revenue’. Most offices are open to the public from 8.30am to 5.00pm, Monday to Friday, and some are also open outside these hours. Social Security offices and Jobcentre Plus offices (part of the Department for Work and Pensions) and your library or Citizens Advice Bureau may also have copies of our leaflets. You can also get most of our leaflets •

by calling our Orderline on 0845 9000 404 between 8.00am and 10.00pm, seven days a week (except Christmas Day, Boxing Day and New Year’s Day)

•

by fax on 0845 9000 604

•

by e-mail on [email protected]

•

by writing to PO Box 37 St Austell Cornwall PL25 5YN

Many leaflets are also available on the Internet at www.inlandrevenue.gov.uk When our offices are closed, you can get general advice on Self Assessment by calling our Helpline, in the evenings or at weekends, on 0845 9000 444. Helpline and Orderline calls are charged at local rates.

These notes are for guidance only and reflect the tax position at the time of writing. They do not affect your right of appeal about your own tax. Issued by Inland Revenue Marketing and Communications February 2003 © Crown copyright 2003 Printed by The Astron Group 02/03 NSV Code R2P 3255