2015 has been another year of upheaval for workplace pension provision in the UK. What can we expect in 2016?
Pensions tax consultation
In the Summer Budget, the Government announced a consultation on whether there is a case for reforming pensions tax relief to strengthen incentives to save, offering savers greater simplicity and transparency. The consultation put forward various options, ranging from fundamental reform (for example, moving to a system which is “taxed-exempt-exempt” like ISAs and providing a government top-up on pension contributions) to less radical changes (such as retaining the current system and altering the lifetime and annual allowances).
The consultation closed on 30 September 2015. There has been speculation that the outcome is a foregone conclusion with the Government having already made up its mind to change to a “taxed-exempt-exempt” model. However, the Chancellor George Osborne told the House of Commons on 27 October 2015 “It is a completely open consultation and a genuine Green Paper, and we are receiving a lot of interesting suggestions on potential reform. We will respond to that consultation fully in the Budget”. At the 2015 Autumn Statement and Spending Review, the Government confirmed that it will publish its response at the 2016 Budget.
So watch this space.
Pensions tax relief restrictions
Two new restrictions are scheduled to take effect on 6 April 2016:
- 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 that adjusted income exceeds £150,000, limited to a maximum reduction of £30,000; and
Employers, trustees and members should be planning for these changes now if scheme members are affected. HMRC has recently published wording that trustees can use in scheme literature or on their scheme website to raise awareness of the reduction in the lifetime allowance and the steps that members will need to take to protect their pension savings from a lifetime allowance tax charge.
The new single-tier state pension
The new single-tier state pension will become live on 6 April 2016 and with it will come the demise of contracting out on a defined benefit basis. The full rate of the new pension has been confirmed as £155.65. It is not just schemes that are, or were, contracted out that will be affected by these changes. 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, will need to review their benefit design to ensure that it continues to work as originally intended.
Future changes to state pension age are also likely to affect any scheme rules which interact with state pension provision and employers and trustees may also wish to consider this issue in any review of their scheme rules.
DC code of practice
The Pensions Regulator is consulting on a draft revised code of practice on the governance and administration of defined contribution (DC) schemes. The revised code is shorter and simpler than the version currently in force and sets out the Regulator's expectations concerning how trustee boards should:
- implement the statutory duty to process core financial transactions promptly and accurately;
- approach compliance with the charges cap; and
- undertake the value-for-money assessment they are obliged to include in the chair's annual statement.
The consultation closes on 29 January 2016. The intention is to lay the revised code of practice before Parliament in May 2016 and for it to come into force in July 2016. The Regulator will be publishing a series of "how-to" guidance documents to support the code, in draft, in spring 2016.
Trustees of DC schemes may wish to familiarise themselves with the Regulator’s proposals and, if they have concerns, to respond to the consultation before it closes.
Claiming back VAT on pension fund management costs
Since the article in our summer newsletter, HMRC has published a further brief (17/15) about an employer's ability to deduct VAT incurred on pension fund management costs. In the brief, HMRC:
- states that where an employer pays directly for asset management costs under a tripartite contract, in its view that employer is not entitled to a Corporation Tax deduction;
- sets out its views on two options other than tripartite contracts that enable an employer to deduct input tax: pension scheme trustees supplying scheme administration services to the employer or VAT grouping a corporate pension scheme trustee and the employer; and
- extends use of the 70/30 rule to 31 December 2016 - under this rule employers recovering VAT incurred in respect of costs of investment management activities of a pension scheme are allowed to assume that 30% of the overall fee paid relates to general management with the remaining 70% relating to investment activities.
HMRC is still considering representations it has received, in particular in relation to asset management services and whether there are alternative tripartite structures that would enable a Corporation Tax deduction. Further guidance on this continuing saga is promised by HMRC. In the meantime, employers and trustees may wish to weigh up the pros and cons of the options outlined in the brief in the light of their own scheme’s circumstances.
Automatic enrolment: re-enrolment may soon be with you
Employers that have automatically enrolled eligible jobholders in an automatic enrolment scheme will need to check their automatic re-enrolment date to make sure that they re-enrol eligible jobholders who have been automatically enrolled but have opted out.
The automatic re-enrolment date will fall around three years after the employer's staging date. The employer can choose the exact date provided that it falls within a period of three months either side of the third anniversary of the staging date.
Horton v Henry (Court of Appeal)
An appeal is due to be heard early in 2016 against the High Court’s decision that it could not make an income payments order (IPO) in respect of a bankrupt’s pension which was not yet in payment even though the bankrupt might be entitled under rules of the scheme to draw the pension.
Briggs v Gleeds (Court of Appeal)
An appeal is to be heard against the High Court’s decision that a series of deeds of amendment executed over 20 years were invalid on the basis that they were defectively executed.
All the signs are that 2016 will be as frenetic as 2015 from a pensions perspective but we wait to see whether the activity translates into the stronger, simpler and more transparent system of pension provision that employers, trustees and employees would like to see.