Taxation of scheme benefits - know the facts
Any benefits paid from BAE Systems pension schemes are subject to both the Rules of the schemes and to European and UK laws including HM Revenue & Customs (HMRC) rules that limit how much of your retirement savings can be paid tax free. The following explains how current tax rules may affect you.
When you start receiving your pension, it is subject to income tax just as your salary was when you were working.
Tax free cash
The maximum amount of tax free cash which you can take when you retire is usually 25% of the value of your benefits at the time you retire.
Lump sums payable on death
The Trustees of the pension scheme have the discretion to decide to whom lump sums are paid when a member dies. This means that most lump sums are paid outside the member's estate and are therefore free from inheritance tax.
The Annual Allowance is the amount by which the value of an individual’s pension benefits can increase each year without incurring a tax liability. The standard Annual Allowance is set at £40,000 for the 2016/2017 tax year. There is the opportunity to carry forward any unused Annual Allowance from up to the three previous tax years to offset an excess in the current tax year. However, any excess benefit still remaining is taxed at your highest marginal rate. In measuring your benefits you must include the increase in value of Defined Benefit pensions, as well as total contributions made into any Defined Contribution scheme, such as AVCs.
Since April 2016, for members who have a total 'adjusted' income of more than £150,000, the Annual Allowance will reduce by £1 for every £2 of taxable income above £150,000. This is called tapering, but tapering will normally not apply if taxable income is less than £110,000. The maximum reduction will be £30,000, so anyone with an 'adjusted' income of £210,000 or more will have an Annual Allowance of £10,000. Adjusted income includes personal sources of income (such as investment income or income from a buy-to-let property), together with employment-related income and the value of the increase in pension benefits over the tax year.
This is a brief summary on the Annual Allowance and further information on the detail of its operation is available at: https://www.gov.uk/tax-on-your-private-pension/annual-allowance. If you think you may be impacted by it, you may wish to seek independent financial advice. An HMRC Annual Allowance calculation tool can be accessed at: https://www.tax.service.gov.uk/paac. Information on the income calculation process to follow, to see if you will be impacted by the reduced or 'tapered' Annual Allowance can be accessed at: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance.
The Lifetime Allowance is the limit on the total value of pension benefits that an individual can build up over their working life without a tax charge. The Lifetime Allowance is £1.0 million for the tax year 2016/2017, which is the equivalent to a total pension of approximately £50,000 a year. Benefits may be paid above this value but there will be a tax charge called a Lifetime Allowance Charge. At retirement an individual will need to sign a declaration confirming whether any pension benefits have already been assessed against the Lifetime Allowance. The Lifetime Allowance will increase each year in line with Consumer Price Inflation from 2018 onwards.
Transitional protections are available for those who have already built up large pension savings. Information on the current open protections that can be applied for is available at https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance.
How can I work out what my total benefits are worth?
In order to work out how much of the Lifetime Allowance you will use you will need to consider all the pensions to which you are entitled. The pension administrator for each of your pension schemes will confirm these figures to enable you to work out the total.
Is the Lifetime Allowance the same for everybody?
Certain people are entitled to a higher (enhanced) LTA if they have previously applied to protect their benefits which were above the LTA, either at the time the tax rules changed in April 2006 or in 2012, 2014 or 2016 when other windows for transitional protections were made available. Examples include Enhanced Protection, Primary Protection, Fixed Protection 2012 & 2014 & 2016 and Individual Protection 2014 & 2016. Information on the current open protections that can be applied for is available at https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance.
Lifetime Allowance Charge
This is the charge applied when the total value of benefits is more than the LTA. Lump sums are taxed at 55% and pensions at 25%.