University of StAndrews

Office of the Principal

Derek A Watson FCCA Quaestor and Factor

DAWKES

To All Grade 9 Staff

11 May 2011

Dear Colleague

Change to pensions tax relief from April 2011

Introduction As you may be aware there are significant changes to the way pension contributions and savings receive tax relief which are being introduced from 6 April 2011 Most of the UK population will not be affected but high earning employees or those making significant additional voluntary contributions could incur large tax charges These changes may affect some senior staff that are members of the Universities Superannuation Scheme (USS)

Pensions are a very important benefit to most staff and the University is keen that all staff who may be affected now or in future years have access to clear information This letter is intended to help you understand the changes but contains no individual financial or tax advice nor should it be construed as such and you should not make any decisions based solely on the content of this letter You should consider taking independent financial advice before taking any action

Summary of pensions tax relief The Annual Allowance and Lifetime Allowance were introduced in 2006 and are part of the pensions taxation regime that is currently in force The Annual Allowance is the maximum pension benefit you can build up in anyone tax year without incurring an additional tax charge The Lifetime Allowance is the total amount of pension savings that you can build up over your lifetime without incurring an additional tax charge

Annual Allowance

Changes to the Annual Allowance - what this means The maximum amount of pension you can build each year will be reduced from the current Annual Allowance of pound255000 to pound50000 from 6 April 2011 The Government has indicated that it will not be increasing the Annual Allowance until at least 2015 and therefore the annual tax threshold of pound50000 will continue for the foreseeable future This is a significant reduction and means that some individuals may no longer be able to build up pension in a tax efficient manner

University of St Andrews College Gate North Street St Andrews Fife KY 16 9AJ Scotland Tel + 1334-462573 Fax + 1334-4621 06 e-mail guaestor(a)st-andrewsaclIk

The University of St Andrews is a charity registered in Scotland No seo 13532

How will the annual tax liability be calculated from 6 April 2011 Under the USS it is the value of your defined benefit accrual over the year plus any Added Years benefits accrued and any money purchase Additional Voluntary Contributions (AVCs) paid over the year that is measured against your Annual Allowance Any contributions to other registered pension schemes ie contributions to a stakeholder or personal pension plan will also increase the total amount measured against the Annual Allowance To calculate the value of your accrual over the year you should consider the following

bull Your beginning of year value is calculated based on the pension and lump sum accrued at the start of the year (including Added Years accrued to that point) revalued to the end of that year in line with the annual increase in the Consumer Prices Index (CPI) CPI will be measured using the figure for the year to September before the start of the Scheme year (1 April) The revalued pension is multiplied by a factor of 16 and the revalued lump sum is added to give the total beginning of year value

bull Your end of year accrual is calculated based on the pension and lump sum accrued at the end of the year (including Added Years accrued to that point) This pension is multiplied by a factor of 16 and the lump sum is added to give the total end of year value

bull The beginning of year value is subtracted from the end of year value to give the total value to be tested against your Annual Allowance

bull The amount of any money purchase AVCs paid over the year and the amount of any contributions paid to other registered pension schemes over the year will be added to the value to be tested against the Annual Allowance

If the total value of your accrual over the year exceeds the Annual Allowance the excess will be taxed at your marginal rate of income tax There is however scope to utilize unused allowances from up to the previous 3 years In order to operate this provision for the three tax years before introduction of the new annual allowance it will be assumed that

bull the annual allowance for each of these years was pound50000 and bull the amendments made by the Finance Bill apply (so benefits in defined benefit

arrangements will have the opening value uprated using the increase in the CPI for the year up to the September before the start of the tax year and will be valued using the 16 1 factor)

The tax due may be collected through the annual self-assessment tax return process although the Government is considering other options for large tax charges

Example If you have 20 years service at 1 April 2011 and your pensionable salary is pound100000 then your benefits at 1 April 2011 are calculated as

Pension =20180 x pound100000 =pound25000 Lump Sum =3 x pound25000 =pound75000

If CPI was 31 during the year the revalued beginning of year pension and lump sum is pound25775 and pound77325 respectively (valued at 16 x pound25775 plus pound77325 =pound489725)

University of St Andrews College Gate North Street St Andrews Fife KY 16 9AJ Scotland Tel +1334-462573 Fmc +1334-4621 06 e-mail gliaestor(agtsl-andrewsaclIk

The University of St Andrews is a charity registered in Scotland No SCO 13532

If your actual pension and lump sum increase to say pound29000 and pound87000 respectively the value of your benefits accrued at the end of the year would therefore be 16 x pound29000 plus pound87000 = pound551000 ie an increase over the year of pound61 275

This is compared to the Annual Allowance and the excess of pound11 275 (over pound50000) would be subject to tax at the marginal rate of income tax

Carry forward You will be able to carry forward unused allowances from the previous three years to increase your allowance in anyone year Therefore if you have not used all of your annual allowance in the previous three years you could have a bigger allowance The maximum total allowance in a year would be pound200000

Pension input period For the purposes of the Annual Allowance it is contributions and pension built up during the USS Scheme year that counts The Scheme year is 1 April to 31 March (this is different from the tax year which is 6 April to 5 April) So in the USS it is pension savings between 1 April 2011 and 31 March 2012 that will count towards the 201112 Annual Allowance

Lifetime Allowance

Changes to the Lifetime Allowance - what this means The Lifetime Allowance is the amount against which all benefits from UK Registered Pension Schemes have to be assessed when they are paid It is currently pound1 8 million and the Government has announced that it will reduce to pound1 5 million from 6 April 2012

Fixed Protection will be available to allow an individual to retain the pound1 8m Lifetime Allowance as long as no further retirement benefits build up after 5 April 2012 If you wish to opt for Fixed Protection you must make an election to HM Revenue amp Customs before 6 April 2012

If you made an election for Primary Protection or Enhanced Protection between April 2006 and April 2009 that election is still valid even after the April 2011 tax changes

How is the Lifetime Allowance charge calculated

The process for calculating the value of benefits to be assessed against the Lifetime Allowance has not changed defined benefit pensions are valued by multiplying them by a factor of 20 Any lump sum benefits are added to the pension value and any defined contribution pensions which include money purchase AVCs are valued by taking the actual value of the fund

When carrying out the test you must include any other benefits you are entitled to from other registered pension schemes If pension benefits from all sources have a value in excess of the Lifetime Allowance there is a tax charge on the excess benefits

In some cases your excess benefits can be returned to you as a lump sum refund in which case a 55 tax charge applies Alternatively you may choose to take the excess as a monthly pension and in that case the initial tax charge is 25 However the additional pension will also be subject to PAYE at your marginal rate For a member who pays tax at 40 this means that the total deduction will be at least 55 for 50 tax payers this will be even higher

Universi ty of St Andrews College Gate North Street St Andrews Fife KY 16 9AJ Scotland Tel +1 334-462573 Fax +1334-462 106 e-mai l quaestorrl1lst-andrewsacuk

The University of St Andrews is a charity registered in Scotland No seo13532

How will the annual tax liability be calculated from 6 April 2011 Under the USS it is the value of your defined benefit accrual over the year plus any Added Years benefits accrued and any money purchase Additional Voluntary Contributions (AVCs) paid over the year that is measured against your Annual Allowance Any contributions to other registered pension schemes ie contributions to a stakeholder or personal pension plan will also increase the total amount measured against the Annual Allowance To calculate the value of your accrual over the year you should consider the following

bull Your beginning of year value is calculated based on the pension and lump sum accrued at the start of the year (including Added Years accrued to that point) revalued to the end of that year in line with the annual increase in the Consumer Prices Index (CPI) CPI will be measured using the figure for the year to September before the start of the Scheme year (1 April) The revalued pension is multiplied by a factor of 16 and the revalued lump sum is added to give the total beginning of year value

bull Your end of year accrual is calculated based on the pension and lump sum accrued at the end of the year (including Added Years accrued to that point) This pension is multiplied by a factor of 16 and the lump sum is added to give the total end of year value

bull The beginning of year value is subtracted from the end of year value to give the total value to be tested against your Annual Allowance

bull The amount of any money purchase AVCs paid over the year and the amount of any contributions paid to other registered pension schemes over the year will be added to the value to be tested against the Annual Allowance

If the total value of your accrual over the year exceeds the Annual Allowance the excess will be taxed at your marginal rate of income tax There is however scope to utilize unused allowances from up to the previous 3 years In order to operate this provision for the three tax years before introduction of the new annual allowance it will be assumed that

bull the annual allowance for each of these years was pound50000 and bull the amendments made by the Finance Bill apply (so benefits in defined benefit

arrangements will have the opening value uprated using the increase in the CPI for the year up to the September before the start of the tax year and will be valued using the 16 1 factor)

The tax due may be collected through the annual self-assessment tax return process although the Government is considering other options for large tax charges

Example If you have 20 years service at 1 April 2011 and your pensionable salary is pound100000 then your benefits at 1 April 2011 are calculated as

Pension =20180 x pound100000 =pound25000 Lump Sum =3 x pound25000 =pound75000

If CPI was 31 during the year the revalued beginning of year pension and lump sum is pound25775 and pound77325 respectively (valued at 16 x pound25775 plus pound77325 =pound489725)

University of St Andrews College Gate North Street St Andrews Fife KY 16 9AJ Scotland Tel +1334-462573 Fmc +1334-4621 06 e-mail gliaestor(agtsl-andrewsaclIk

The University of St Andrews is a charity registered in Scotland No SCO 13532

If your actual pension and lump sum increase to say pound29000 and pound87000 respectively the value of your benefits accrued at the end of the year would therefore be 16 x pound29000 plus pound87000 = pound551000 ie an increase over the year of pound61 275

This is compared to the Annual Allowance and the excess of pound11 275 (over pound50000) would be subject to tax at the marginal rate of income tax

Carry forward You will be able to carry forward unused allowances from the previous three years to increase your allowance in anyone year Therefore if you have not used all of your annual allowance in the previous three years you could have a bigger allowance The maximum total allowance in a year would be pound200000

Pension input period For the purposes of the Annual Allowance it is contributions and pension built up during the USS Scheme year that counts The Scheme year is 1 April to 31 March (this is different from the tax year which is 6 April to 5 April) So in the USS it is pension savings between 1 April 2011 and 31 March 2012 that will count towards the 201112 Annual Allowance

Lifetime Allowance

Changes to the Lifetime Allowance - what this means The Lifetime Allowance is the amount against which all benefits from UK Registered Pension Schemes have to be assessed when they are paid It is currently pound1 8 million and the Government has announced that it will reduce to pound1 5 million from 6 April 2012

Fixed Protection will be available to allow an individual to retain the pound1 8m Lifetime Allowance as long as no further retirement benefits build up after 5 April 2012 If you wish to opt for Fixed Protection you must make an election to HM Revenue amp Customs before 6 April 2012

If you made an election for Primary Protection or Enhanced Protection between April 2006 and April 2009 that election is still valid even after the April 2011 tax changes

How is the Lifetime Allowance charge calculated

The process for calculating the value of benefits to be assessed against the Lifetime Allowance has not changed defined benefit pensions are valued by multiplying them by a factor of 20 Any lump sum benefits are added to the pension value and any defined contribution pensions which include money purchase AVCs are valued by taking the actual value of the fund

When carrying out the test you must include any other benefits you are entitled to from other registered pension schemes If pension benefits from all sources have a value in excess of the Lifetime Allowance there is a tax charge on the excess benefits

In some cases your excess benefits can be returned to you as a lump sum refund in which case a 55 tax charge applies Alternatively you may choose to take the excess as a monthly pension and in that case the initial tax charge is 25 However the additional pension will also be subject to PAYE at your marginal rate For a member who pays tax at 40 this means that the total deduction will be at least 55 for 50 tax payers this will be even higher

Universi ty of St Andrews College Gate North Street St Andrews Fife KY 16 9AJ Scotland Tel +1 334-462573 Fax +1334-462 106 e-mai l quaestorrl1lst-andrewsacuk

The University of St Andrews is a charity registered in Scotland No seo13532

If your actual pension and lump sum increase to say pound29000 and pound87000 respectively the value of your benefits accrued at the end of the year would therefore be 16 x pound29000 plus pound87000 = pound551000 ie an increase over the year of pound61 275

This is compared to the Annual Allowance and the excess of pound11 275 (over pound50000) would be subject to tax at the marginal rate of income tax

Carry forward You will be able to carry forward unused allowances from the previous three years to increase your allowance in anyone year Therefore if you have not used all of your annual allowance in the previous three years you could have a bigger allowance The maximum total allowance in a year would be pound200000

Pension input period For the purposes of the Annual Allowance it is contributions and pension built up during the USS Scheme year that counts The Scheme year is 1 April to 31 March (this is different from the tax year which is 6 April to 5 April) So in the USS it is pension savings between 1 April 2011 and 31 March 2012 that will count towards the 201112 Annual Allowance

Lifetime Allowance

Changes to the Lifetime Allowance - what this means The Lifetime Allowance is the amount against which all benefits from UK Registered Pension Schemes have to be assessed when they are paid It is currently pound1 8 million and the Government has announced that it will reduce to pound1 5 million from 6 April 2012

Fixed Protection will be available to allow an individual to retain the pound1 8m Lifetime Allowance as long as no further retirement benefits build up after 5 April 2012 If you wish to opt for Fixed Protection you must make an election to HM Revenue amp Customs before 6 April 2012

If you made an election for Primary Protection or Enhanced Protection between April 2006 and April 2009 that election is still valid even after the April 2011 tax changes

How is the Lifetime Allowance charge calculated

The process for calculating the value of benefits to be assessed against the Lifetime Allowance has not changed defined benefit pensions are valued by multiplying them by a factor of 20 Any lump sum benefits are added to the pension value and any defined contribution pensions which include money purchase AVCs are valued by taking the actual value of the fund

When carrying out the test you must include any other benefits you are entitled to from other registered pension schemes If pension benefits from all sources have a value in excess of the Lifetime Allowance there is a tax charge on the excess benefits

In some cases your excess benefits can be returned to you as a lump sum refund in which case a 55 tax charge applies Alternatively you may choose to take the excess as a monthly pension and in that case the initial tax charge is 25 However the additional pension will also be subject to PAYE at your marginal rate For a member who pays tax at 40 this means that the total deduction will be at least 55 for 50 tax payers this will be even higher

Universi ty of St Andrews College Gate North Street St Andrews Fife KY 16 9AJ Scotland Tel +1 334-462573 Fax +1334-462 106 e-mai l quaestorrl1lst-andrewsacuk

The University of St Andrews is a charity registered in Scotland No seo13532

Will the changes impact me

We cannot say definitively if you will be affected by the Governments tax changes The attached Ready Reckoner may help you determine if you are likely to be You should bear in mind that the figures in the ready reckoner reflect only your normal pension and lump sum benefits under the USS Any Added Years benefits or money purchase AVes under the USS should also be taken into consideration Further any contributions made to any other schemes should also be taken into account

Further information

Further information is available on the USS website (wwwusscouk) including a tool to estimate how much of the new lower Annual Allowance figure for the 201112 year you are likely to use

Further if you are close to exceeding the Annual Allowance you can request a full quotation from USS by contacting Lisa Harley the Universitys Pensions Administrator This quotation will be more accurate as it will use your actual pensionable salary over the period The quotation will also indicate if you have scope to utilise any unused allowances from the previous three tax years

The University has arranged for KPMG Pensions to provide a group presentation to all Grade 9 staff on the 18th May in School 3 at 4pm and Physics Lecture Theatre A at 530pm which will explain the changes in more detail and include illustrative examples Further details will be announced shortly In the meantime please consider the information in this letter carefully and if you have any queries please direct these to Lisa Harley in the first instance

Once you have considered the impact that the changes may have on your benefits you should consider taking independent financial advice

~SinreIY

~

Derek Watson Quaestor ampFactor

University of St Andrews College Gate North Street St Andrews Fife K Y 16 9Al Scotland Tel +1334-462573 Fax +1334-4621 06 e-mail qllaeslor st-andrewsaclIk

The University of St Andrews is a charity registered in Scotland No SCOl3532

Ready Reckoner

The tables below illustrate the approximate value of accrued benefits over one year based on a range of pensionable salaries and past service

Annual Allowance

Illustration 1 Assumes an increase in pensionable salary of 04 received during the year

Pensionable Salary

50000 60000 -

_7000~

80000 90000

----raquo~OOO 110000 12000(1 130000 140000 150000 160000 1700~-8QQ(L 190000 200000

Service (years)

5 10 15 20 25 30 35 40

10973 10023 9073 8123 7173 6223 5273 4322

13167 12027 __10887 9747 MQ7_ 7467 6327 5187

15~ - 14032 12702 __11372 1 Q0~ 8712 7382 6052

17556 16036 14516 12996 114~ 9956 8436__6~6 _

_ 19751 1I~) 041 16331 11621 12911 11 201 9491 7780

21945 20045 18145 16245 14345 12445 10545 8645

24140 22050 19960 17870 15780 13690 11600 9~

_ ~sect334 24054 f 1774 19494 17214 14~34 126~ 10374

28529 ~05~ 23589_ 2111_9__ 18649 16179 13709 11 239_

30723 28063 25403 22743 20083 17 ~23 14763 12 10~

32918 __30068 27218 243_68 21518 18668 15818 12968

~112 32072 29032 25992 22952 19912 16872 13832

37307 34077 30847 27617 ~4 387 21157 17927 14696

39501 36081 ~~ 29241 25821 ~401 18981 15561

41 696 38 086 34476 ~866 27256 23646 20036 16425

43890 40090 36290 32490 28690 24890 21090 17290

Illustration 2 Assumes an increase in pensionable salary of 31 received during the year

Pensionable Service (years)

Salary 5 10 15 20 25 30 35 40

13549 14 ~ 1485_6 _~509 16162

16259 170lt13 17sect2J 18611 _ 19394 20178 20962

18969 19884 20 7~ 21 712 22 627 23541 24

21 679 22724 23769 24814 ~5amp59 26904 __27949

243~_9 __25564 26740 __27916 __29091 30267

10000(L 25793 27099 28405 29711 31018 3232_4__ ~~ ~~Q_

110000 28372 29809 31246 32~ ~~ 35556 36993 38430

120000 3Q 9J 1 32519 middot 340_86 35653 37 221 38788 40356 41 923

33530 35228 36927 38625 40323 42021 4371 9 45417

36110 37938 397137 41596 43425 45253 47082 48911

38689 40648 42608 44567 46526

41268 43358

43847

Universi ty of St Andrews College Gate North Street St Andrews Fife K Y 16 9AJ Scotland Tel +1334-462573 Fa +1334-4621 06 e-mail guaestor st-andrewsacuk

The Universi ty ofSt Andrews is a charity registered in Scotland No SC01 3532

_

7187_5 _

86250

lQD625

115000

129375

~75D

1 sect~l25

172500

186875

2Ql 25g

~625

230000

244375

258750

Notes 1 These ready reckoners are illustrative only and do not necessarily reflect the actual position for any

individual 2 They are based on the current rules of the USS and make no allowance for any potential future changes 3 Annual Allowance figures assume a CPI increase over the year of 20 based on the Governments

inflation target 4 Figures ignore any unused carry forward allowance 5 Figures ignore the impact of the scheme specific earnings cap 6 Figures should not be used as the basis for any decisions and independent financial advice should be

obtained 7 If salary growth is greater than that assumed the impact will be greater 8 Figures ignore the impact of any Added Years money purchase AVCs or contributions paid to any other

pension arrangements

Lifetime Allowance

The table below illustrates the approximate value of total accrued benefits based on a range of pensionable salaries and past service accrual The figures do not allow for any commutation of pension for additional cash and are based on the benefits accrued under the USS only Any benefits under other registered pension schemes must be added to the total value

Pensionable Service (years) Salary (pound) 5 10 15 20 25 30 35 40

50000 143750 215625 287500 359375 431 250 503125 575000

600~ 172500 258750 345000 4312O 517sectOD 6D3~5D 690000

70000 201250 301875 402 -500 503125 6D~75D 704375 805000

230000 345000 460000 575000 690000 805000 92000080Q0090000 258750 388125 517500 64687_5__776250 905625 1035000

100000 2875~9 431 259 575000 718750 sectsect2sectDD 1006250 1150000

11 Q900 316250_ 474375~~5DD 790625 948750 1106875 1265000

120000 345000 __517500 690000 862500 1035000 1207500 1380000

130000 373750 ~6D625 747500 934375 1121 250 1308 1 25 1495000

1 __4D~~OD 603750

431250 6468751 ~0amp00

160000 460000 690000

170000 488750 7331~

1JQOOO 776250_

1 819375

2 862500

indicates amount is above the tax limit indicates amount is close to the tax limit

8D5D~D 1006150

862500 1078125

920000 1150000

977500

1035000

1092500

University of St Andrews College Gate North Street St Andrews Fife KY 16 9AJ Scotland Tel +1334-462573 Fax +1334-4621 06 e-mail Quae torlst-alldrewsacuk

The University of St Andrews is a charity registered in Scotland No SCOl3532