How does tax apply to pensions?
The Fund is registered under the 2004 Finance Act, which means it receives certain tax advantages. In return, your benefits must fall in line with certain HM Revenue & Customs rules.
Income tax
'Tax relief' currently applies to pension contributions, and cash sums paid from the Career average plan (on retirement or death) are currently free of income tax.
When your pension comes into payment, you are liable for income tax on it.
Special tax rules for pensions
Tax-free cash
On retirement, you can take part of your benefits as tax-free cash. However, there are restrictions on how much tax-free cash you can take when you retire – we will let you know the maximum figure that applies to you nearer the time.
This is because the rules for tax-free cash are quite complicated. For arrangements where you build up an account – like the Investing plan – you can take up to 25% of the value of that account as cash when you retire. For arrangements where you build up a pension – like the Career average plan – the percentage is much harder to work out and depends on your age, among other things. Further details will be provided as you near retirement.
Lifetime allowance
The lifetime allowance is the total amount of tax-approved benefits you can build up over your working life before you must pay a special tax charge on them. This includes benefits from all sources except the State – so if you have benefits due from tax-approved schemes you were in before you joined Unilever, or any personal pension plan or stakeholder plan, they all count.
The allowance should only affect a small number of people. For the 2010/2011 tax year, it is £1.8 million. Most of you will be able to see how high this figure is by comparing the value of your benefits with the allowance.
To do this, first take the total tax-approved pension you have built up so far and multiply it by 20. This figure is set by the Government to make it simple for people to work out the 'value' of their pension.
Then add the amount you get to:
- the 'value' of any deferred pensions you have in company schemes you belonged to before or after joining Unilever – remember to multiply any pension amounts by 20 first;
- the value of your Investing plan account (if you have one);
- the value of any personal or stakeholder pension plan benefits you have; and
- the 'value' of any pensions from tax-approved plans which you are already receiving (multiply the annual amount by 25 before adding to your total).
Another way of looking at how high the lifetime allowance is set is to imagine that the only benefit you need to take into account was your Unilever pension. If this was the case, your annual pension for the 2010/2011 tax year would have to be £90,000 a year (£1.8 million divided by 20) for you to reach the allowance.
Please note, however, that it is your responsibility to keep track of your benefits against the allowance. If you are over the allowance when you retire, you will pay a special pensions tax charge, known as the 'lifetime allowance charge', on the excess. The excess may be paid as pension or it may be possible for it to be drawn as a cash sum. In either event, the excess will effectively be subject to an overall tax rate, currently of 55%.
Annual allowance
The annual allowance is the yearly amount of tax-approved benefits you can build up before you must pay a special tax charge on them. The allowance should only affect a small number of people. For the 2010/2011 tax year, it will be £255,000. Most of you will be able to see how high this figure is by comparing the value of your benefits with the allowance.
To do this, first take the pension you have built up over the year – that is, the difference between your total pension at the start of the year and your total pension at the end of the year – and multiply it by 10. This figure is set by the Government to make it simple for people to work out the 'value' of the pension they have built up in a year. Then add the amount you get to:
- any contributions made into an Investing plan account over the year;
- any contributions you have made into personal or stakeholder pension plans over the year.
Another way of looking at how high the allowance is set is to imagine that the only benefit you need to take into account is your pension from the main plans – that is, any pension you have from the Final salary or Career average plan (or both). If this was the case, your pension amount would have to go up by £25,500 that year (£255,000 divided by 10) for you to reach the allowance.
Please note, however, that it is your responsibility to keep track of your benefits against the allowance. If you are over the allowance for the tax year, you will pay a 40% tax charge ('annual allowance charge') on the excess over the allowance. Pension scheme trustees can decide on the 12-month period they will use to measure their members' position against the allowance – this is called the 'pension input period'. For the Career average plan, the pension input period is 1 April to 31 March.