George Osborne pledges to scrap the 55% tax rate on inherited DC pension funds
Chancellor George Osborne has announced that from April 2015 changes will be made to the tax charge which applies to defined contribution (DC) pension funds passed on at death.
These are the amounts designated to but not yet taken from a drawdown fund and DC funds not yet crystallised at all. According to the announcement, individuals will be able to nominate any beneficiary for such funds to be passed to when they die.
- If the individual dies before reaching age 75, the beneficiary will pay no tax on it, whether it is taken as a single lump sum, or accessed through drawdown
- If the individual dies at or over the age of 75, the beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate(s) of income tax. There are no restrictions on how much of the pension fund the beneficiary can withdraw at any one time. There will also be an option to receive the pension as a one-off lump sum payment – and the longer term intention is that this too would be subject to the recipient’s marginal rate of tax, but while government engages with the pensions industry in order to put such a regime in place for 2016/17 a flat 45% tax will apply instead
The Lifetime Allowance “still applies”.
This system will replace the current 55% tax charge that applies for some death payouts which the Government committed to review as part of the Freedom and Choice in Pensions consultation (see LCP’s News Alert).
Comment
This is a big announcement. Although it was inevitable that the 55% tax would be altered, being inappropriate in a world where a much wider range of individuals than before may hold DC funds into retirement rather than buy an annuity, quite what would happen was uncertain.
This key decision will encourage those accessing their DC funds to take longer over doing so, if they can turn to other means. Given the apparent intended scope for inheritance tax advantages (although the law in this area may need revision), it may also encourage more discretionary saving into DC vehicles – again, for those that can afford to.
And those with significant DB rights might be incentivised to transfer some of these rights shortly before retirement to seed such a DC vehicle.
The so called “abolition” of this DC death tax also takes away one of the worries about drawdown –so inevitably makes it harder for insurers to sell annuities. But it is still the fact that for some, converting retirement savings into a guaranteed throughout life income is the best thing to do (if the terms are right).
As ever, the announcement gives an outline of the policy decision but there are many unanswered questions which will not become clear until draft legislation and/or detailed guidance is issued. If it is the big deal that is being suggested it has to be fraught with political risk – the previous Government closing down a similar vehicle that enabled pension wealth to be passed down the generations.
IORP 2 marches on
Following the launch of the European pensions directive, IORP 2, in March (see LCP’s News Alert) the European Council, under the outgoing Italian presidency, has adopted a “compromise” directive which will be submitted to the European Parliament for further debate and amendment.
This latest version includes the following significant changes to the text proposed by the European Commission in March:
- The requirement for schemes which operate cross-border to be fully funded at all times is removed. Although they must demonstrate full funding at the start of cross-border activity, subsequent shortfalls that emerge are to be addressed by a recovery plan
- The proposed fit and proper requirements for trustees are loosened somewhat. Trustees will need professional qualifications, experience and knowledge adequate to the functions they perform for the scheme
- The risk evaluation for pensions required for schemes must now be appropriate to the size and organisation of the scheme and its nature, scale and complexity. There is a significant increase in the amount of detail prescribed for how the risk evaluation is to be conducted and documented. In particular, it specifically mentions quantitative risk profile information on material risks including those relating to longevity. The European Insurance and Occupational Pensions Authority (EIOPA) is to issue guidelines in relation to the principles outlined under the risk evaluation
- As part of the system of governance that pension schemes will be required to have from 2017 there must now be an internal controls function which must include a legal/regulatory compliance function
- There are some significant changes to the pension benefit statement that schemes will be required to provide. Most notably the information previously required about past investment performance and pension projections has now been dropped as has the silly requirement to squeeze the statement onto two sides of A4. It must now be concise
The European Parliament will probably make further changes and we still expect the directive to be adopted as EU law by the end of 2015.
Comment
The new wording on the funding of cross-border schemes is intriguing, suggesting that it may be possible for national authorities such as the Pensions Regulator to require the repairing of deficits on a longer timescale than is currently permitted.
The new requirement for an internal controls function and the increased prescription for the risk evaluation together represent further unwelcome regulation. On the latter, some uncertainty is introduced as to whether it will become necessary to quantify specific risks facing pension schemes.
On the plus side the vision for the pension benefit statement seems to be more straightforward.
PPF calls for “Bridge” out-of-cycle valuations where the effect is material
As set out in the Pension Protection Fund’s (PPF) consultation response to money purchase benefits (see Pensions Bulletin 2014/31), the PPF has begun to write to schemes to request out-of-cycle section 179 valuations where the effect is material.
Schemes which are materially impacted by the amended definition of money purchase benefits must write to the PPF by 31 March 2015 on whether an out-of-cycle valuation (with an effective date between 24 July 2014 and 31 March 2015) or a section 179 valuation (with an effective date on or before 24 July 2014) will be submitted. The submission deadline for both types of valuation will be 31 March 2015.
Schemes which are not materially impacted are not required to respond to the PPF.
A scheme is materially impacted if the amended money purchase definition reduces a scheme’s PPF levy surplus (or increases its deficit) by at least 10% in relative terms and at least £5 million in absolute terms.
State pension top up pre-registration begins
The Department for Work and Pensions (DWP) has opened pre-registration for those interested in topping up their state pension entitlement who will have reached state pension age before the new single tier state pension is introduced from 6 April 2016 (see Pensions Bulletin 2013/53).
Known as Class 3A, the extra additional state pension purchased will include the same benefits as standard additional state pension, including annual index-linked increases and inheritability on death. The cost of the top-up is age-dependent and is set at £890 for each £1 per week at age 65, decreasing to £674 for each £1 per week at age 75.
Those interested will be able to make a contribution for a state pension top-up between 12 October 2015 and 5 April 2017.
Comment
At first sight the cost of purchasing the additional state pension seems reasonable (at a rate of £17.11 for each £1 per annum of pension at age 65). However, it is important that those considering the opportunity should bear in mind that for those with gaps in their national insurance contributions record it will be much better for them first of all to plug this using the pre-existing Class 3 voluntary contribution facility which offers more favourable terms.
Active membership of occupational pension schemes starts to rise
The Office for National Statistics has published the results of its 2013 Occupational Pension Schemes Survey showing that for the first time in a long while active membership has increased (see Pensions Bulletin 2013/41 for details from the 2012 survey).
Total membership of occupational pension schemes rose to 27.9m in 2013 (27.6m in 2012). Other changes highlighted in the report include:
- Total active membership rose from 7.8m in 2012 to 8.1m in 2013, consisting of an increase from 2.7m to 2.8m in private sector schemes and from 5.1m to 5.3m in public sector schemes
- The number of members in receipt of pensions in payment rose from 9.5m to 9.6m
- The total number of deferred pensioners was unchanged at 10.2m; and
- Overall membership of private sector schemes rose from 14.4m to 14.6m, with public sector membership also rising from 13.1m to 13.3m
In the private sector, DB schemes continue to have higher contribution rates than DC schemes with the survey finding that over the year:
- Average member contribution rates to open DB schemes rose to 5.0% in 2013 (from 4.9% in 2012), and the average employer contribution rate rose to 14.1% (from 13.8% in 2012)
- The average member contribution rate to closed DB schemes also rose to 5.4% (from 5.0% in 2012) and the average employer contribution rose to 16.4% (from 16.1% in 2012); and
- The overall contribution rate to open DC schemes fell, however, with the average member contribution rate down to 2.9% (from 3.1% in 2012) and the average employer rate also fell to 6.1% (from 6.6% in 2012)
Comment
Phased implementation of auto-enrolment began in October 2012. Although this was only half a year before the data for this survey was collected, the effect can already be seen in the increase in active membership in private sector schemes, reversing the 20-year trend of declining membership. As medium and small employers begin to auto-enrol their employees, one may expect this reversal to accelerate, with the largest increase in DC rather than DB schemes.
Transition of HMRC pensions content to GOV.UK
Following its previous announcement in Newsletter 65 (see Pensions Bulletin 2014/38), HM Revenue & Customs (HMRC) has created links from the Government’s GOV.UK internet hub to the Registered Pension Schemes Manual, HMRC’s pension news pages and its Pension Schemes Newsletters. The first two links (eventually) lead back to HMRC’s website whilst the Newsletters are on GOV.UK.
Further, there is a new “Beta” Pension scheme administration area within the “Business tax” area of GOV.UK, which seems to be the new access point to a considerable part of the HMRC and DWP collections of information, guidance, forms and tables for pension scheme administrators, trustees and members (including the three areas specified above). We hope this is still a work in progress (for urgent completion) given that at the moment we cannot find useful guidance material that was issued as recently as March.
Comment
This does mean that webpage references currently included by trustees and administrators in letters and flyers to members, to help members work out their pensions tax affairs, may now take them to strange pages (if any) – rather unfortunate timing given the number of Annual Allowance Pension Savings Statements being sent out at this time of year.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
