Michael Johnson asks (and answers): “What of DB, in a TEE World?”
Michael Johnson, Research Fellow at the Centre for Policy Studies, has published radical proposals for dealing with DB pension schemes if the taxation of pensions were to change from an “Exempt, Exempt, Taxed” (EET) basis to a “Taxed, Exempt, Exempt” (TEE) model, similar to ISAs. Whilst this is just a research paper, Mr Johnson does appear to currently have the ear of the Treasury, as indicated by the introduction of Lifetime ISAs in the March 2016 Budget.
The paper is published on the assumption that changing the pension taxation system to TEE is desirable and should be implemented. Mr Johnson has written the paper to address the very difficult questions about how DB pension schemes, with issues such as pooled assets, average contribution rates and funding deficits, could be included in a TEE system. This is an attempt to counter arguments that these questions are too difficult to answer and the status quo should therefore be maintained.
Amongst other things, the paper discusses:
- The possibility of a one-off tax raid on DB schemes, with all pension payments subsequently being paid with no income tax liability
- The challenges surrounding tax-reliefs for DB deficit contributions in a TEE world
- How to tax future DB accruals as a benefit-in-kind
The paper also touches on what it refers to as “the elephant in the DB room”: public service pensions. The paper notes that the questions around DB pensions are now synonymous with the public sector and that the introduction of a TEE framework could serve as a catalyst for replacing DB public service pension schemes with funded DC provision.
Comment
Whether you agree or disagree with Mr Johnson, this paper contains some thought provoking material. He has dared to “think the unthinkable” and proposes radical ideas which could be attractive to the Treasury.
Furthermore, Mr Johnson has little sympathy for DB pension managers, claiming that “those industry providers who have failed to invest in 21st century systems have only themselves to blame: their operational challenges are no reason not to adopt an ISA-centric framework.” We believe this view is harsh and overly simplistic and that many challenges to imposing TEE on DB pension schemes remain unanswered. However, it’s the view of the Treasury that matters here, and no doubt the content of the paper will already have been noted.
Extending the scope of Pension Wise to the secondary annuity market
The Bank of England and Financial Services Act recently extended the scope of Pension Wise to individuals who are considering transferring the rights to payments under their annuity to a third party in the forthcoming secondary annuity market (see Pensions Bulletin 2016/18). Regulations have now been made that specify exactly which annuitants will be entitled to access the Government’s free guidance service.
Broadly, the new regulations now define this scope to include those in receipt of, or with a right to, payments in relation to an annuity that is purchased out of funds from a pension scheme (but is not a pension scheme asset). This includes those with contingent rights to such an annuity.
HMRC continues to tie up loose ends after ending contracting out
Although we are now well past 6 April when salary-related contracting-out was abolished, there is still plenty to be done before reconciliation work with HMRC is complete. There are just under 4,000 schemes registered to use the Scheme Reconciliation Service, covering some 13.8 million members who will need to have their GMPs reconciled by the end of 2018. Some of the actions highlighted in HMRC’s latest Countdown Bulletin 17 include:
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HMRC’s Customer Relationship Manager team will allocate time slots for schemes to submit GMP reconciliation queries. This time allocation can be negotiated, but any early or late submission outside of the agreed time is likely to cause difficulties
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Schemes must continue to inform HMRC of GMP increments to be paid to members who reached State Pension Age before 6 April 2016 but whose GMP payments are postponed. For members who reached SPA before 6 April 2012, all GMP increments must be notified; only pre-1988 GMP increments are needed for members who reached SPA after 5 April 2012
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Schemes that ceased to contract out before 6 April 2016 must inform HMRC of the cessation
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HMRC will request notification of “Method of Preservation” for all members once a scheme has reconciled membership through the Scheme Cessation process. Schemes will need to reply within six weeks of request, otherwise HMRC will assume that the GMPs have been preserved in the scheme
New State Pension deferral factsheets (but only for those who reached SPA before 6 April 2016)
The Department for Work and Pensions has produced two new factsheets giving information on deferring state pensions for people who reached State Pension Age before 6 April 2016. These replace leaflet DWP024, which has now been removed from the DWP’s website.
The first outlines how to defer State Pension, whether it is possible to claim additional pension or a lump sum as a result, how deferral affects other state benefits and how living abroad affects entitlement.
The second highlights the position for a spouse, civil partner or estate on death while either state pension is deferred or any payment for deferral has not yet been made.
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.
