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The Superannuation Arrangements of the University of London

 

 

Active Members ► The Annual Allowance

If you are an active member of SAUL, the increase in the value of your pension benefits from 1 April to 31 March each year is measured against an ‘Annual Allowance’. If your benefits increase by more than the Annual Allowance you may be taxed.

Very few SAUL members will be affected unless:

  • you are a high earner or moderate earner with long service;
  • you receive a large pay rise; or
  • your employer grants you additional service in SAUL.

For more information please read the FAQs below. You can find the letter informing active members about the Annual Allowance here.

  
 

 

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Glossary

What is tax relief?

What is the limit on tax relief?

When will the legislation covering these changes to pensions tax relief be finalised?

Will the £50,000 Annual Allowance be increased in the future?

SAUL’s pension input period

How are pension savings measured against the limit?

What happens if the Annual Allowance is exceeded?

How is the tax on pension savings above the new Annual Allowance paid?

When will affected members be contacted?

Is it possible for members to lower the tax bill they might face if they breach the reduced Annual Allowance?

A member is contributing to another pension scheme as well as SAUL.  How does the reduced Annual Allowance affect them?

How might these pensions tax relief changes affect future ill-health retirements?

Is the Government making any other changes to pensions tax relief?

 

What is tax relief?

SAUL members do not pay tax on their contributions to SAUL. In practice this means that members are taxed on their pay only after SAUL contributions have been deducted from salary.

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What is the limit on tax relief?

From 6 April 2011 the government reduced the amount of pension savings you can make to all registered pension schemes during a “pension input period” before being taxed. The limit is called the Annual Allowance and is £50,000 a year.

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When will the legislation covering these changes to pensions tax relief be finalised?

These changes should become law in summer 2011 and will take effect from 6 April 2011.

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Will the £50,000 Annual Allowance be increased in the future?

The Government has said that this figure will not increase until at least the 2015/16 tax year.

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SAUL’s pension input period

Under relevant legislation, SAUL Trustee Company has nominated 31 March 2007 as the end date for SAUL’s first pension input period, so SAUL’s pension input period for all members will run from 1 April to 31 March in each year.

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How are pension savings measured against the limit?

In SAUL pension savings are the increase in the value of a member’s benefits from 1 April to 31 March each year. This is the difference between:

  • the value of your benefits at the start of the year which is then increased in line with the Consumer Prices Index (CPI); and
  • the value of your benefits at the end of the year.

The difference is measured against the Annual Allowance by multiplying the increase in your pension by 16 and adding the increase in your lump sum. In practice, if the value of a basic SAUL pension goes up by £2,632 in the year (and the value of the lump sum goes up by £7,896) after allowing for any increase in CPI, the Annual Allowance will be exceeded. We show the basic pension and lump sum figures on members’ annual benefit estimates.

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What happens if the Annual Allowance is exceeded?

Tax is paid on pension savings above the Annual Allowance at the marginal rate. The marginal rate is the highest tax band in which members pay tax.

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How is the tax on pension savings above the new Annual Allowance paid?

If a member exceeds the Annual Allowance then the onus is on them to provide information to HMRC via their self-assessment tax return.  The Government is putting in place information requirements that will require pension schemes such as SAUL to provide the necessary information to members.  SAUL will write to members in June each year if the growth in their benefits exceeds the Annual Allowance.

Affected members will be taxed at their marginal rate, which is the highest tax band in which they pay tax.

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When will affected members be contacted?

SAUL will write to members in June each year if the growth in their benefits exceeds the Annual Allowance.

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Is it possible for members to lower the tax bill they might face if they breach the reduced Annual Allowance?

Yes.  The Government is going to put in place arrangements that will allow members to ‘carry forward’ any ‘surplus’ Annual Allowance from previous tax years.  This means that if scheme members have pension saving of less than £50,000 in a year, the difference between that saving and £50,000 can be carried forward for up to three years.

For more information on this, please see HMRC’s website:

http://www.hmrc.gov.uk/pensionschemes/annual-allowance/examples.htm

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A member is contributing to another pension scheme as well as SAUL.  How does the reduced Annual Allowance affect them?

The reduced Annual Allowance applies to all a member’s pension savings so if they are paying contributions to other registered pension schemes (e.g. a personal pension), they should check to see if their total savings exceed the Annual Allowance.

For more information on this, please see HMRC’s website:

http://www.hmrc.gov.uk/pensionschemes/annual-allowance/examples.htm

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How might these pensions tax relief changes affect future ill-health retirements?

As part of these changes, the Government has proposed that members who take early retirement due to ill-health or who take their benefits as a lump sum because they are very ill will be exempt from the Annual Allowance test, subject to some conditions.

The Trustee is currently considering how these conditions might affect SAUL.

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Is the Government making any other changes to pensions tax relief?

The Government has decided that from 6 April 2012 the Lifetime Allowance will also be reduced, from its current level of £1.8 million to £1.5 million.

The Lifetime Allowance is the maximum amount of benefits a member can build up from all their pension schemes without incurring additional tax.

When a member retires, the value of their pension benefits is tested for Lifetime Allowance purposes by multiplying their pension by 20 and adding the value of their lump sum.  As is the case now, SAUL will inform members of how much of their Lifetime Allowance their SAUL benefits take up.  The member will then have to declare whether the value of their pension benefits – excluding state benefits – exceeds the Lifetime Allowance.  Very few members of SAUL are caught by the Lifetime Allowance and the Trustee expects this to be case even with the reduced limit from 6 April 2012.

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