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The new rules for pensions and the teachers pension scheme

Apr 11, 2011

By Alastair Lyon, Partner, Crowe Clark Whitehill, audit partner and member of the firm’s Not for Profit unit.  Alastair acts for several schools and has been involved in the sector for over 20 years.

As a bursar, you are expected to have a good understanding of the Teachers Pension Scheme.  It may help in your dealings with teachers to know about a couple of changes that are coming in that affect all teachers but particularly those who have recently had a substantial pay rise or promotion.

On 6th April 2011 the Annual Allowance for pension contributions, and the amount that can be built up in pension arrangements, are being reduced. These changes can be summarised as:-

  • the Annual Allowance for each tax year (6th April – 5th April) will be reduced to £50,000, with an ability to ‘carry forward’ unused relief from the preceding three tax years.
  • the Lifetime Allowance will be reduced from £1.8 million to £1.5 million from 6th April 2012.

What is the Annual Allowance calculation?

The Teachers’ Pension Scheme, uses a formula to calculate the deemed contribution for any tax year.  In simple terms this is the difference between someone’s pension entitlement at the end of the year less their entitlement at the start of the year, all multiplied by 16.  This is not the same as the contributions actually paid! If this movement strays over the new limit of £50,000, then the excess will be taxable.  So for example if a teacher’s pension entitlement moved from £25,000p.a. to £28,000p.a. in one year, then the deemed contributions are £28,000-£25,000=£3,000 X 16=£48,000 which is just under the limit.

What is the Lifetime Allowance (“LTA”)?

At the point of retirement, the pension entitlement will be multiplied by a factor of 20 e.g. a pension entitlement of £10,000 equates to £200,000 when tested against the LTA.

Should retirement benefits from all sources exceed the LTA then the excess can be returned to them less a 55% tax charge, or, if taken as income it would suffer a 25% tax charge.

The above is just an overview, and there are a lot more detailed rules.  If you would like to know more it is recommended you contact a professional advisor.

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