The FPS has to comply with rules set by HM Revenue and Customs (HMRC). There are, for example, limits on the amount of pension and lump sum which can be taken by a pension scheme member before tax charges apply.
The two main limits on your benefits are the annual allowance and the lifetime allowance.
The growth in the value of your pension each year must be compared with an annual limit set by the Treasury. If the value exceeds the limit, tax would be due, payable through self-assessment. Or you could elect that the fire and rescue authority should make the payment on your behalf and collect the sum due from your benefit entitlement (this is referred to as the "scheme pays" method).
When benefits are due the total value must be tested against the lifetime allowance, also set annually. If the value exceeds the limit, tax would be deducted by the fire and rescue authority and paid over to HMRC.
The testing of the value of benefits is in respect of all pension benefits you may have accrued, including from arrangements other than the FPS. Consequently the fire and rescue authority will ask you to provide statements in respect of any other pension arrangement you may have so that they can check the total value of benefits before making payment from the Scheme. The authority can give you more details of the way in which tax rules work, how benefits are valued, current limits and the tax chargeable.
This is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge. From the tax year 2016/2017 the pension savings year for all pension schemes runs from 6 April to 5 April; this is called the pension input period. Prior to the tax year 2016/2017 the pension savings year in the FPS ran from 1 April to 31 March. (Although in 2015/16 it ran from 1 April 2015 to 5 April 2016).
The annual allowance limit since 2011/12 is set out below:
|2015/16||£80,000 (transitional rules applied)|
*From 2016/2017 a new tapered allowance is being introduced for higher earners.
Generally, assessing your pension growth for the annual allowance covers any pension benefits you may have in all tax-registered pension arrangements where you have been an active member of the scheme during the tax year i.e. you have paid contributions during the tax year (or your employer has paid contributions on your behalf).
You would only be subject to an annual allowance tax charge if the value of your pension savings for a tax year, increase by more than the annual allowance for that tax year, or if you are subject to the tapered annual allowance, if your savings increase by more than your tapered annual allowance.
However, a three year carry forward rule allows you to carry forward unused annual allowance from the previous three tax years. This means that even if the value of your pension savings increase by more than the annual allowance in a year you may not be liable to the annual allowance tax charge.
For example, if the value of your pension savings in 2015/16 increased by £50,000 (i.e. by £10,000 more than the annual allowance) but in the three previous years had increased by £25,000, £28,000 and £30,000, then the amount by which each of these previous years fell short of the annual allowance for those three years would more than offset the £10,000 excess pension saving in the current year. There would be no annual allowance tax charge to pay in this case. To carry forward unused annual allowance from an earlier year you must have been a member of a tax registered pension scheme in that year.
Most people will not be affected by the annual allowance tax charge because the value of their pension saving will not increase in a tax year by more than the annual allowance limit or, if it does, they are likely to have unused allowance from previous tax years that can be carried forward.
If, however, you are affected you will be liable to a tax charge (at your marginal rate) on the amount by which the value of your pension savings for the tax year, less any unused allowance from the previous three years, exceeds the annual allowance.
The Avon Pension Fund will inform you if your FPS pension savings in a pension input period are more than the annual allowance limit no later than 6 October following the end of the relevant tax year.
Special rules apply if you have any benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed on or after 6 April 2015, or you are a higher earner to whom the 'tapered annual allowance' applies.
More details can be found in the factsheet Pensions Taxation - Annual Allowance
Annual Allowance 'Scheme Pays'
There are certain circumstance where the scheme can pay if you exceed your Annual Allowance. More details can be found in the factsheet Taxation - Annual Allowance 'Scheme Pays'
The lifetime allowance is the total value of all pension benefits you can have without triggering an excess benefits tax charge. If the value of your pension benefits when you draw them (not including any state retirement pension, pension credit or any partner's or dependant's pension you may be entitled to) is more than the lifetime allowance, or more than any protections you may have (see below), you will have to pay tax on the excess benefits. The lifetime allowance covers any pension benefits you may have in all tax-registered pension arrangements - not just the FPS.
The lifetime allowance limit has been steadily reducing from 2012/13 as below:
For pensions that start to be drawn on or after 6 April 2006, the capital value of those pension benefits is calculated by multiplying your pension by 20 and adding any lump sum you draw from the pension scheme.
For pensions already in payment before 6 April 2006, the capital value of these is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.
When any FPS benefit, or any other pension arrangement you may have, is put into payment you use up some of your lifetime allowance - so even if your pensions are small and will not be more than the lifetime allowance you should keep a record of any pensions you receive. If you have a pension in payment before 6 April 2006, this will be treated as having used up part of your lifetime allowance.
If your FPS benefits are more than your lifetime allowance you will have to pay tax on the excess. If excess benefits are paid as a pension the charge will be 25%, with income tax deducted on the ongoing pension payments; if the excess benefits are taken as a lump sum they will be taxed once only at 55%.
There are protections called primary lifetime allowance protection, enhanced protection, fixed protection, fixed protection 2014 and individual protection 2014, fixed protection 2016 and individual protection 2016.
Use the Lifetime Allowance Quick Check tool to work out if you are likely to exceed the Lifetime Allowance.
You can get more information about tax allowances for both the annual and lifetime allowance, and protections that are in place, as well as special provisions for very high earners from HMRC.
HMRC have also produced the following guides:
Check if you have unused annual allowances on your pension savings - this provides guidance on carrying forward unused annual allowances from previous years if your pension savings are more than your annual allowance.
Work out your reduced (tapered) annual allowance – If you are affected by the tapered annual allowance, this will help you work out how much annual allowance you get for your pension savings for 2016 to 2017 and each later tax year.
Who must pay the pensions annual allowance tax charge - Find out when your pension scheme must pay some or all of the tax for you and when they can choose to do so.
If you have exceeded your annual allowance and you do not have sufficient carry forward from previous years to cover the excess, you must declare this on your self-assessment tax return, even if your pension scheme are paying the tax charge on your behalf. The following help sheet has specific information on declaring the annual allowance charge on your self-assessment return.