Lifetime Allowance and ProtectionBP UK Pensions & Benefits

February/March 2014

The presentation will start shortly

FOR BP INTERNAL USE ONLY

• What is the Lifetime Allowance and what does the latest reduction mean to you?

• How to value your total pension benefits

• Your options

• A couple of examples

• Timescales

• Your actions

• Time for questions

Today’s session

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• The LTA is the value of the maximum total pension (from ALL schemes) an individual can receive in payment without paying additional tax

• Pension savings from all registered arrangements count towards the LTA (excludes State pension)

• Benefits normally tested against the LTA when they become payable

• Initial tax charge of 25% on exceeding the LTA on benefits from BP Pension Fund (BPPF) (equivalent to an extra 15% tax on top of the normal 40% tax rate you would expect to pay on your pension in retirement)

• Scheme administrator pays tax charge and reduces benefits accordingly

What is the lifetime allowance (LTA)?

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The reduced LTA

• Current LTA reduces from £1.5m to £1.25m from 6 April 2014

• If your current pension is above or close to £62,500 pa then you will be impacted by the latest reduction in the LTA

• To calculate whether you may be impacted:

− Final salary pension

− Current pension built up x 20 = value

− Take into account any salary increase at 1 April for BP pension benefits

− Defined contribution pension

− Current value of fund

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The reduced LTA & protections available

• No impact if you take benefits before 6 April 2014, providing benefits are below £1.5m

• Existing protections are not impacted

• Two new protections are available

− Fixed (FP14)

− Individual Protection (IP14):

*IP14 cannot be applied for before August 2014

FP14 IP14

Who can apply? No minimum LTA value Minimum LTA value £1.25m on 5 April 2014

Impact on LTAFixed at £1.5m. ‘Excess’

benefits subject to LTA Tax Charge

Individual LTA of value on 5 April 2014 up to 1.5m. ‘Excess’ benefits subject to LTA Tax

Charge

RestrictionsNo new benefits can be built

up after 5 April 2014, otherwise FP14 is lost

None

Application deadline 5 April 2014 5 April 2017*

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• Defined benefit arrangements

− BP DB Scheme

− BP money purchase AVC fund

− Defined benefit pension arrangements outside BP

Valuing your benefits when you take them

Annual pension at retirement*

Valuationfactor of 20

x

Any cash sum taken

PLUS

• Other money purchase pension benefits

− BP Defined Contribution (DC) 2010 Pension Plan

− Personal pensions

− Any pension arrangements outside BP used to buy an annuity

Fund value at retirement

* After allowing for any early retirement reduction factor

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• Defined benefit arrangements

− BP DB Scheme

− Defined benefit pension arrangements outside BP

Annual pension on 5 April 20141,2

Valuationfactor of 20

x

• Other pension arrangements

− BP Defined Contribution (DC) 2010 Pension Plan

− Personal pensions

− Any pension arrangements outside BP used to buy an annuity

Fund value on 5 April 2014

1. Based on service to 5 April 2014, ignoring any reduction that would apply if benefits are taken before NRD. Where benefits are not in payment

2. Money purchase AVC fund converted to pension amount based on conversion terms available from normal pension age

Valuing your benefits for IP14

The value of anyseparate lump sum builtup to 5 April 2014

PLUS

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Individual protection in practice

• If the standard LTA overtakes your personal LTA due to future increases made by the Government, you revert to the higher LTA

• Legislation expected to be finalised in summer 2014

Pension savings as at 5 April 2014

LTA without individual protection

LTA with individual protection

£1.3 million £1.25 million £1.3 million

£1.5 million £1.25 million £1.5 million

£1.7 million £1.25 million £1.5 million

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Your options if ……………….

• If you apply for Individual Protection 2014

− You may continue to build up future pension benefits and your current membership will remain unchanged

− You are entitled to opt out at any point in the future – you may then qualify for payment of the cash accrual allowance, providing the value of your BPPF benefits exceeds £1.25m

• If you are currently a member of the BPPF but are receiving salary linkage only – either as a result of BP’s transitional arrangements since 2012 or for Annual Allowance reasons – please contact a member of the UK Pensions & Benefits team to discuss your options in more detail

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Your options if you apply for Fixed Protection 2014

• If you apply for Fixed Protection 2014

− You cannot build up any future pension benefits, so

− You must opt out of your current BP pension arrangement

• If you are a member of the BPPF:

− You will become a deferred pensioner in the BPPF

− Your deferred pension will increase annually in line with RPI up to a maximum of 5%pa

− Life cover of 4x salary will be provided through BP’s insured arrangements (you will have a one-off opportunity to increase this through the registered scheme on 5 April 2014)

− You will receive income protection of 50% of basic salary, with the opportunity to increase this annually through your benefits, your way

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Your options if you apply for Fixed Protection 2014 (2)

• If your BPPF benefits are at least £1.25m in value, you will receive a cash accrual allowance (currently 35%¹·²), based on your basic salary, which is subject to tax and NI in the usual way

• If your BPPF benefits are below £1.25m in value, you will be entitled to the 15% flexible benefits allowance

• If you are a member of the DC2010 Pension Plan, you must

− Stop paying contributions through your benefits, your way

− Advise Aegon that you have applied for Fixed Protection 2014, so that you continue to receive fee discounts applicable to active employees

− Advise UK P&B

− You will continue to receive the 15% flexible benefits allowance

1. The amount of cash accrual allowance is not guaranteed and may change

2. Payable until the notional value of your BPPF benefit reaches 2/3rds, when it will reduce to 15% 11

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Worked example A

• Alan is a member of the BPPF

− age: 53

− accrued pension: £65,000

− basic salary: £130,000.

• Scenario1: Alan takes individual protection and takes early retirement with consent, aged 55

− he receives an individual LTA of £1,300,000 (65,000 x 20)

− his accrued benefits are now £72,000

− as he is VERA eligible, only his post-2006 benefits are reduced and he receives an early retirement pension of £65,000

− The HMRC value of his benefits is £1,300,000

− As this is below his individual LTA allowance, Alan does not need to pay any tax

• Scenario 2: Alan does not take individual protection and takes early retirement, aged 55

− his benefits exceed the LTA of £1,250,000

− he has to pay £12,500 in tax on the excess (25% * £50,000)

− His pension is reduced by £500 to meet this tax charge

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Worked example A

• Had Alan elected to take fixed protection 2014 he would have opted out the pension scheme on 5 April 2014 with a deferred pension of £65,000

• At age 55 Alan’s deferred pension has increased in line with inflation to £68,000

• As he is VERA eligible only, his post-2006 benefits are reduced and he receives an early retirement pension of £62,000

• The HMRC value of his benefits is £1,240,000

• As this is below his LTA allowance, Alan does not need to pay any tax

• Alan also received a gross cash accrual allowance of 35% of his basic salary

• He invested this cash accrual allowance and at his retirement date the invested value is £50,000

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Summary – worked example A

No protection

Individual protection

2014

Fixed Protection

2014

Pension after LTA charge*

£64,500 p.a. £65,000 p.a. £62,000 p.a.

Cash accrual allowance*

No No £50,000

Pension before LTA charge

£65,000 £65,000 £62,000

LTA £1,250,000 £1,300,000 £1,500,000

LTA charge £12,500[((£65k * 20) – £1,250k)*

25%]

Nil Nil

Reduction in pension to meet

LTA charge

£500 Nil Nil

* Pension figures quoted are gross, cash accrual allowance figures are net of tax

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Worked example B

• Barbara is 57, has an accrued pension of £70,000 and basic salary of £150,000.

• She decides to take fixed protection and receives a gross cash accrual allowance of 35% of her basic salary at 5 April 2014.

• She retires at her normal pension age of 60 and her pension has increased in line with inflation to £75,000.

• The HMRC value of her benefits is £1,500,000. As this is below the LTA for fixed protection, she does not have to pay a tax bill.

• Barbara saved her cash accrual allowance. At her retirement date the value of this savings account is £85,000

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Worked example B

• Had Barbara elected to continue benefit accrual and not take fixed protection, she would have retired with a pension of £85,000 at age 60

• The HMRC value of this benefit is £1,700,000

• The LTA of £1,250,000 would have applied to her and she would have had to pay £112,500 in tax on the excess (25% * £450,000)

• Barbara elects to pay this tax charge via reduction to pension of £5,000, resulting in a pension from the BP Pension Fund, net of Lifetime Allowance Charge of £80,000 p.a.

• If Barbara had elected to take individual protection 2014 then her LTA would have been £1,400,000, resulting in a lower tax charge of £75,000 and a pension from the BP Pension Fund, net of LTA charge of £81,700

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Summary - worked example B

No protection

Individual protection

2014

Fixed Protection

2014

Pension after LTA charge*

£80,000 p.a. £81,700 p.a. £75,000 p.a.

Cash accrual allowance*

No No £85,000

Pension before LTA charge

£85,000 £85,000 £75,000

LTA £1,250,000 £1,400,000 £1,500,000

LTA charge £112,500 [((£85k * 20) – £1,250k)*

25%]

£75,000[((£85k * 20) – £1,400k)*

25%]

Nil

Reduction in pension to meet

LTA charge

£5,000 £3,300 Nil

* Pension figures quoted are gross, cash accrual allowance figures are net of tax 17

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The individual protection decision

• Key decision is if you wish to continue to build up future pension benefits

• It is strongly recommended that you consider electing for Individual Protection 2014 if your LTA is greater than £1.25m on 5 April 2014.

• Even if you have Fixed Protection 2012, you may wish to consider electing for Individual Protection 2014 in case you lose your Fixed Protection 2012 in the future.

• Financial advice recommended – ensure you take appropriate action

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The fixed protection decision

• Very complex decision depending on:

− Retirement date

− Value of employer pension contributions

− Value of cash alternative

− Future increase in LTA

− Tax-free cash implications

− Tax position pre- and post-retirement

• Financial advice recommended – ensure you take appropriate action

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Reminder - post 5 April 2014

No protection

Individual protection

2014

Fixed protection

2014

Continued pension accrual after 5

April 2014?

Yes Yes No

Increase in accrued BP

benefit prior to retirement age

Link to salary growth

retained

Link to salary growth retained

In line with annual

increases in the RPI

LTA £1.25m £1.25 - £1.5m £1.5m

Cash accrual allowance

No No Yes*

Who qualifies? All Only individuals whose benefits

LTA value assessed >

1.25m on 5 April 2014

All

* See previous slides for qualification criteria

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Lifetime allowance calculator

• Calculator developed to help you decide• Above LTA?• Apply for Individual or Fixed Protection or both?• Comparison LTA tax vs cash alternative

• Use the calculator to help inform your decision: https://ukpensiontax.bp.com

• Get independent financial advice: www.unbiased.co.uk

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LTA calculator screenshots

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LTA calculator screenshots

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LTA calculator screenshots

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LTA calculator screenshots

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Timescales and actions

• Fixed Protection 2014 - if member of BPPF

− Notify HMRC of election by 5 April 2014

− Notify UK P&B that you wish to opt out – there will be a special form for you on PensionLine to download, complete and return by 31 March 2014

− You will receive new Ts&Cs which you will need to sign and return

• REMEMBER

− You must complete the opt out form if you want to stop building up future pension in BP – just telling us you have applied for Fixed Protection is not enough

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Timescales and actions (2)

• Fixed Protection 2014 - if member of DC2010 Pension Plan

− Notify HMRC of election by 5 April 2014

− Cease contributions through your benefits, your way by 1 April 2014

− Advise Aegon that you have applied

− Advise UK P&B so that we can amend your record and monitor to help check you don’t inadvertently lose your protection

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Timescales and actions (3)

• Individual Protection 2014

− Obtain value of pension arrangement(s) as at 5 April 2014

− Notify HMRC between summer 2014 and 2017

− Decide when/if you wish to opt out of BP pension arrangement

− No further action at this stage unless you decide to opt out

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Your actions

Decision• Protection?• Individual?• Fixed?• Both?• Opt out of BP

pension now or in the future?

Individual• No need to

opt out or notify UK P&B

• Apply to HMRC before April 2017

Fixed• Apply to

HMRC by 5 April 2014

• DB - complete opt out form

• DC – cease contributions and advise UK P&B

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Additional notes

Notes

• If you have Fixed Protection 2012, then your LTA is £1.8m and you do not need to apply for Fixed Protection 2014

• If you have applied – or intend applying for an LTA enhancement factor as a result of overseas service, you also need to apply for Individual and/or Fixed Protection in 2014. Otherwise the enhancement factor will be applied to the current LTA at the point you retire.

• Please provide copies of your Individual Protection 2014 and/or Fixed Protection 2014 certificates to UK P&B as soon as possible, to ensure retirement benefit calculations are correct

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Useful links

• Queries to UK P&B : pensioncomms@bp.com

• PensionLine: https://pensionline.bp.com

• Aegon: http://pension.aegon.co.uk/bp

• HMRC pension savings and Lifetime Allowance protection:

• http://www.hmrc.gov.uk/pensionschemes/pension-savings-la.htm

• Independent financial advice: www.unbiased.co.uk

• LTA calculator: https://ukpensiontax.bp.com

• Your benefits, your way: www.bp.com/yourbenefits

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Risk warning

• This presentation is for information only.  It does not take into account your personal circumstances and does not constitute financial advice.  Neither anyone in the BP Group nor the Trustee of the BP Pension Fund can provide you with advice; if you are unsure as to what action to take we strongly recommend that you seek independent financial advice.  For a list of financial advisers in your area you can visit www.unbiased.co.uk.  Please be aware that you may be charged a fee for any advice.

• The information in this presentation is based on our understanding of current tax rules and other legislation, which is subject to future change.  Please note that where reference is made to tax or legal matters, UK Pensions & Benefits is not qualified to provide tax or legal opinions.  BP UK Pensions & Beneifts accepts no liability for errors or omissions. 

• Please note the value of investments, and income from them, may fall as well as rise. This includes but is not limited equities, government or corporate bonds, derivatives and property, whether held directly or in a pooled or collective investment vehicle.  Further, investments in developing or emerging markets may be more volatile and less marketable than in mature markets.  Exchange rates may also affect the value of investments.  As a result, an investor may not get back the full amount of the original investment.  Past performance is not necessarily a guide to future performance

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Thank you

• Any questions?

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