The Scheme is registered with HMRC under Section 153 of the Finance Act 2004. Under current legislation, this gives members and the Company certain important tax exemptions and ensures that investment income is largely tax-free. As a member of the Scheme and any other pension schemes, you are responsible for the tax consequences of your membership. You should therefore note the following:
If you have either Enhanced Protection, Primary Protection, Fixed Protection 2012, Fixed Protection 2014 or Individual Protection 2014 you should bring this to the attention of the Pensions Team in Edinburgh and seek specialist advice before joining or continuing in the Scheme.
Your total pension benefits from all sources are subject to a Lifetime Allowance tax threshold. The Lifetime Allowance for the following tax year's is:
2017/18 £1,000,000 (equivalent to a pension of about £50,000 a year)
2016/17 £1,000,000 (equivalent to a pension of about £50,000 a year)
2015/16 £1,250,000 (equivalent to a pension of about £62,500 a year)
If the value of your benefits exceeds the Lifetime Allowance they will be subject to additional tax. Before we pay retirement benefits from the Scheme, you will need to provide details of how much of the Lifetime Allowance you have already used up within other pension arrangements. Benefits over the Lifetime Allowance can be taken as a cash sum subject to tax at 55% or as additional pension which will be taxed at 25% plus your normal marginal income tax rate.
If the value of your pension benefits is close to (or above) the Lifetime Allowance, the amount of the tax-free cash you can take at retirement may be restricted. Different rules apply if you have some form of pension protection. Other events can also have an impact e.g. a Pension Sharing Order following divorce or a period of time working overseas. Please tell the Pensions Team in Edinburgh if you believe special circumstances may apply to you.
There are no restrictions on the number of pension arrangements that you can be a member of at any one time. For example, if you wish, you can contribute to a personal pension (including a stakeholder pension) at the same time as paying contributions to the Scheme. You may generally obtain tax relief on pension contributions (to all schemes) up to the greater of 100% of your earnings or £3,600. However, each year, the pension benefits you earn in all pension schemes are subject to an Annual Allowance tax threshold. The Annual Allowance for the following tax year's is:
2015/16 £40,000 (previously £50,000)
The pension benefits you earn in the Scheme are measured over the year to 5 April (called the ‘Pension Input Period’). If, in one year, the total of the value of the pension benefits you earn in the Scheme, plus any contributions you pay to another pension scheme, exceed the Annual Allowance, you will generally be subject to an Annual Allowance tax charge. It is possible to carry forward any unused Annual Allowance from the previous 3 years. Exemptions to the Annual Allowance tax charge also exist such as in the event of serious ill-health retirement. If you incur an Annual Allowance tax charge you may have the option of asking the Scheme to pay the tax charge on your behalf in return for a reduction in your benefits from the Scheme. The Pensions Team in Edinburgh will provide full details of the available options in the event you incur an Annual Allowance tax charge under the Scheme.
Since 6 April 2006, only certain benefits are “authorised” by the Finance Act 2004. If unauthorised benefits are paid by a pension scheme, both the scheme and the recipient will be liable for additional tax. It is generally expected that the benefits payable by the Scheme will be authorised, but in rare cases some benefits may be classed as unauthorised. In such cases, the Trustee is not required to pay the benefit. There may be adverse tax consequences if you invest (or it could be construed that you had invested) part or your entire tax-free cash sum from a pension scheme, into another pension scheme. This is often called ‘recycling’ tax-free cash sums. If you are concerned about this issue you should seek professional independent financial advice.
You may be permitted to elect, when your pension starts, for any lump sum death benefit (for example, any guaranteed benefit payable on death in retirement) to be treated as a pension protection lump sum death benefit. This would be taxed at 35%. If you have significant pension benefits this could be beneficial.
In addition to the above, the Trustee of the Diageo Pension Scheme has retained some of the pre 6 April 2006 Inland Revenue limits and incorporated them into the Scheme Rules.
Generally, this means that the maximum pension payable under the Scheme is calculated as 2/3rds of your final remuneration at age 60. Furthermore, the maximum amount you can pay into the Scheme (including normal contributions and any Additional Voluntary Contributions) is 15% of your earnings subject to the Scheme Specific Earnings Cap (£149,400 for the 2015/16 tax year).