It is becoming a truism that in pensions each year is more interesting than the last. Interesting for lawyers that is as more and more layers are added to UK pension regulation.
And if 2015 was an interesting year for UK pensions, then 2016 has the makings of being an interesting year too. This year's common themes being a simplification exercise that simplifies very little and the age-old Government favourite of "bringing forward tax revenues".
Tax revenue has been something of a constant for UK pensions. 2015 was the year of pension freedoms agenda. This gives pension savers the option of taking their pension pots in a variety of ways, some of which could easily generate a big tax bill. The Government attempted to close off its own risks through the magic of "pensions guidance", much of which sits on a website (Pensions Wise) which was criticised by the Work and Pensions committee as being unfit for purpose.
At the same time, one of the UK's growth industries, pensions liberation, hitched itself firmly to this pension freedoms bandwagon asking the question of why is it okay to take your entire pensions pot at 55 but not at 54 even if you are in financial difficulty? Pensions liberation also muddied the waters between risky but acceptable retirement planning and scams where pensions savings end up in a tax haven but the tax bill sits with the saver.
So, what's to come in 2016?
Contracting out and the state second pension
Up to April 2016, the UK's state pension system is based on two tiers. One is the state pension which is not something that alone will support a comfortable retirement. Then there is the state second pension system in its various iterations which tops this up on a basis that even the Government has some difficulty following. The benefits system steps in where the end result of this structure is penury.
From April 2016, the Government will replace this with a single tier system that for most (but not all) people should provide a bigger state pension and which, if nothing else, has the merit of being easier to understand. Unless you are in the transitional group who will have an unholy combination of new and old system state pensions in which case pension planning for you will probably remain confusing.
With the abolition of the state second pension comes the abolition of contracting-out. Contracting-out allowed employers to use their pension scheme to provide benefits replacing the state second pension. In return they and their employees received national insurance rebates to reflect the money saved by the exchequer.
With the abolition of contracting-out these rebates will disappear. Most employers in the private sector will have the option of modifying their scheme to either reduce benefits or increase contributions to reflect this change. Most, but not all. The former nationalised industries will just have to accept the additional cost.
When faced with the option of running through a quite complicated modification exercise involving actuaries, lawyers and trustees, or simply closing off their defined benefit pension scheme, how many employers will be taking the former option? We suspect that it does not take a crystal ball to guess which way most finance directors will jump on this difficult question.
Of course, nothing is ever simple. Contracted-out rights that are accrued before the abolition date will continue to exist and most of the restrictions that apply to them will continue post abolition. Subject to the Government finally providing a practical route for converting these rights into normal scheme rights, schemes will keep the complexities of the current system without the national insurance rebates which made them bearable.
Case law: Barnardo's
Turning to cases, the Court of Appeal will be considering an appeal from the decision inBuckinghamshire and others v. Barnardo's and others  EWHC 2200 (Ch).
This case (in which Dentons acts for the Representative Beneficiaries) considers the question of when one inflation index can replace another in a pension increase provision. The High Court decision was that under the specific wording of the relevant increase rule the trustees of the scheme had to continue to use the RPI for so long as it was an officially published index.
More importantly, the appeal is likely to consider whether the current state of the law on section 67 (detrimental modifications as set out in the QinetiQ case) is correct. If it decides that it is not, this could have very significant implications for past changes in many pension schemes.
2016's tax changes come in two forms. The knowns and the unknowns.
First the knowns.
This is the traditional annual tinkering with the Finance Act 2004's pensions saving system coming into force in April. By now you need a spreadsheet to keep track of the various protected amounts, transitional protections and tax breaks that have been implemented over the years. Each change seems to be aimed more towards squeezing every last penny out of an already overstressed pension savings system. The point of the pensions tax relief system – to encourage people to save for their retirement on the basis of a simple and easily understood system – appears to have been lost.
The latest tinkerings include:
- Pension input periods will be aligned to the tax year from 6 April 2016.
- The Lifetime Allowance will drop to £1.25m with new transitional protections for those with pension savings over this amount.
- Tapered tax relief is being implemented for those whose total annual income including pension contributions exceeds £150k. For every £2 that a person has over that amount in pension contributions and pay, they will lose £1 of their annual allowance down to a minimum of £10k.
- Similarly, those who have started to take their pension through flexible drawdown will have an annual allowance of £10k for money purchase savings to prevent them recycling that money back into their pension.
Then we have the great unknown of 2016. The Treasury consulted on some "blue sky thinking" around tax relief on pensions. Oddly enough, this blue sky thinking included no improvements to tax relief but did consider changing the tax basis for pensions savings from the current untaxed payments in, untaxed investment income and taxed payments out to a taxed payments in, untaxed investment income, untaxed payments out basis. This is generally referred to as a potential switch from EET to TEE (the T being taxed) and would, again, oddly enough, result in more tax now for the Treasury and make pensions look a lot like ISAs (a savings vehicle with a completely different purpose from a pension).
Three things to note.
- We should get a response to the consultation in the Spring Budget.
- The proposals as set out in the paper do not appear to have been anything more than a "back of a cigarette packet" set of suggestions and its key proposals have received some negative commentary from the pensions industry.
- None of this matters one jot as tax relief on pensions is very expensive and easily painted as a benefit for the rich due to tax relief being provided at the earner's marginal rate of tax. Higher earners pay more tax, therefore get more benefit from not paying that tax.
In the Budget we can expect some big changes. Even if EET is not switched to TEE, at the very least we can expect a "fair" rate of pensions tax relief to apply going forward and (we suspect) that salary sacrifice for pensions savings will be abolished.
Then we will have to watch the Government try to graft the new system onto an existing system with around a trillion and a half pounds in assets and some of the most complex law in the world. Good news for pensions professionals, terrible news for everyone else.
The Local Government Pension Schemes are going to go through their valuation process in 2016 with the new employer contribution rates based on the valuations to apply from April 2017.
Auto-enrolment and re-enrolment dates for a lot of large employers will be coming up. This will be a good time for these employers to consider their pensions strategy and the way their current scheme is working.
Don't three years pass quickly?