A day
It is expected that the pensions of only a very small minority of Service personnel will be affected by the changes introduced under A Day.
The AA is unlikely to be breached by Service personnel unless they have substantial pension arrangements outside the Armed Forces pension schemes, or are promoted with at least a pay rise of £35K.
The LTA will not be breached for personnel whose annual pension is less than £70K per annum.
Annual Allowance
The AA in effect limits the amount of tax privileges available on pension savings paid by or in respect of an individual in a tax year to a registered pension scheme. Where the increase in savings at the end of the input period (6 April to 5 April for Armed Forces pensions) has increaesd above the AA limit since the beginning of the period, an AA charge will be made. The AA limit for FY 010/11 is £255,000.
To determine if the AA has been exceeded for a tax year it is necessary to know the value of pension benefits at the start and end of the year. This is done by multiplying the value of the annual pension by 10 and adding the lump sum for both the start and end of the period. The difference in amount at the end period is the amount which has been put into your pension pot. If this exceeds £255,000 in FY 10/11 you will be liable to pay HMRC a tax charge on the excess. It is your responsibility to pay this direct to HMRC.
Lifetime Allowance
There is no absolute limit placed on the level of benefits an individual can be provided with under a registered pension scheme. However, every indiviudal has a set level of benefits that they can draw from all registered pension schemes in their lifetime, without triggering certain tax charges. This measure is referred to as LTA. The LTA is expressed as a capital value and is set at a particular standard level for each tax year. The LTA for FY 10/11 is £1.8M. The LTA test is not done until you draw your pension benefits. Before you can be paid your Armed Forces pension, SPVA will need information from you regarding any other pension savings you have in order to correctly assess your percentage of LTA used up. If you exceed the LTA, a tax charge of 25% is made for the excess where the LTA is breached through payment of pension, and 55% if the LTA is breached by the lump sum.
The following are not tested against the LTA:
Early Departure Payments (EDP)
Attributable benefits (eg AFCS, AFAB, WPS awards)
AFPS 05 Tier 1 ill-health lump sum
Dependants' pensions
To calculate your LTA you multiply the value of your annual pension due to come into payment by 20 and add the lump sum. If this figure exceeds £1.8M in FY 10/11, you will be taxed on the excess. If the breach is due to the lump sum, your lump sum will be reduced by the tax charge (55% on the excess). If you breach the LTA through your pension, you will be taxed 25% on the excess. SPVA will calculate this. The tax charge is then divided by 20 and your pension is reduced annually by this amount forever. Your spouse's pension would also be reduced annually in the event of your death.
