How are my benefits taxed?

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.

Retirement pension

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.

Annual Allowance

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 2020/2021 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 Additional Voluntary Contributions.

In the period from 6 April 2016 to 5 April 2020, for members who had a total 'adjusted' income of more than £150,000, the Annual Allowance reduced by £1 for every £2 of taxable income above £150,000. This is called tapering. In the period to 5 April 2020 tapering did not normally apply if taxable income was less than £110,000. The maximum reduction was £30,000, so anyone with an 'adjusted' income of £210,000 or more would 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.

From 2020/21 the Annual Allowance will only begin to taper down for individuals who have an adjusted income above £240,000 and the allowance will once again reduce by £1 for every £2 of taxable income.  The Annual Allowance will taper down further than the £10,000 in place during previous tax years, so that those with an adjusted income over £312,000 will have the Annual Allowance fixed at £4,000 a year.
Members must declare this by completing a Self-Assessment tax return with HM Revenue and Customs no later than 31 January of the following year.
This is a brief summary on the Annual Allowance and further information on the detail of its operation. If you think you may be impacted by it, you may wish to seek independent financial advice. 

Lifetime 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 £1,073,100 for the tax year 2020/2021, which is the equivalent to a total pension of approximately £53,655 a year. Benefits may be paid above this value but there will be a tax charge called a Lifetime Allowance Charge. Any tax due will be deducted from the settlement of benefits at retirement. At retirement an individual will need to sign a declaration confirming whether any pension benefits have already been assessed against the Lifetime Allowance. Since April 2018, the Lifetime Allowance increases each year in line with Consumer Price Inflation.
Transitional protections are available for those who have already built up large pension savings. Information is available on the current open protections.


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) Lifetime Allowance if they have previously applied to protect their benefits which were above the Lifetime Allowance, 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 is available on the current open protections.


Lifetime Allowance Charge

This is the charge applied when the total value of benefits is more than the Lifetime Allowance. Lump sums are taxed at 55% and pensions at 25%.