CPPIB Cash in Lieu Allowance Guide

Cash in Lieu Allowance Guide (Including Tapered Annual Allowance Guide)

Contents

Page Important Notes…………………………………………………………………………………………….. 3 Lifetime Allowance …………………………………………………………………………………………. 4 Tapered Annual Allowance …………………………………………………………………... .......... 5 Cash in Lieu Allowance ………………….………………………………………………....... ........... 8 General Rules of the CIL Allowance and Application Instructions …………………… 11

The Cash in Lieu Allowance Guide (Guide) has been produced to help members of staff understand the complex rules surrounding pension participation and allowances. This Guide has been prepared by CPP Investment’s Benefit Advisers, James Murray Associates (JMA). If you have any questions, please refer to JMA ’s contact details below:

David Keary (davidk@jmurray.co.uk) – 0208 642 3680 Nick Young (nyoung@jmurray.co.uk) – 0208 642 3680

Important Notes 1. CPP Investments (CPPIB) reserve the right to change or withdraw the Cash In Lieu Allowance Program at any time and without notice. 2. CPPIB fully encourages standard pension membership (default option) where an individual is not affected by legislative restrictions. Only essential requests for participation in the Cash in Lieu Allowance Program will be accepted – requests will be monitored closely. 3. The Guide is based on current UK tax and UK pension legislation. HMRC can change this at any time in the future. Whilst every effort has been made to ensure the accuracy of this Guide, it is provided for information purposes only. It does not in itself confer any right or privilege and all benefits will be paid in accordance with CPPIB’s standard approach.

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Lifetime Allowance

Overview

• Prior to 06 April 2023, the Lifetime Allowance (LTA) was the maximum pension value that could be generated by an individual before excess tax charges applied.

• The LTA reached a peak of £1.8m in 2011/2012 but subsequently reduced in 2012, 2014 and 2016. It stood at £1,073,100 in 2022/2023 before being abolished.

Fixed Protection

• Individuals may have previously applied for Fixed Protection in 2016, 2014 or 2012 or even Enhanced Protection, going much further back.

• These forms of protection meant that higher LTAs could be retained but in return, no further contributions could be paid after certain dates. This includes both personal and employer pension contributions.

• Paying additional contributions after April 2023 does not forfeit any form of Protection. Therefore, contributions can re-start for any members with Protection.

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‘ Tapered Annual Allowance

• Tapered Annual Allowance (TAA) is a complex piece of legislation, in effect from 06 April 2016, that only affects higher earners. • In most circumstances, individuals whose total taxable income (plus the value of company pension contributions) is less than £250,000 per year will not be affected. • Individuals whose total income is above £250,000 may be affected and should read on to find out more. • Individuals whose total income is more than £260,000 are impacted and should be fully aware of the changes. • The Annual Allowance (AA) is the maximum pension contribution that can be paid in a year (tax charges apply to any excess). • The standard AA is £60,000 * per tax year. This includes both personal and employer pension contributions. • For higher earners, the AA is reduced by £1 for every £2 of income over £260,000 in a tax year. • AA reduces to an absolute minimum of £10,000 per year. • If income is £360,000 or more, AA will be reduced by £50,000 to the £10,000 minimum (£100,000 ‘excess’ income divided by two).

 It may be possible to pay more than this using the 3-year carry forward facility. Individuals potentially impacted should calculate their available carry forward allowance.

Test 1 – Adjusted Income

• Adjusted Income consists of an individual’s income from all sources before tax (salary, bonus, benefits in kind, profits from self-employment, rental income, investment income). PLUS

• The value of any employer pension contributions.

If the Adjusted Income figure exceeds £260,000 in a tax year, the tapering of AA will apply. If the Adjusted Income exceeds £360,000 the AA will be just £10,000.

Test 2 – Threshold Income

In a small number of situations, an individual that fails the Adjusted Income test may not see their AA reduced:

• Threshold Income uses the same starting point (income from all sources before tax). • Personal pension contributions can be deducted. • Employer pension contributions are not added.

If the Threshold Income is £200,000 or less for the tax year, the AA will not be reduced.

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H ow to Value Employer Pension Contributions

• Money Purchase Pension arrangements are valued by the monetary amount that an employer contributes to an individual’s pension plan over the course of a tax year. • CPPIB’s Group Personal Pension plan that is administered by Aviva is an example of a Money purchase Pension arrangement.

AA Tax Charge

• If an individual exceeds their AA (and has zero carry forward allowance from previous years), the excess amount is included in their taxable income for the year. • In most instances, this will mean a 45% tax charge on the excess contribution over the AA. • As an example, if an individual who earns in excess of £360,000 receives an employer pension contribution of £20,000, this will be £10,000 above their tapered AA. The tax charge will be 45% on the £10,000 excess over the AA (£10,000 x 45% = £4,500 tax bill). It may be possible to instruct the pension provider to pay the tax charge from the underlying pension fund (as opposed to paying the tax personally). However, this depends on meeting certain time restrictions and other conditions. Impacted individuals should refer to the pension provider or their personal advisers for further details. • Be aware of how much carry forward allowance exists and how long this will last (see following example). • Where possible, take advantage of the Threshold Income rules by paying personal pension contributions. • Consider reducing your personal pension contributions if this protects your employer contributions. • Undertake all sensible tax planning strategies to reduce taxable investment income. • Consider any alternative options, such as CPPIB ’s Cash in Lieu Allowance Program, that may be available. Things to Consider

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Carry Forward – An Example

• Any unused pension AA can be carried forward from the previous three (3) years to help accommodate any excess contribution above the AA. • The current year’s AA must be used first (before any carry forward). Thereafter, any unused AA from the third year back is used, followed by the second and finally, the previous year. • The following simplified example explains more:

Total Pension Contributions Paid (Company and Personal)

Annual Allowance in Year

Spare Allowance for ‘Carry Forward’

Tax Year

Total Income

2016/2017

£100,000

£20,000

£40,000

£20,000

2017/2018

£110,000

£20,000

£40,000

£20,000

2018/2019

£120,000

£40,000

£40,000

£0

2019/2020

£360,000

£30,000

£10,000

£0

2020/2021

£360,000

£24,000

£4,000

£0

2021/2022

£360,000

£24,000

£4,000

£0

2022/2023

£360,000

£4,000

£4,000

£0

2023/2024

£360,000

£10,000

£10,000

£0

• Please note that between 2016/2017 and 2019/2020 inclusive, tapering started when incomes exceeded £150,000 - and ended at £210,000. The minimum tapered contribution was £10,000 in these years. • Between 2020/2021 and 2022/2023 inclusive, tapering started at £240,000 and ended at £312,000. The minimum tapered contribution was £4,000 in these years. • From 2023/2024 onwards, tapering starts at £260,000 and ends at £360,000. The minimum tapered contribution is £10,000. 1. The individual is a consistent higher earner. Full tapering has applied from 2019/2020. 2. The individual was working within the AA until 2019/2020 when the AA was exceeded by £20,000. However, there was £20,000 of unused AA from 2016/2017 (the third year back). This was carried forward into 2019/2020 to justify the excess contribution and legitimately avoid any AA tax charge. 3. In 2020/2021, the AA was again exceeded by £20,000. The spare AA from 2017/2018 was carried forward to justify the excess contribution. 4. In 2021/2022 the AA was again exceeded by £20,000. There is no remaining AA that can be carried forward. This meant that an AA tax charge of £9,000 was due (£20,000 x 45%). 5. From 2022/2023, contributions have been deliberately limited to the minimum level so not to exceed the AA.

Please note that you must have had a UK approved pension arrangement in place during the previous three (3) years to carry forward although there does not have to be any contributions made during these years.

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Cash in Lieu Programme

Overview

To help individuals genuinely impacted by the TAA, CPPIB offers the Cash In Lieu Allowance Program (CIL).

An individual should carefully check to see if they are impacted by the TAA. It is important to remember that standard pension membership is most likely to be the best of the available options. Only if standard pension membership is negatively impacted by the TAA should an individual consider applying for the CIL. Rules are in place to prevent non-essential requests for participation.

How Does CIL Work and What Are The Rules of Participation? TAA Impacted Individuals

• The key objective is to help individuals facing restricted annual pension contribution allowances (as a result of the TAA). • For individuals that qualify for (and opt-in to) CIL, the CPPIB employer pension contributions continue at the minimum level. This is £10,000 per year (the amount of pension contribution that can be paid, no matter how severely an individual is impacted by the TAA) with a CIL allowance (pre-deductions) providing the remainder of the entitlement. • To emphasise, the most efficient contribution of all is the employer pension contribution (as opposed to using some of the limited allowance with mandatory personal contributions). Employer contributions are optimised with the CIL Allowance Program. • For individuals who are only partially affected by the TAA (where standard pension contributions are still within the partially tapered allowance or where sufficient carry forward allowance remains to justify full pension membership for at least another year), CIL should possibly not be selected (you can elect to switch to CIL at a subsequent review point). • Individuals with an annual salary of £150,000 or greater (and have total taxable income of >£260,000) can request to participate in the CIL Allowance Program. • The CIL allowance: ➢ Qualifying participants in CIL will receive a flat rate CPPIB employer pension contribution of £833.33 per month (equivalent to £10,000 per year – using up the entire TAA). ➢ Zero mandatory employee pension contributions. ➢ CIL monthly allowance payment equivalent to the CPPIB employer pension contribution entitlement that exceeds £10,000 per year. ➢ Lump sum CIL allowance payment based on the annual in-year incentive award. Employer pension contributions are subject to the definition of pensionable earnings. ➢ Pensionable earnings are defined as an individual’s annual base salary plus their in -year incentive award up to a maximum of 50% of their basic salary. • The CIL allowance payment will be reduced by 13.8% to take into account the current level of corporate NIC CPPIB must pay on this type of allowance payment (i.e. cash payment). Please note that if the rate of corporate National Insurance changes, this deduction will change accordingly. • The CIL allowance payment will be subject to personal NIC and income tax in the normal way (exactly the same as basic salary). • An Example of how the CIL allowance works in practice is shown on the following pages.

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Example – Member A Impacted by the Tapered Annual Allowance

• Member A has an annual salary of £300,000. Member A also receives rental income of £15,000 per year. When variable incentive award payments are added, Member A ’s income exceeds £360,000. • The employer contribution rate is 10% of pensionable earnings. Pensionable earnings are defined as an individual’s annual base salary plus their in -year incentive award up to a maximum of 50% of their basic salary. • Member A has invested heavily towards their pension over recent years and has no carry forward allowance available. • Member A ’s total income means that they are fully impacted by the TAA. On this basis, the maximum annual contribution that can be efficiently paid into their pension is £10,000. With standard pension membership, they would be entitled to routine employer contributions of £30,000 (£300,000 x 10%) plus £15,000 from their in-year incentive award related employer contribution (£150,000 x 10%). If the standard 3% employee pension contribution is also included, Member A would exceed their TAA by an even greater amount. • Member A therefore applies for the CIL allowance (instead of standard pension membership), to ensure that they do not face an unwanted tax charge on any excess pension contributions. This works as follows: ➢ Ongoing employer pension contributions of £10,000 per year (£833.33 per month). ➢ Zero personal pension contributions (the main objective is to optimise the employer contributions). ➢ Pre-deduction CIL allowance of £20,000 per year (£30,000 entitlement - £10,000 continuing pension contributions) ➢ Corporate National Insurance is not payable on pension. It is, however, payable on CIL allowance payments since they are considered cash payments. ➢ Consequently, this needs to be deducted from the CIL allowance as follows: ➢ (£20,000/113.8%) = £17,574.69 ➢ This CIL allowance of £17,574.69 per year (£1,464.55 per month) is added to Member A ’s pay from April. This CIL allowance will be subject to income tax and personal National Insurance in exactly the same way as salary. ➢ Member A also receives a single CIL based on the in-year incentive award. Pre-deduction, this is £15,000 (£150,000 x 10%). ➢ After the deduction of the corporate National Insurance, the payroll CIL allowance becomes £13,181.02. Again, this will be subject to income tax and personal National Insurance. • CPPIB continues to provide the same level of entitlement, just in the form of CIL and employer pension contributions. • Member A is advantaged that they have the CIL allowance now (albeit less tax and personal NI). In contrast, if Member A continued with standard pension membership, they would have to pay 45% tax on the excess contribution over the TAA in the very short term plus normal income tax on the eventual pension income when they reach their pension withdrawal age (any time from age 55 onwards, rising to 57 from 2028).

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Example: Member A

£300,000 Basic Salary + £150,000 Annual Incentive

On £300,000 Basic Salary

Standard Routine Employer Contribution to Pension

10%

£30,000

On Qualifying Annual Incentive of £150,000

Personal Contribution 0%

£0 Applies for Cash in Lieu Allowance

CIL Allowance

10%

£15,000

Employer Contribution to Pension Pre-deduction monthly CIL Allowance

£10,000

10%

£20,000

Corporate NI (13.8%) must be paid on a Cash in Lieu allowance

£15,000 ÷ 113.8% = £13,181.02

CIL Allowance of £10,000 per year (£833.33 per month)

£10,000 (£833.33 per month) added to Pension

‘One off’ £ 13,181.02 added to Member A ’s Pay

Corporate NI (13.8%) must be paid on a Cash in Lieu allowance

Subject to Income Tax and personal NI in the same way as Salary

£20,000 ÷ 113.8% = £17,574.69 Annual CIL

£17,574.69 ÷ 12 months = £1,464.55 added to monthly pay

Subject to Income Tax and personal NI in the same way as Salary

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General Rules of the CIL Allowance

• The CIL Allowance has been created to help only individuals genuinely affected by pension legislation. • The CIL does not form part of your contractual salary. CIL does not affect any future salary related pay changes or anything else linked to basic salary (e.g. Group Life Assurance, Group Income Protection). • In the event of a future salary change, the CIL will be recalculated accordingly from the same calendar month. • The CIL will start from April onwards (or from the month of opt-in, for newly eligible individuals). • Requests for non-default levels of CIL or pension contribution will not be considered. Individuals will have the opportunity to use any spare pension allowance by participating in CPPIB ’s Salary Exchange Scheme or In-Year Incentive Award Exchange Scheme. • If the CIL option is selected, this will apply for the entire tax year. It is not possible to switch between standard pension membership and CIL mid-year unless an individual receives a mid-year promotion and/or pay increase. • A review period will be set for March each year. During this period, individuals will have the option to select CIL for the first time (if qualifying conditions are met) or switch back to standard pension membership if the TAA is not going to apply in the following tax year. • IMPORTANT NOTE – all CIL participants will not be asked to re-apply each year. If an individual previously selected CIL, it will be assumed that they wish to continue with the CIL allowance unless advised to the contrary during the March review period. • The CIL Allowance stops on cessation of employment with CPPIB.

To select the CIL allowance you must complete the provided CIL Application form (this should be completed on screen) and email to James Murray Associates (corporate@jmurray.co.uk)

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