Key pensions decisions for the next Government?
The Institute for Fiscal Studies has published a report setting out what it believes are the five key pensions decisions that should be taken – in some cases urgently – by the next Government.
While acknowledging that there are many and varied long-term pensions issues that need resolution, the report discusses two key issues facing the state pension system and three facing the private pension system for the next Government to focus on, as follows:
- Decide whether to provide additional financial support to those not able to work up to an increased state pension age, and how to target any such support – this is flagged as requiring urgent attention due to the anticipated rise in the state pension age between 2026 and 2028.
- A long-term plan regarding the level of the state pension – with the aim of deciding on a credible indexation system that creates a more predictable path for the future.
- Decide whether to go ahead with legislated increases in auto-enrolment minimum pension contributions – and, if so, consider how to help low earners adjust to the resulting lower take-home pay.
- Decide how to address the problem of low pension saving among the self-employed – in particular in light of the fact that it is not possible to implement auto-enrolment in the same way as for employees.
- Develop and implement policies to help people make good decisions when drawing on their private pension wealth – in particular to enable a regular income to be balanced against keeping resources in accessible form.
Comment
Whoever assumes the mantle of Pensions Minister after the election will face an in-tray overflowing with issues that need addressing and progressing. We await with interest to see what they tackle first.
IFS supports the re-introduction of the Lifetime Allowance, but Labour decides against
Separately to the above and less than two months after its abolition, the Institute for Fiscal Studies is suggesting that, in the absence of comprehensive reform of the pension tax system along the lines that it had previously advocated (see Pensions Bulletin 2023/05), there is a case for the re-introduction of the Lifetime Allowance to place a limit on the tax-favoured amount that individuals accumulate in registered pension schemes. Moreover, the next Government should move quickly on the issue to limit the adverse impact on tax revenue of wealthier people choosing to access their benefits (including earlier than they might otherwise do) to take advantage of the current tax regime.
In a short article the IFS says that it would also be sensible to go beyond a simple re-introduction of the £1,073,100 cap, with one option being to set it at a higher level (noting that had the £1.8m figure reached in 2010/11 been increased in line with inflation, rather than being cut on three separate occasions, it would be around £2.7m today). Alongside this higher level, there would be a reduced level for the purpose of determining how much can be taken as a tax-free lump sum.
The IFS also calls for:
- a new limit (ideally zero) on the amount of pension that can be bequeathed free of inheritance tax; and
- the reinstated Lifetime Allowance to be less generous for DB pensions (relative to DC pensions) than the one that was in place from 2006 to 2022, and particularly so for those who take their DB pensions earlier.
The IFS also says that it would also be worth considering reintroducing the Lifetime Allowance as a cap on contributions to DC pensions and accrued benefits in DB pensions, rather than on the pensions’ estimated value.
Comment
As the IFS quite rightly points out, stability is desirable in pensions policy, and it is more than apparent that this has not been the case since 2010. There is little doubt that the recent LTA abolition will benefit those with the largest pension pots, but at the same time those on the highest incomes, whatever their current pot size, are largely prevented from making pension savings.
Until this week it was not clear what the Labour Party intended to do should it win the General Election, but with press reports that the reintroduction of the LTA has been dropped from the party’s manifesto, it seems that this aspect of the pensions tax regime will remain in place for now.
HMRC publishes transitional tax-free amount certificate tool
This is the main item in HMRC’s latest pension schemes newsletter, which is otherwise concerned largely with routine matters. The HMRC tool can be used by an individual (or their personal representative in the event of their death) to check eligibility for a “transitional tax-free amount certificate”. Such certificates are potentially beneficial for those who started to take retirement benefits before 6 April 2024 as the certificate may result in their having higher available lump sum and lump sum and death benefit allowances as at 6 April 2024 than under the ‘standard’ approach which makes assumptions as to lump sums taken when benefits were put into payment prior to this date.
There is then some news for pension scheme administrators on 2024/25 payroll reporting in respect of serious ill-health lump sums, stand-alone lump sums and lump sum death benefits paid to or in respect of members under 75.
The newsletter then moves on to the following routine matters.
For schemes that operate relief at source on member contributions, there is a reminder that the deadline for submitting the 2023/24 annual return of information is 5 July 2024, along with details of how to submit and what happens if the return fails processing.
In relation to the Managing Pension Schemes service there is:
- a reminder that the 2023/24 tax year is the last tax year in which a pension scheme return (when requested by HMRC) can be submitted through the Pension Schemes Online service;
- some information on migrating schemes to the Managing Pension Schemes service; and
- a reminder that the lifetime allowance protection look up service will be transferred to the Managing Pension Schemes service in 2025, along with a request for assistance in developing the new service
Finally, the newsletter sets out the various ways in which pension scheme administrators and practitioners can raise queries with HMRC’s Pension Schemes Services.
Comment
Care is needed when using HMRC’s new transitional tax-free amount certificate tool. It is not a straightforward decision to apply for such a certificate and the tool, whilst useful, risks oversimplifying matters. For example, it does not identify the potential scope to have some post April 2024 lump sum and death benefit allowance where all the pre–April 2024 Lifetime allowance has been used, and it does not consider whether it is actually worth applying for one where retirement savings are unlikely to exceed the new allowances.
PPF confirms new approach to valuation entry assumptions for small schemes
Following a consultation the Pension Protection Fund has confirmed that it is going ahead with a new approach to the actuarial assumptions used for valuations to test whether the scheme has insufficient assets to cover PPF benefits and so should be admitted to the PPF – ie those carried out under sections 143 and 152 of the Pensions Act 2004. The new assumptions guidance took effect from 31 May 2024 and the updated valuation and assumptions guidance documents will be published, along with a full summary of the responses that were given to the consultation, in due course.
The consultation that was launched on 25 March 2024, proposed to allow actuaries to use a bespoke discount rate assumption (to be agreed with the PPF) when conducting a section 143 valuation of schemes with liabilities of less than around £50m. This was as a result of concerns that the principle of using assumptions that erred on the side of underestimating the buy-out price of PPF compensation resulted in some small schemes being refused entry to the PPF, but then struggling to receive affordable buy out quotes, and so usually having to run-on as closed schemes before seeking later to enter the PPF.
The PPF hopes that the new approach will provide additional flexibility and ability for section 143 valuations to better reflect buy-out pricing for smaller schemes, while minimising disruption and the additional burden on actuaries and the schemes they advise.
Comment
This flexibility is likely to be welcomed, but care will need to be exercised in its use. Although underfunded small schemes that ought to be taken on by the PPF following employer insolvency may now more quickly transfer (rather than having to run on as a closed scheme for a period), the potential downside is that some of them may miss out on securing higher than PPF benefits in the insurance market. Therefore, it is important to first establish that PPF benefits are not affordable in the insurance market before finalising the section 143 valuation.
Chris Gubby – a tribute
We suspended production of the Pensions Bulletin last week due to the untimely death of our colleague Chris Gubby. Chris was a key person behind the scenes at LCP for over 30 years, working tirelessly and diligently across many roles including sourcing information for and publishing the Pensions Bulletin. He will be greatly missed.
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.
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