Whilst yesterday’s Budget contained no major changes to pensions tax relief (to the surprise of some commentators, both the 25% tax-free lump sum and salary sacrifice remain intact), a few lesser initiatives were announced. We will look at these, and at the new Lifetime ISA, in our March newsletter.
Some of the pensions measures mentioned in the Budget papers, such as the reduction in the Lifetime Allowance (LTA), were announced last year. This Update considers the change in the LTA and a number of other important changes that are going to take effect on or around 6 April 2016. It is important that pension scheme trustees and employers are aware of and, where relevant, meet the deadlines, in order to avoid falling foul of any legal requirements.
The changes highlighted in this Update take effect on 6 April 2016 unless stated otherwise.
Annual Allowance and Lifetime Allowance
The Finance Act 2015 provides that the Annual Allowance (AA) for those earning an adjusted income of between £150,000 and £210,000 will be tapered so as to reduce the AA by £1 for every £2 by which that adjusted income exceeds £150,000, limited to a maximum reduction of £30,000.
The Finance Bill 2016, due to be published on 24 March 2016, will contain provisions to reduce the standard LTA from £1.25 million to £1 million. It will also introduce two forms of protection from the LTA charge: Fixed Protection 2016 (FP2016) and Individual Protection 2016 (IP2016). HMRC recently issued further information on how individuals can claim these protections - members planning on taking benefits between 6 April 2016 and July 2016 can apply for FP2016 or IP2016 using an interim application process from 6 April 2016; members who are not planning to take benefits between these dates should apply for protection using HMRC’s online digital service which will be available in July 2016.
It may be necessary to review scheme documentation (including member literature) in light of the changes and to consider the impact on scheme design.
Introduction of the single-tier state pension and the end of contracting out
The new single-tier state pension, with the full rate set at £155.65, will become live, with the consequent demise of contracting out on a defined benefit basis. Schemes that are, or were, contracted out on this basis should be well underway with their preparations to deal with the abolition of contracting out. Unfortunately, as we predicted, the Government has been making legislative amendments and clarifications right up to the date of abolition.
It also appears that the ability to transfer contracted-out rights without the consent of the member will be limited to transfers between schemes which were previously contracted out. This is because from 6 April 2016 it will no longer be possible to establish a new contracted-out scheme or section to receive such transfers. Employers involved in the restructuring of group pension provision or those looking for a pensions solution as part of a business transaction will need to factor this change into their deliberations.
Schemes that have never been contracted out but which are designed to interact with the state pension in some way, for example, by means of a bridging pension or state scheme offset, may also wish to review their benefit design to ensure that it continues to work as originally intended.
Automatic enrolment: new earnings limit and easements
The upper earnings limit of the qualifying earnings band for automatic enrolment purposes is due to increase in line with the upper earnings limit for NICs (from £42,385 to £43,000). However, the lower earnings limit and the earnings trigger will remain as they are currently (£5,824 and £10,000 respectively). Employers should continue to use existing figures up to and including 5 April 2016, but will need to ensure that payroll systems are revised to factor in the new figure from 6 April 2016.
Regulations just laid before Parliament will implement new exceptions to the employer duty to automatically enrol in respect of company directors and partners in LLPs.
PPF levy certification
Scheme data and contingent assets/asset-backed contributions/mortgages to be taken into account for the purposes of calculating an employer’s 2016/17 PPF levy must be submitted/certified/ re-certified by midnight on 31 March 2016. Deficit-reduction contributions must be certified by 5pm on 29 April 2016.
Power to pay surplus to the employer
The period during which trustees can amend their scheme rules by resolution to preserve the power to pay surplus to the employer expires on 5 April 2016.