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Taxation of<br />
<strong>Pension</strong> Rights<br />
The basic principles of how the<br />
Government taxes the benefits<br />
provided by company pension<br />
schemes such as the <strong>Plan</strong> have<br />
remained the same for many years<br />
and are relatively straightforward:<br />
• <strong>Pension</strong>s in payment are taxed as<br />
earned income.<br />
• Provided the amounts are not<br />
“excessive”, lump sums on death<br />
or retirement are paid tax-free.<br />
Private Medical scheme counts<br />
as a “benefit in kind” on which<br />
you have to pay tax but you are<br />
not taxed on any actual payouts<br />
made from that scheme to the<br />
healthcare provider.<br />
The rules about what counts as<br />
“excessive” pension benefits are<br />
based on two separate “Allowances”:<br />
• There is an Annual Allowance (“AA”) for<br />
the maximum amount of “new pension<br />
rights” which is allowable tax-free in any<br />
one year. For members of the <strong>Plan</strong>, “new<br />
pension rights” are the total of:<br />
• The cash value of the extra pension<br />
earned in the <strong>Hess</strong> <strong>Plan</strong>, and;<br />
• Any contributions you pay by way of<br />
AVCs or to an individual pension policy.<br />
• Again, provided the<br />
amounts are not “excessive”,<br />
pension rights can be built up over<br />
your working life without any tax charge<br />
– this includes giving full tax relief to<br />
AVCs paid by members.<br />
In overview, the benefits are taxed once<br />
they come into payment but, subject<br />
to upper limits, there is no tax paid on<br />
the value of pension rights as they are<br />
built up. There is a clear contrast here<br />
between pensions and, say, the Private<br />
Medical scheme provided by the<br />
Company; each year’s cost of the<br />
If the value of your new pension rights in<br />
any tax-year is over the AA then you have<br />
to pay a tax on the excess.<br />
• There is a Life Time Allowance (“LTA”)<br />
for the maximum pension value that<br />
can benefit from tax relief. This is tested<br />
when you come to retire and if the value<br />
of your benefits is greater than the LTA<br />
then you’ll have a tax charge to pay.<br />
Initially, these allowances were set at<br />
such generous levels that few members<br />
were affected. However, the Government<br />
has decided that too much tax relief is<br />
being given to pensions and announced<br />
in October 2010 that these allowances<br />
16 Trustees’ Report 2010
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