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About Your Benefits

Tax treatment of pensions

Up to 6 April 2006, the MPS was an ‘exempt approved scheme’ for the purposes of the Income and Corporation Taxes Act 1988. The Scheme’s exempt approved status meant that pension contributions were not treated as taxable earnings, cash lump sums on retirement and death were tax-free and both the investment income from the fund, and the growth in value of investments, were mainly exempt from tax.

In exchange for these tax advantages, the benefits that the Scheme provided were subject to certain limits, based on salary and service. MPS benefits generally fell well within these limits and for most members could be paid with no restrictions.

Since 6 April 2006, the HMRC limits on contributions and benefits from approved pension schemes have been replaced with allowances, up to which tax treatment remained favourable. The MPS became a Registered Pension Scheme. All types of registered pension schemes come under one set of regulations. For most people, the 2006 tax regime applies to all sources of pension income, except State pensions.

The Lifetime Allowance, introduced in 2006, applies to all pensions savings, replacing the previous rules for different types of pension arrangements. The allowance applies to the total value of benefits from all registered schemes, not just MPS, at the time benefits are put into payment. Initially, the Lifetime Allowance was set at £1.5 million; currently, the allowance is £1.8 million.

If you have not yet drawn your pension, you can work out the value of your MPS benefits against the Lifetime Allowance by multiplying the annual deferred pension by 20 and, if you left the MPS before 1 March 1992, adding any separate lump sum.

If you who think your total pension entitlement may amount to over £72,000 a year, or over £1.8 million in value – or are close to that figure – you can download a factsheet from the Scheme’s website, which explains the taxation of pensions in more depth. A copy of the factsheet is also available on application to the Administration Office.