New State Pension arrives with fanfare
A new era of state pension provision was ushered in this week as the new State Pension came into existence for all those reaching State Pension Age (SPA) on or after 6 April 2016. George Osborne claimed that the “reform of the State Pension is the most significant since its inception”, whilst new Secretary of State for Work and Pensions Stephen Crabb said the “new reform will transform the State Pension for future generations”.
To celebrate, the DWP has issued a new State Pension handout and updated a whole host of other documents.
The “New State Pension Myth Busting” handout addresses common misconceptions such as “everyone will get the same amount of new State Pension” and “the new State Pension will increase my State Pension Age”. Unfortunately it also glosses over some of the downsides of the new system – for example, it suggests “I will get less State Pension under the new system than under the old system, despite starting work before 6 April 2016” is incorrect. Whilst it is true that pensions under the new State Pension system will not be less than those earned up to 5 April 2016 under the old system, many people would have been better off in future had the old State Pension system continued. Both the Pensions Policy Institute and the Institute for Fiscal Studies have issued reports highlighting the fact this week.
The materials published or updated to reflect matters such as new rates of benefits in 2016/17, updated website references, the ending of contracting out and of course the introduction of the new State Pension include:
- The suite of State Pension factsheets
- Resources for stakeholders and employers
- “Your State Pension Statement explained” leaflet
- “Your State Pension explained” guide
- The “4 ways to increase your new State Pension” handout; and
- The new State Pension glossary
Pensions Freedoms - a good thing?
The Institute and Faculty of Actuaries (IFoA) commissioned research on the British population over 55 and their views of the pension freedoms for the first anniversary of the reforms that came into force last April. The research found that 44% of respondents viewed the pension freedoms as a good thing, however nearly one third (29%) reported that they viewed the changes as a bad thing, with positive opinion dropping for those over 65.
Of the 5% of total respondents who had accessed their DC pension savings only 5% had bought an annuity.
The research also found that 73% of respondents were aware of the new pension freedom rules and 55% said they understood the difference between the “guidance” that is provided by the Government’s Pension Wise service and paid for regulated financial “advice”.
Fiona Morrison, President of the IFoA and LCP partner, commented: “There is some good news in the findings, with a high proportion of respondents being aware of the freedoms. However this knowledge doesn’t appear to follow through to their understanding of the difference between the guidance that is provided through the Government’s Pension Wise service and regulated financial advice.
The most worrying finding is that only 21% of respondents believe that their combined personal and State pensions will be enough to last for the rest of their lives. This should be a red flag to policy makers who have been looking at how to incentivise people to save for their retirement”.
The Lifetime Allowance is now (mostly) £1m…
On 6 April 2016, the lifetime allowance (LTA) reduced from £1.25m to £1m. “Benefit Crystallisation Events” on or after this date should now be compared to the new LTA - unless the member has appropriate lifetime allowance protections.
The long-term legislation to achieve this is contained in the current Finance Bill which will not be passed into law until the summer, with retrospective effect. So to give this reduction “real time” effect from the start of the tax year a parliamentary resolution was passed on 22 March 2016.
HMRC has now duly included the change, along with full details on how to apply for Fixed and/or Individual Protection 2016 or indeed Individual Protection 2014 (see Pensions Bulletin 2016/13), in its public plain English guide to pensions tax (including the online process available from the end of July and the interim process for urgent cases), in a new “protect your lifetime allowance” webpage linked into the lifetime allowance section.
The pages include HMRC’s reminder that, whilst there may not be a deadline for applying for the 2016 protections, 6 April 2016 was a crucial date for individuals who are thinking of applying for Fixed Protection 2016 to make sure that thereafter they do not take (or fail to take) actions that will disqualify them from having or registering for it.
One key action is that the individual stopped “benefit accrual” in all pension schemes by 5 April 2016. If an individual has a contribution “made” into a defined contribution scheme after 5 April 2016 (see our previous bulletin on this) he will be so disqualified. If the individual was accruing in defined benefit or cash balance schemes before 5 April 2016 and did not fully opt out by then, that means disqualification in many cases but not necessarily in all, as the HMRC technical webpages explain.
Comment
The new online page states “You need to apply for a permanent reference number online before your temporary protection runs out” and that “This [temporary] protection will only last up until 31 August 2016”. Schemes may worry whether this might mean the benefits of the protection could retrospectively “disappear” if the member does not subsequently proceed to register online. But HMRC is clearly putting in huge efforts to make the interim process work and we hope that it will issue something soon that allays any such concerns.
…and as for the Annual Allowance…
With the passing of 5 April 2016, we of course also move into the new Tapered Annual Allowance regime.
We are perhaps awaiting some further regulations on some operational aspects such as Scheme Pays (and, if not, will certainly need some help from HMRC to understand how these elements will work in practice). But most of the legal framework was put into place by Finance (No.2) Act 2015 (see Pensions Bulletin 2015/49) – and it is very clear that it adds huge complexity for employers, schemes, and in particular for pension scheme members old and new.
Finance (No.2) Bill 2015-16 begins to make its way through Parliament heralding more pension taxation changes
Finance (No.2) Bill 2015-16, which will bring into effect a whole range of pension tax changes, is scheduled for its Commons’ 2nd Reading debate on Monday when Parliament returns from its Easter recess. The Bill will go through Parliament for comment and should then achieve Royal Assent before Parliament rises for its summer recess in July, some elements having retrospective effect; and at that time relevant associated regulations can be expected to be laid. As noted above, many of the pension tax aspects of the Bill have been given real time effect from the start of the tax year by a parliamentary resolution passed on 22 March 2016 (although that is interim as some aspects of the Bill could change).
The Bill contains miscellaneous tidy up provisions including those mentioned in Budget 2016 to make the 2015 Freedom and Choice changes work as intended (see Pensions Bulletin 2016/11). But of most interest is the follow-up to the draft clauses issued for consultation in December. Our 23 December 2015 Bulletin gave details of some of the key provisions, and our comments. The following picks up some of the areas that changed.
Lifetime Allowance
As noted above, the Bill contains the provisions that the lifetime allowance (LTA) will reduce from £1.25m to £1m on 6 April 2016 – and also (as expected) that it will increase in line with the CPI for the tax year 2018/19 onwards; and it introduces Fixed and Individual Protection 2016.
A small but key change is that clauses have been changed to make it absolutely clear that, although there is no deadline for an individual to apply for a 2016 protection, once validly applied for the protection will apply retrospectively to 6 April 2016.
Comment
Unchanged from the December draft, but worth noting again, the Bill confirms that (differently from previous protections) members will have the right to ask their schemes to provide “such information … as is necessary” for the individual to calculate their pension amounts to register for Individual Protection 2016, within three months of request, and that right will persist until 6 April 2020. For the practical implications this raises – not to be underestimated - see our December 2015 article. Our experience in just the last few months confirms that many more people are going to be impacted by the new lifetime allowance and many of those will be seeking to use the protections.
Dependants’ scheme pensions – revised solution and a measure that administrators will have to get to grips with
Pension tax law contains provisions relating to the pension amount that can be paid to dependants following the death at or after age 75 of an individual who started to draw (defined benefit) scheme pension after 5 April 2006. The Bill contains HMRC’s attempt to address longstanding problems – and it is a much revised version compared to the initial attempt in the December draft clauses, changing the provision for future (and some recent) deaths.
The current regime requires a scheme to carry out a (very flawed) test at the individual’s death and counts part of the dependant’s pension as an unauthorised payment in a range of circumstances, many clearly unintended. The Bill firstly corrects many (though not all) of the obvious flaws where the basic mathematics of the test were clearly not as intended. And, among other things, it also has a new carve out such that, broadly, if the total dependant pensions actually put in place from a scheme on the death of a member start at a combined level of no more than £25,000 pa, then they should not suffer the consequences of the test (and that £25,000 is generously indexed). The Bill also simplifies some of the ongoing tests once dependant pensions are in payment.
Comment
The new provisions are still not the broader solution that we had hoped for following many years of lobbying– such a solution would completely avoid setting up complex administration systems, and make it possible to guarantee at the point of retirement that a given member/dependant pension combination was “safe”. But they are undoubtedly a huge step forward – HMRC has clearly listened to feedback.
The above is only a very brief summary of a complex measure (which needs testing on the detail, but may have some easily workable bits). To date, schemes have been in a quandary as to how to apply a completely unworkable test, and were hoping it would “go away”. They will now have to get to grips with its new incarnation, because we could start to see actual “over age 75” deaths from “post A-day retirees” very soon. In some scheme designs it could impact a group systematically and in a lot of schemes the measure could impact which options members wish to exercise at retirement (or later).
FCA again makes pensions a priority for 2016/17
Pensions are the first of seven priority themes set out in the Financial Conduct Authority’s (FCA) business plan for 2016/17. The FCA acknowledges the fundamental recent changes to the market and sets out the outcomes it seeks as being:
- Increased competition and innovation in the pensions sector, particularly in products that are good value for money for consumers
- Firms offering consumers better value for money products and services and actively and honestly competing to keep them
- The availability of appropriate advice and guidance which meets consumers’ needs
- Consumers know how to access suitable pensions advice and guidance
- Reduced harm to consumers from investment scams; and
- Proportionate regulation which supports innovation and competition in the consumer interest
Amongst other actions, the FCA expects to launch a review on Retirement Outcomes in 2016/17 which will consider the impact of the pension reforms on competition and switching in the market. Further work will also be conducted into how consumers react to “wake-up packs” which are sent out shortly before expected retirement dates.
The FCA will be consulting on how it should develop proposals to impose a cap on early exit charges (see Pensions Bulletin 2016/06). The FCA also states it will work to create a consumer protection model for the secondary annuities market (scheduled to start in April 2017) and continue to take action against pension scams as necessary.
Comment
We are pleased that the FCA continues to give pensions the attention it deserves. Just reading the business plan gives an indication of how busy the world of pensions continues to be. We do hope that the FCA is able to do even more to stop pension scams which, as has been said many times, are now a real blight on retirement savings.
The Lifetime ISA – potential next steps?
The Centre for Policy Studies (CPS) has published a new report setting out proposals to broaden the appeal of the Lifetime ISA (announced in the Budget last month, see Pensions Bulletin 2016/11). The report makes six specific recommendations:
- Double the contributions bonus rate from 25% to 50%
- Double the contributions cap to £8,000
- Introduce a low-cost default investment fund
- Build a bridge with Cash ISAs, to encourage a culture of “investing” rather than cash “saving”
- Assimilate today’s Child Trust Funds and Junior ISAs into the Lifetime ISA, to simplify the savings landscape for children; and
- Introduce stock dividends as the default (rather than cash), to help savers benefit from the power of compound interest
The report also addresses some of the criticisms made of the Lifetime ISA since it was announced.
An accompanying sister paper titled “The Workplace ISA” is also promised for publication this month which is intended to address concerns about conflicts between the Lifetime ISA and pension auto-enrolment legislation.
Comment
The CPS is not a government body so this report is far from official. However, the author, Michael Johnson, appears to be influencing current government policy in this area, so the report is worth reading to glimpse into a crystal ball of what the future might hold.
Mr Johnson continues to be open in his criticism of the pensions industry and calls the Lifetime ISA “only the first step” in merging “pension saving” and “saving” into a “single, coherent framework”. His view is that the Lifetime ISA should provide competition to private personal pensions and the proposed Workplace ISA to provide competition for occupational pensions. But he recognises that pension auto-enrolment legislation is a key blockage to this at the moment. The forthcoming paper should therefore make for very interesting reading.
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.
