Headlines for the year ahead include:
- Reduction in pension tax allowances;
- Beware potential radical changes to the taxation of pensions in the March budget;
- Auto-enrolment continues – large employers may need to re-enrol staff (note some new exemptions) and mid to small employers will be reaching their staging dates.
- VAT on pensions costs – generally continue with current arrangements until 31 December 2016;
- Potential higher national insurance costs for employers and employees who previously benefited from contracting out when that is abolished in April;
- Deadline for submitting contingent asset certificate (or re-certification) to reduce Pension Protection Fund levy 31 March 2016.
TAX CHANGES – REDUCTION IN TAX ALLOWANCES
The annual allowance will be reduced for those with annual incomes over £150,000. For every £2 of income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000. Pension contributions are counted as income for this purpose unless the individual's income net of pension contributions is £110,000 or less.
The lifetime allowance will reduce from £1.25M to £1M. The rules surrounding transitional protection are slowly being drafted by HMRC. Both of these changes take effect from 6 April 2016.
POSSIBLE NEW TAX REGIME
The Government is consulting on whether, to reform the current system of tax relief on pension savings. The current exempt, exempt, taxed model (EET – on contributions, investments and benefit payments respectively) is under review. There is a possibility of moving to a taxed, exempt, exempt system (TEE), which would see tax relief on pension contributions fully (expected March) removed.
As an alternative, the Government is considering a flat rate pension relief for all savers. This could be in the 30 – 35 % region. That would mean less tax relief for higher rate tax payers but greater relief for basic rate tax payers. The Government will publish its response as part of the 2016 Budget.
Auto-enrolment continues, with smaller employers and new employers reaching their staging dates in 2016 and 2017. The larger and medium employers will need to plan for their three yearly re-enrolment process, reassessing their workforce in a similar way as at their original staging date and auto-enrolling eligible jobholders who are not in a qualifying scheme. Postponement does not apply on re-enrolment.
Those who originally staged early, in late 2012 or early 2013, may be in the middle of this process and may be able to take advantage of some new exemptions for specified categories of worker.
The deadlines for increasing the minimum contributions are being pushed back to align them with the tax year. It is proposed that the increase in contributions due at 1 October 2017 will now be due at 6 April 2018 and that at 1 October 2018 moved to 6 April 2019.
Employers who are meeting their auto enrolment obligation by using a pension scheme that is currently contracted-out of the State Scheme will need to ensure that the scheme satisfies one of the other available tests for auto-enrolment purposes from 6 April 2016 (when contracting out is abolished).
VAT ON PENSION COSTS
HMRC has extended the transitional period before introducing its new policy on recovering VAT on pension costs to 31 December 2016. Until then the existing approach will continue to apply. Companies, trustees and their service providers still need to consider how they will respond to HMRC’s change of policy and implement any necessary changes before the transitional period expires when HMRCs position becomes clear.
Further guidance is expected from HMRC early in 2016.
- a new code of practice for DC governance of occupational schemes with a DC element is expected;
- for contract-based arrangements, 2016 will see the first reports from Independent Governance Committees set up in 2015 to oversee the governance of contract based DC arrangements.
END OF DB CONTRACTING-OUT
Contracting-out of the State Second Pension on a defined benefit basis will end from 6 April 2016 as a result of the introduction of the new single-tier state pension (see below). There is a statutory override designed to allow most private sector employers to offset the cost of additional National Insurance Contributions by amending the pension scheme rules. It is likely to take some time to decide on and implement changes to pension scheme rules using the override (with a 60 day member consultation exercise being required in many cases). So, employers that wish to make use of the statutory override by 6 April 2016 need to take immediate action.
Trustees wishing to use HMRC’s service to reconcile their GMP records with those held by HMRC must register to do so before 5 April 2016. After that, it will be too late. Trustees who do not reconcile their plan’s GMP data with that held by HMRC are at risk of paying incorrect benefits to members and adversely affecting individuals’ state pension entitlements.
NEW SINGLE TIER STATE PENSION
From 6 April 2016, the current state pension will be replaced with a new single tier state pension. Where scheme’s benefit design is integrated with the current state pension system (for example, there is a basic state pension offset or definitions refer to the state second pension), the rules may need to be amended to reflect the changes to the state pension.
Deadline for certifying contingent assets (or re-certification) to reduce the pensions protection fund levy is midnight on 31 March 2016.
Other issues on the horizon
- The fate of salary sacrifice arrangements: there are indications that these may not be permitted in their current form long-term as a means of avoiding National Insurance contributions, although there are no concrete proposals or timing as yet. The most recent development on this was in the Autumn Statement when the Government said:
"The government remains concerned about the growth of salary sacrifice arrangements and is considering what action, if any, is necessary. The government will gather further evidence, including from employers, on salary sacrifice arrangements to inform its approach."
- Member-borne adviser commission and consultancy charges are expected to be banned under qualifying schemes used for automatic enrolment from April 2016. The Government is proposing a phased introduction to the implementation of the commission ban.
The increased focus on DC governance by both the Government and the Pensions Regulator continues.