Pensions Bulletin 2015/32

Finance Bill published – including important clarifications of the Annual Allowance changes announced at the Budget

The Finance Bill was published on 15 July 2015 as promised, containing within it a number of the measures announced in the Summer Budget (see Pensions Bulletin 2015/30).

The measures of most interest to many are the tapered annual allowance applying from 6 April 2016 for high earners and the immediate changes for 2015/16 annual allowance pension input periods for all. HMRC had issued draft guidance (now updated) around this alongside the Budget.

In relation to the tapered AA, the Bill contains details of anti-avoidance measures that were not announced in the Budget material. Broadly, the measures will unwind the AA impact of any attempts to “move” relevant income between tax years with the aim of reducing the reduction in the AA. The measure did not, and still does not, appear in HMRC’s guidance, so it is unclear how HMRC will interpret this in practice, but it will be an important matter for employers (and individuals) to take into account.

In relation to the immediate 2015/16 AA change the Bill confirms our interpretation of some areas where the original guidance looked odd. The key matter of doubt for us that it clarifies is that the special annual allowance of £80,000 is granted for what is effectively a “mini tax year” from 6 April 2015 to 8 July 2015. Unused elements of this AA can be carried forward to future tax years (including the “second mini tax year” to 5 April 2016), subject to a maximum of £40,000. The exact operation of this carry forward is important for individuals who are trying to mitigate the impact of the tapered AA.

LCP’s News Alert on the changes to the Lifetime and Annual Allowance has accordingly been updated to reflect this new information – and on new information on the Lifetime Allowance noted in an article below.

The Bill also contains the necessary changes to legislation so that taxable lump sum death benefits paid from a registered pension scheme directly to an individual are taxed by the scheme administrator at the recipient’s marginal rate of income tax, rather than at 45%. As expected, the Bill provides that tax is only payable where the owner of the pension rights dies aged 75 or over and in some limited circumstances where the deceased was aged under 75. Where the taxable lump sum is not paid directly to the individual the 45% rate continues to apply, but the recipient can claim this as a deduction when assessing the payment against their marginal rate of income tax. Where the taxable lump sum death benefit is paid to a “non-qualifying person”, the 45% rate continues to apply. All these changes will have effect in relation to lump sums paid from 6 April 2016.

The Bill also – unexpectedly but welcome – aligns the tax treatment of defined benefit lump sum death benefits with certain other lump sum death benefits, subjecting them to the 45% rate where they are not paid out within two years, rather than regarding them as unauthorised payments.

The Act is expected to receive Royal Assent in the autumn.

Pension Schemes Newsletter fills in further details of the Summer Budget

HMRC’s Newsletter 70 unsurprisingly majors on those announcements in the Summer Budget of immediate relevance to tax-relieved pension schemes:

• In relation to the tapered annual allowance, the newsletter notes a few changes have been made to the guidance that was published on Budget Day, including a correction (that we had anticipated) to the definition of threshold income
• It provides more important information on the Lifetime Allowance reduction – see the next article below
• HMRC will consult informally with stakeholders on how to tackle the use of unfunded employer financed retirement benefit schemes to obtain a tax advantage in relation to remuneration. Meetings are expected to take place during the summer and further details will be published later

Moving away from the Summer Budget, the newsletter also:

• Reminds readers of the process that must be followed for HMRC to accept changes to contracting-out records
• States that certificates of residence can only be issued for countries that HMRC holds a tax treaty with where taxes are liable
• Alerts readers to the existence of the forms that can be used to make a repayment claim for overpaid tax on payments taken under the new pension flexibility rules
• Reminds readers of the existence of guidance in the Pensions Tax Manual as an alternative to contacting HMRC directly; and
• Publicises some routine changes to Pension Schemes Online due to take place by the end of July

HMRC confirms the key operational details of the 2016 Lifetime Allowance protections

Within Newsletter 70 HMRC confirms that the Finance Bill 2016 will contain the legislation necessary to effect the reduction in the Lifetime Allowance to £1.0m from 6 April 2016 and the two protection regimes in relation to the 2016 reduced LTA will have the same conditions as the 2014 fixed and individual protection regimes.

No “benefit accrual” after 5 April 2016 will be permitted under Fixed Protection 2016 and savings must be at least £1m on 5 April 2016 for Individual Protection 2016 to apply. The notification process will though be different – individuals will not need to notify HMRC in advance where they want to rely on fixed protection or have three years to apply for individual protection. Instead, HMRC is considering options around removing the deadlines for applying for these protections and will be consulting informally with stakeholders over the next few weeks so that it can publish full details later this summer.

Comment

The indication of (perhaps?) not having to register for protections leaves huge questions about how such a regime can operate in the real world – we can only wait to hear HMRC’s ideas.

But the Newsletter item closes off some points of doubt – the deadline for stopping “benefit accrual” if wanting to hold Fixed Protection 2016 will be 5 April 2016 (there had been some consultation discussion as to whether that might move). So that means 5 April 2016, no longer a registration deadline, is still a deadline for a key decision/action (opt-out?) for many individuals. (We note that HMRC has confirmed to us that “benefit accrual” here has the same complex meaning for DB and cash balance schemes that it had for 2014 protections.)

Even without the final details on registration, this means the key details for decision-making are confirmed – many employers/trustees will now (if not already) want to firm up options and roll out communications around this urgently to members.

Are people receiving adequate support with their retirement decisions?

The House of Commons Work and Pensions Committee has launched an enquiry into whether the guidance and advice on offer in the light of the “freedom and choice” changes introduced in April is adequately supporting people in making good decisions about their retirement savings.

The Committee, chaired by Frank Field, is inviting written evidence on take-up, suitability, affordability and independence of the advice, guidance and information currently available. It also invites recommendations for improvement in that support.

The deadline for submissions is 28 August 2015.

Comment

Ever since George Osborne announced that guidance would accompany the new DC freedoms there has been concern by many as to whether those affected would be adequately supported, so it is inevitable that MPs are now looking into the subject. The submissions will be of interest as will be the Committee’s findings.

Abolition of contracting-out: consultation response and regulations

The Department for Work and Pensions has laid regulations that outline the rules to be followed by schemes that are currently contracted-out once contracting-out has been abolished in April 2016.

The Occupational Pension Schemes (Schemes that were Contracted-out) Regulations 2015 (SI 2015/1452) are published together with the Government’s response to its consultation on the regulations in May 2014 (see Pensions Bulletin 2014/20).

The DWP has also made the Pensions Act 2014 (Savings) Order 2015 which saves certain provisions of the Pensions Act 1993 which would otherwise have been repealed by the Pensions Act 2014. Many of the savings are just for three years, to allow trustees and HMRC time to carry out necessary tasks relating to the ending of contracted-out employment, such as the payment of CEPs.

Resulting from the consultation process are:

• A savings provision to ensure that individuals whose contracted-out employment ends before 6 April 2016 but who continue to be active members of their schemes will continue to be entitled to fixed rate GMP revaluation from the date their contracted-out employment ends
• Confirmation that schemes ceasing to contract out on 6 April 2016 will not be required to insert a “protection rule” in their rules as they will not be subject to approval arrangements by HMRC. Schemes that cease to contract out prior to 6 April 2016 will still be required to insert a protection rule
• That the restrictions introduced in April 2013 that must be observed when amending Section 9(2B) rights will be unchanged for the time being. There had been concerns that the new regulations provided a more stringent test – the DWP expects to re-consult on proposed amendments in due course
• A commitment to consult on the regulations governing transfer payments to and from schemes that have been contracted-out to ensure that it is possible for benefits to transfer between two schemes that were formerly contracted-out on a salary-related basis
• An undertaking to address the issue of whether there will be a requirement for employers to notify and consult with members in advance of the ending of contracting-out in a further consultation that is to deal with required changes to the Disclosure Regulations
• Retention of the Reference Scheme Test provisions – there were concerns that the RST provisions would be lost and scheme rules that referred to them (eg in relation to benefit underpins) would therefore no longer work
• An explanation of why the DWP does not think it necessary to provide trustees with additional amending powers to modify scheme rules to reflect the state pension reforms – the theory is that, as the Basic State Pension will still exist and be published for those who reach SPA before 6 April 2016, the rules should automatically point to that figure

There is also the intention to produce guidance for scheme administrators by early 2016.

Unfortunately, the suggestion by some that the lifetime allowance excess lump sums should become an authorised alternative to a pension for a member’s rights derived from post April 1997 contracted-out service has been rejected by the DWP.

Comment

While it is good for the DWP to have reached a landing on much of what were intended to be relatively straightforward regulations, it is concerning that, with less than nine months to go before the end of contracting-out, a number of important issues remain unresolved.

Help for small employers choosing an auto-enrolment scheme

The Pensions Regulator has published new and updated guidance to support the 1.3 million small and micro businesses preparing for automatic enrolment in finding a good quality pension scheme.

Refreshed website content includes information to help employers find a scheme and a quick guide for small and micro employers on what to look out for when choosing a scheme suited to their needs. The information includes, for the first time, a list of master trust pension schemes which have been independently reviewed to prove they meet the master trust assurance framework standards (see Pensions Bulletin 2014/19).

Comment

Only three master trusts have achieved the “master trust assurance” standard – a small proportion of the master trusts currently active in the UK. It is not clear whether this is a result of few trusts being able to meet the required standards or whether they have simply not engaged with the accreditation.

How contracting-out affects the new state pension

Since details were published of the new state pension for those reaching State Pension Age after 5 April 2016 there have been media reports about the effects of previously having been contracted-out on that pension. The DWP has now produced a note clarifying the position in this very difficult area.

The seven-page note highlights:

• How those who were previously contracted-out might see a reduced new state pension; and
• The phenomenon of the disappearing GMP increases – ie future increases currently paid as part of the additional state pension, in order to fully inflation proof the GMP, will no longer be available under the new state system

The example calculations provided help to illustrate these effects of contracting-out.

Comment

Whilst this document will assist specialists who need to understand the intricacies in this area, the Government still needs to come up with a way of explaining to the man on the street why those who have contracted-out are unlikely to get a full “single-tier” pension and why the GMP element of their private pension will not be fully inflation proofed in retirement.

Pension scheme contributions–how does your scheme compare?

You can now compare contributions paid into your own scheme with the median employee and employer contribution rates (split by industry, earnings band, occupation, age and sex) in tables released by the Office for National Statistics.

The ONS has published a Statistical Bulletin building on data collected for the Annual Survey of Hours and Earnings published in February (see Pensions Bulletin 2015/10). The Bulletin shows a drop in average contribution rates as many new people with low contribution rates join pension schemes as a result of auto-enrolment. It also shows the stark contrast between the levels of public and private sector pension scheme saving; for example, employees earning between £10,000 and £20,000 pa receive median employer contributions of 14.2% in the public sector but just 1.9% in the private sector.

A similar publication by the Department for Work and Pensions looks at the level of workplace pension participation and savings trends of eligible employees in the ten years to 2014. Whilst auto-enrolment has helped increase the level of pension saving by around 10% in real terms over the past couple of years, the relative level of pension saving in 2014 was still lower than comparative 2005 levels.

Comment

Auto-enrolment has done a good job of getting people saving and lower average contributions as a result of these new savers are to be expected – the averages will get even lower as smaller employers auto-enrol. Future increases in minimum auto-enrolment contributions will help, but those looking for a comfortable retirement are likely to need additional contributions.

PPF sees surplus go up but chances of self-sufficiency drop slightly

A perhaps odd combination of improved surplus (up £1.2bn to £3.6bn) and lower chance of reaching self-sufficiency in 2030 (down 2% to 88%) are the headline figures from the Pension Protection Fund’s 2014/15 Annual Report and Accounts published on 19 July.

The PPF’s funding position at the end of March 2015 improved particularly due to impressive investment returns and claims being lower than expected (only £322m in 2015 compared to £619m in 2014 and £1,028m in 2013).

Low interest rates have caused the PPF to lower its expectations of reaching a “self-sufficient” state by 2030, where self-sufficiency appears to mean that there is sufficient money to cover the remaining risks, including longevity and claim risks, with limited future levies being raised.

It appears that schemes’ risk-reduction strategies are working, as the accounts show the levy collected over the period was considerably less than expected (£574m compared to an original estimate of £695m).

The PPF promises to publish its latest Funding Strategy document on 27 July.

HMRC finalises regulations to make minor changes to pension tax rules

Draft regulations on which HMRC consulted in March have now been finalised and laid before Parliament.

• The Registered Pension Schemes (Transfer of Sums and Assets)(Amendment No.2) Regulations 2015 (SI 2015/1454) enable but limit the extent to which nominees’ and successors’ annuities may be transferred respectively to nominees’ or successors’ annuities issued by a different insurer. They have effect from 6 April 2015
• The Registered Pension Schemes (Provision of Information)(Amendment No. 2) Regulations 2015 (SI 2015/1455) require scheme administrators to tell beneficiaries where the payment of an annuity is subject to the lifetime allowance charge; and where such annuities are transferred between insurance companies, require the transferring insurance company to provide certain information to the receiving insurance company so that the correct tax treatment can be applied following the transfer. They have effect from 6 April 2015
• The Registered Pension Schemes (Audited Accounts)(Specified Persons) (Amendment) Regulations 2015 (SI 2015/1518) enable an employer participating in a scheme with at least 500 other employers to audit the scheme’s accounts. They have effect from 6 April 2014

The Regulations are to all intents and purposes identical to the draft regulations (for details of which see Pensions Bulletin 2015/15).

Cap on care costs delayed until 2020

The £72,000 cap on social care costs due to be implemented in April 2016, has been pushed back by four years due to the £6 billion it was expected to cost the public sector and concern that the private insurance market is not developing as expected.

Alistair Burt, the Minister of State for Community and Social Care, this week presented a written statement to Parliament announcing the delay. The cap, intended to act as a safety net preventing individuals from facing catastrophic care costs, is now expected to be introduced in April 2020.

The Government intends to use this delay to work with the financial sector to see what products can be developed to help people meet the costs of care, with the new pension flexibilities introduced in April being mentioned as a “real opportunity” in this respect.

Comment

Cuts are inevitable and expected in such times of austerity, but this could hit those affected very hard. As alluded to in the statement, new pension flexibilities such as the extended income drawdown provisions mean that individuals are starting to think of their retirement wealth as an accessible pot of money. Being able to limit the amount of that pot they might have to spend on care would be very helpful, but is now sadly four years further away.

New accounting standards for small companies and micro-entities published

The Financial Reporting Council has issued a suite of changes that update, and in many cases simplify, UK and Irish accounting standards. Key amongst them are new requirements for micro-entities and small entities and the withdrawal of the Financial Reporting Standard for Smaller Entities (FRSSE).

The changes are largely in response to the implementation of the new EU Accounting Directive, and include:

• A new standard, “FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime”
• New Section 1A Small Entities of “FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland”; and
• The annual review of “FRS 101 Reduced Disclosure Framework”
  

The main changes are effective for accounting periods beginning on or after 1 January 2016 with early application permitted for accounting periods beginning on or after 1 January 2015.

Comment

The new standards bring welcome clarity on the future of standards for small companies, and will mean that most, but not all, small companies with DB pension schemes will be reporting pensions figures in line with the new FRS 102 accounting standard. Companies affected, and micro-entities in particular, should evaluate the effect of the accounting change on their pension figures, which could change significantly in some cases.

Further work to be carried out on aligning income tax and national insurance

The Office for Tax Simplification, which has this week been made permanent, has published the terms of reference of a project it is carrying out to see whether closer alignment of income tax and national insurance contributions can be achieved.

The main aim of the project is to explore more fully the steps that would need to be taken to achieve closer alignment, and the costs, benefits and impacts of each of those steps. The project will not consider the extension of NICs to non-employment income, such as pensions.

The OTS will publish a final report ahead of Budget 2016. It may publish an interim report and/or calls for evidence during its work.

Comment

Although this is being reported in some quarters as a study to merge the two systems, it is quite clear from the terms of reference that it is nothing of the sort. But that is not to say that greater alignment might not lead to merger at some future point. Right now, after five years of Coalition Government, the two systems are arguably less aligned than when Labour was in power.

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.