How are my benefits taxed?

Any benefits paid from BAE Systems pension schemes are subject to both the Rules of the schemes 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

 
Pension schemes trustees have the discretion to decide to whom lump sum death benefits are paid. This means that most lump sum death benefits are paid outside a 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 has been set at £40,000 since 6 April 2014. 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 schemes, including Additional Voluntary Contributions.
 

Tapered Annual Allowance

 
In April 2016 HMRC introduced the Tapered Annual Allowance and since April 2020 the Tapered Annual Allowance has reduced the standard Annual Allowance by £1 for every £2 of ‘adjusted income’ between £240,000 and £312,000. 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 a measure of the increase in pension savings over the tax year. Anyone with an adjusted income of over £312,000 has a fully tapered Annual Allowance of £4,000.
 
Prior to April 2020 the taper reduced the standard Annual Allowance by £1 for every £2 of adjusted income over £150,000, subject to a maximum reduction of £30,000.  Therefore, anyone with adjusted income of £210,000 or more had an Annual Allowance of £10,000.
 
It is important to note that since April 2020 the standard Annual Allowance is not reduced if your threshold income for the tax year was £200,000 or less (or £110,000 for the tax years 2016/17 to 2019/20), no matter what your adjusted income was. Threshold income is your adjusted income but excluding the value of your pension benefits over the tax year.
 
If you exceed the Annual Allowance or the Tapered Annual Allowance you must declare this by completing a Self-Assessment tax return with HMRC no later than 31 January of the following year.
 

Money Purchase Annual Allowance

 
If you have flexibly accessed and started to take money from a defined contribution (money purchase) pension, the amount you can then pay into a defined contribution arrangement and still get tax relief reduces. This is known as the Money Purchase Annual Allowance and it is currently £4,000. This allowance covers both your own contributions and any other contributions paid into your pension pot on your behalf.
The main situations when you will trigger the Money Purchase Annual Allowance are:
 
  • If you take your entire pension pot as a lump sum or start to take ad-hoc lump sums from your pension pot
  • If you put your pension pot money into a flexi-access drawdown scheme and start to take an income
  • If you buy an investment-linked or flexible annuity where your income could go down
 
If you buy an annuity that is not an investment-linked or flexible annuity (i.e. a lifetime annuity) then the trigger does not apply. You will be subject to the standard Annual Allowance (£40,000) or the Tapered Annual Allowance as applicable.
 

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 incurring a tax charge. The Lifetime Allowance has been sent at £1,073,100 since 6 April 2020, which is 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.
 
Transitional protections are available for those who have already built up large pension savings. Information on the  current open protections can be found at gov.uk.

 

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 and 2016 and Individual Protection 2014 and 2016.
 

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%.

 

Where can I go for more information?

 
Further information on the various Allowances and how they might affect you can be found at: gov.uk/tax-on-your-private-pension.

The Pensions Advisory Service produces a range of leaflets, guides, forms and reports on various issues, including the above Allowances. Please feel free to download them at: pensionsadvisoryservice.org.uk/publications/category/spotlights.

Also refer to the Pension Guide - Triggering the Annual Allowance which can be found on the ‘More Info’, ‘Pension Guides’ page of this website.