Changes to both the annual and lifetime allowances are being introduced from April 2016. These changes raise a number of issues of which schemes should be aware. In addition, changes are being made to the tax treatment of lump sum death benefits.

Annual allowance

What’s changing?

From 6 April 2016, a reduced or “tapered” annual allowance (“A A”) will apply to individuals with:

  • “threshold income” of over £110,000; and
  • “adjusted income” of over £150,000.

The AA will be reduced by £1 for every £2 over  the £150,000 threshold, down to a minimum of £10,000 (for individuals with adjusted income of £210,000 or over).

“Threshold income” is essentially taxable income before deducting any employee pension contributions. “Adjusted income” is essentially taxable income after deducting employee pension contributions, but then adding back the AA value of the individual’s pension savings over the tax year i.e. in a DB arrangement, the AA value of the individual’s benefit accrual over the year, and in a DC arrangement, the aggregate of employee and employer contributions over the year. To prevent individuals from using salary sacrifice to circumvent the threshold income test, employment income sacrificed in return for pension contributions under salary sacrifice and f lexible remuneration arrangements made on or after 9 July 2015 are to be included in the threshold income calculation.

In order for the new system to function correctly, pension input periods (“PIPs”) will need to be aligned with the tax year. (This will be the case for all indi- viduals, whether or not they are likely to be subject to the tapered annual allowance.) From 6 April 2016 therefore, all PIPs will start on 6 April and end on the following 5 April.

Complicated transitional measures have been put in place to ensure that individuals receive the correct amount of tax relief for the period up to 5 April 2016. Essentially, all PIPs that were “open” on 8 July 2015 ended on that date. A new PIP for those arrangements started on 9 July 2015, and will end on 5 April 2016. All members will have a total AA for the 2015/16 tax year of £80,000 (plus any available carry-forward from the previous three tax years). Members will be able to make up to £40,000 (plus any available carry-forward) of pension savings in the period from 9 July 2015 to 5 April 2016. HMRC has published a helpful guidance note explaining the transitional measures in detail and giving a number of examples of how these measures will work in practice.

Issues arising for schemes

Salary sacrifice and flexible remuneration arrangements

As we said above, contributions paid under salary sacrifice and flexible remuneration arrangements made on or after 9 July 2015 are to be included when calculat- ing an individual’s “threshold income”. The legislation leaves open a number of questions about when a salary sacrifice or f lexible remuneration arrangement is “made” for these purposes and, in particular, when post-9 July 2015 changes to an arrangement entered into before 9 July 2015 will bring contributions under the arrangement within the scope of the threshold income calculation. To date, HMRC has not published any guidance in this respect.

In our view:

  • arrangements in respect of post-9 July 2015 joiners may well be caught (even if similar arrangements existed for earlier joiners);
  • where a pre-July 2015 joiner is taking part in a pre-9 July 2015 salary sacrifice arrangement, a straight “refresh” of that arrangement should be acceptable, and so should an indirect increase in the amount sacrificed arising simply because the amount of employment income sacrificed is expressed as a percentage of salary and the underlying salary is increased; but
  • anything else (whether amounting to an increase or decrease in the level of contribution) runs the risk of bringing all employment income sacrificed under the arrangement within the scope of the threshold income calculation.

Schemes and employers should remember that the tapered AA, and in particular whether an individual has income in excess of either the threshold income level or the adjusted income level, are questions involving members’ individual tax affairs. Employers and schemes cannot determine whether an individual is within the scope of the tapered AA and should avoid providing information that could be construed as tax advice.

Pension savings statements

Schemes are required to provide a “pension savings statement” to any member whose savings under the scheme in any tax year exceed the AA. A pension savings statement must set out certain prescribed information about the member’s pension savings and the AA in the relevant tax year and the three preceding tax years. From April 2016, the obligation to provide a pension savings statement will arguably apply where a member who is subject to the tapered AA has pension savings in the tax year that exceed the tapered AA.

This will present a problem for schemes. The level of the tapered AA is determined by the relevant indi- vidual’s adjusted income. The level of the tapered AA will therefore vary from one individual to another, and schemes will not be able to know (a) whether a mem- ber is subject to the tapered AA, and (b) if so, what that member’s tapered AA actually is, unless the member tells them. This puts schemes in a position where they are subject to a statutory duty with which they are extremely unlikely to be able to comply.

We would hope that the Government will correct the legislation in some way, for example to impose an obligation on members who are subject to the tapered AA to notify their scheme of the level of their tapered AA, and for schemes only to be required to provide pension savings statements to members who have complied with this duty. However, even if the legisla- tion is not corrected, we do not believe that schemes could reasonably be penalised for failing to comply with a duty where they had insufficient information to do so.

Other provision of information  requirements

Regulations set out a new requirement for schemes to provide a pension savings statement to any member whose savings under the scheme exceed £80,000 over the 2015/16 tax year and/or exceed £40,000 in the period between 9 July 2015 and 5 April 2016. The statutory provisions setting out the information to be included in this statement are adjusted so that:

  • some information must be provided separately for the periods between 6 April 2015 and 8 July 2015 and between 9 July 2015 and 5 April 2016; and
  • some information that must normally be included in a pension savings statement need not be provided.

Lifetime allowance

What’s changing?

The lifetime allowance (“LTA”) will be reduced from

£1.25m to £1m from 6 April 2016. Individuals whose pension savings on 5 April 2016 exceed £1m will be able to apply for two types of “protection” from the reduction: fixed and individual protection (“FP16” and “IP16”). Members holding FP16 will have an LTA of the greater of the “standard” LTA (£1m for the 2016/17 tax year, but intended to rise in line with inflation in future) and £1.25m. Members holding IP16 will have an LTA of the greater of the “standard” LTA and the value of their pension benefits on 5 April 2016.  It will be possible to hold both FP16 and IP16.

Further benefit accrual from 6 April 2016 (other than in certain prescribed circumstances) will result in the loss of FP16, but not in the loss of IP16. FP16 can also be lost in certain other circumstances, for example if the member transfers DB rights to another DB scheme without the original scheme being wound up.

The protections will operate in largely the same way as the fixed and individual protection regimes for the 2014 reduction in the LTA, but the application process for both protections will be different:

  • Members will need to apply online for protection. There is no deadline for applying for either FP16 or IP16.
  • Until 5 April 2020, members will have the right to ask schemes for “such information ... as is neces- sary” for them to calculate the value of their pension benefits as at 5 April 2016.  The information must be provided within three months of the request.
  • The online application system will not be available until July 2016, so an interim application process will apply between April and July 2016. Members wishing to rely on FP16 or IP16 in that period must contact HMRC in writing with certain prescribed information.  Protection granted during this interim period will expire on 31 July 2016.  Once the online application system is available, members who have already applied for protection under the interim process will therefore need make a full online application in order to continue their protection.
  • Members who successfully apply for FP16 or IP16 will receive a reference number (whether applying for interim or full protection). They should supply this number to the scheme administrator when applying to take their benefits.
  • HMRC is also planning to introduce an online service for scheme administrators to check the protection status of members.

Issues arising for schemes

5 April 2016 benefit valuations

Members wising to apply for IP16 will need to send HMRC details of the value of their pension benefits as at 5 April 2016. The f luctuating nature of the value of money purchase benefits means that it will be extremely difficult, if not impossible, to calculate the value of a member’s money purchase benefits after the relevant date. We would therefore recommend that trustees ask their administrators to “bank” a record of the value of members’ money purchase pots as at 5 April 2016.  Whilst the calculation required for defined benefits can be carried out after 5 April 2016, schemes may still wish to consider banking valuations of members’ defined benefits as at that date.

Other issues

A number of other issues are raised by the current drafting of the legislation intended to implement the 2016 reduction in the LTA and the associated protec- tion regimes. We hope that these issues will be resolved before the legislation is passed by Parliament.

Taxation of lump sum death benefits

What’s changing?

The special lump sum death benefits charge will reduce from 45% to the recipient’s marginal tax rate from 6 April 2016. The special lump sum death benefits charge is payable on most lump sum death benefits paid in respect of a member who died after age 75.

In addition, from 6 April 2016 the requirement to pay lump sum death benefits within two years of the member’s death will only apply when the lump sum is paid to a “non-qualifying person”, meaning:

  • a person who is not an individual (e.g. a company); or
  • a person who is an individual and is paid the lump sum in his or her capacity as:
    • a trustee or personal representative (unless their only duty is to pass the money on to specified beneficiaries);
    • a company director; or
    • a partner in a firm or limited liability partnership.

Lastly, the scope of the exemption from inheritance tax (“IHT”) for certain death benefits paid from pension schemes will be extended so that an IHT charge will not arise where a member dies leaving undrawn but designated drawdown funds. This change will be backdated to apply to deaths since 6 April 2011.

Issues arising for schemes

Schemes which have hard-coded the requirement to pay lump sum death benefits within two years of the member’s death may wish to review their death benefit rules in order to reflect the increased f lexibility from April 2016 with regard to the timing of payment.