What's new

Last updated: 10 March 2021


 

Pension Taxation - Lifetime Allowance (LTA) - updated 10 March 2021

In the Chancellor's Budget on 5 March 2021, Mr Sunak announced that the LTA will be maintained at its current level of £1,073,100 for a further five years, until April 2026, rather than being linked to inflation as usual.

The lifetime allowance (LTA) is the total value of benefits an individual member can have without triggering an excess benefit charge.

If the value of a member's pension benefits when they draw them (not including state retirement pension, pension credit or any partners pension of dependants pension) is more than the LTA, the member will have to pay tax on the excess benefits.

Members affected by the LTA will have a pension benefit in excess of £45,000 per annum.


 

£95K exit payment cap no longer in place

On Friday 12 February, HM Treasury announced that the Restriction of Public Sector Exit Payments Legislation has been revoked with immediate effect, due to 'unforeseen consequences' of the legislation. The (brief) Treasury guidance (external link to a PDF document) on this can be found on their website.

As a consequence of the Treasury announcement, the following applies to Scheme members:

Leavers from 12 February 2021

This means the £95K cap regulations is being treated as if it never applied therefore if you are leaving your employment through redundancy or efficiency from 12 February 2021, your pension benefits will be paid unreduced under regulation 30 (7) providing you are over age 55 at your date of leaving. This is the same position as before the exit cap was introduced.

Leavers between 4 November 2020 and 12 February 2021

If you think you were affected by the £95K exit cap you should contact your former employer directly.


 

  Please note: regulations revoked on 12 February 2021

Public sector exit cap - FAQs for LGPS members

The government has introduced a cap on the amount of money a public sector employer can pay when an employee leaves their employment. It is called the public sector exit cap, or £95k cap. It applies to employees leaving public sector employments from 4 November 2020.

The exit cap is most likely to affect you if you are a public sector employee aged 55 or over and you are made redundant or you leave your employment due to business efficiency. This is because the amount your employer pays to the pension fund so that you can receive your pension early is included in the exit cap calculation.

The Local Government Association (LGA) have also published member FAQs on the exit cap. Please take some time to read this information.

Further information

If you have any further questions about how the £95,000 exit payment cap may affect you, then please speak directly to your employer.


 

  Please note: regulations revoked on 12 February 2021

Fund’s pension discretion - public sector exit payment cap

Background to the public sector exit payment cap

The Public Sector Regulations 2020 came into force with effect from 4 November 2020. These placed a £95,000 cap on the total of exit payments made to an employee, when they are made redundant or their employment is terminated for reasons of business efficiency. The Ministry of Housing, Communities and Local Government (MHCLG) has opened a consultation seeking views on proposals for further reforming exit payment terms, by employers. The consultation also proposes changes to the Local Government Pension Scheme (LGPS) Regulations, in order to accommodate the £95,000 exit payment cap. This consultation closes on 18 December 2020, with the amending regulations coming into force early in 2021.

As the amendments to the LGPS Regulations were not in place when the £95,000 cap came into force, the Staffordshire Pension Fund sets out our policy below for the payments of benefits related to redundancy and business efficiency exits, that occur from 4 November 2020, until the LGPS regulations are changed to accommodate the exit payment cap.

Staffordshire Pension Fund - administering authority policy

Please note: this policy applies only to LGPS members who are aged 55 or over.

If the total of the exit payment elements are less than or equal to £95,000, LGPS benefits are payable immediately, without reduction for early payment, in line with the current regulations.

If the total exit payment is over £95,000, there is a conflict between the exit payment cap regulations and the current LGPS regulations and therefore, the Fund's discretionary policy is to offer the LGPS member the opportunity to receive one of the following:

  • a deferred benefit under LGPS regulation 6
  • a fully actuarial reduced pension under LGPS regulation 30(5)

Who does the exit payment cap apply to?

It applies to all public sector employees and employers including councils (metropolitan, county, district, borough) police and fire authorities and academies.

What is covered?

The exit payment cap is set at a total of £95,000 with no provision for this amount to be index-linked. Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs - which arise when an LGPS pension is paid unreduced before a member's normal pension age - and other payments made as a consequence of termination of employment.

The cap applies to all exit payments that arise within a 28-day period and the regulations cover the process to follow if an individual has multiple exits from public sector employment within 28 days.

The cap will only apply to those individuals where the combined total value of their exit payments (including pension strain costs) is greater than the £95,000 limit. Where it does apply then the value of the exit payments will have to be reduced to the point where the total value of all exit payments is no greater than £95,000.

Printable version

If you wish to print out this information, please select the document below:


 

  Please note: regulations revoked on 12 February 2021

The £95,000 exit payment cap regulations came into force from 4 November 2020

Who does the exit payment cap apply to?

The cap will apply to all public sector workers including employees of councils (whether metropolitan, county, district, borough or parish), police and fire authorities and academies.

When will the exit payment cap come into force?

The legislation implementing the £95,000 exit cap has now been signed off by the Government and came into force on 4 November 2020.

The amendments to the LGPS regulations were not in place when the £95,000 cap came into force and are not expected until early 2021. Therefore, in the period between 4 November 2020 and the date the LGPS regulations are amended, only exits where the cost exceeds the £95,000 cap will be impacted.

What is the value of the exit payment cap and what payments does the cap include?

The exit payment cap is set at a total of £95,000. Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs - which arise when a Local Government Pension Scheme (LGPS) benefit is paid unreduced before a member's normal pension age - and other payments made as a consequence of termination of employment.

The cap applies to all exit payments that arise within a 28-day period and the regulations cover the process to follow if an individual has multiple exits from public sector employment within 28 days.

The cap will only apply to those individuals where the combined total value of their exit payments (including pension strain costs) is greater than the £95,000 limit. Where it does apply then the value of the exit payments will have to be reduced to the point where the total value of all exit payments is no greater than £95,000.

What is the pension strain cost and who pays the pension strain cost?

Under the rules of the LGPS, if you choose to receive your local government pension before your normal retirement date, then your pension would normally be reduced, to take into account the fact that you are receiving your pension earlier than your normal retirement date.

However, if you are over age 55 and your employer terminates your contract of employment on grounds of redundancy or efficiency, you are entitled to receive an immediate payment of your pension benefits relating to that employment. This will mean that your employer will need to pay an amount of money into the Staffordshire Pension Fund, so that you can receive your full pension, up to the date of leaving, without any reduction in your pension because it has been paid early. The amount of money your employer pays into the Pension Fund, so that you can receive an unreduced pension is called the pension strain cost.

To qualify for LGPS pension benefits, you must pay into the LGPS for at least two years, or transfer pension benefits from another scheme into the LGPS. If you leave the scheme with less than two years' membership, you may not qualify for LGPS pension benefits and will usually be able to choose to have a refund of your contribution.

How can I find out if my exit payments exceed the £95,000 cap?

If you are currently 55 or over and serving a notice period under redundancy, or you and your employer have entered into a redundancy consultation period, your employer should already have (or will be in the process of obtaining) the amount of the pension strain cost. When they have this, they will be able to establish if the pension strain cost when added to other termination payments you are entitled to receive, exceed the £95,000 cap.

If you are facing immediate redundancy from an employer who is covered by the exit payment cap regulations and your exit payment (including the pension strain) will be more than the cap your current options are:

  • take a deferred benefit payable from your normal retirement age
  • or immediate payment of your pension benefits with a full early retirement reduction applied

If you have any concerns about an ongoing redundancy case and your employer is likely to be affected by the cap, please speak to your employer.

What happens next? – government's consultation on further reform of exit payments

In addition to the £95,000 exit payment cap, MHCLG has launched a further consultation on changes to the LGPS and the Discretionary Compensation Regulations.

Further to the government introducing the Restriction of Public Sector Exit Payments regulations and subject to LGPS regulations being amended we understand that other possible options could be that:

  • receive payment of a reduced pension and lump sum, but keep the redundancy or other exit payments (limited to the £95,000 cap)
  • give up some or all their redundancy payment or other exit payments to receive an unreduced pension, or limit the amount of the reduction to the retirement benefits
  • choose a mixture of the two options above, which will mean giving up some of their redundancy pay to remove some (but not all) of the reduction on their pension and lump sum
  • receive a deferred pension benefit rather that a partially reduced pensions, but keep the redundancy or other exit payments (limited to the £95,000 cap)

Further information

If you do have any further questions about how the £95,000 exit payment cap may affect you, then please speak directly to your employer.

The LGA have also published member FAQs on the exit cap, please take some time to read this information.