2016 is already shaping up to be another significant year for UK pensions. A number of important legal and regulatory changes came into force on 6 April of this year, and there are more changes on the horizon. Many of the changes affect both defined benefit (DB) and defined contribution (DC) pension plans but, consistent with developments over the last few years, there continues to be a real focus on the operation and regulation of DC pensions.
CHANGES WHICH CAME INTO EFFECT ON 6 APRIL 2016
Tapered annual allowance
The full annual allowance for pension savings remains £40,000 in this tax year. However, the allowance has been reduced for many people with taxable income of over £150,000 per annum. “Income” for this purpose includes employer and employee pension contributions, as well as income from other non-employment-related sources such as investment and rental income. For those individuals with taxable income over £210,000 per year, the annual allowance could now be as low as £10,000.
Employers who have not already done so, should act quickly to assess which of their staff may be affected by this change and decide whether to limit pension contributions and/or re-shape the benefits they pay to higher earners. Any changes then need to be implemented and communicated to affected staff.
Also, all pension input periods for arrangements under a registered pension scheme are now aligned with the tax year.
Reduction in lifetime allowance
The standard lifetime allowance for pensions was reduced to £1 million (from £1.25 million) from 6 April this year. Two forms of transitional protection - fixed protection 2016 and individual protection 2016 – are available to individuals who may be affected by this change. Individuals who wish to apply for fixed protection 2016 needed to have stopped benefit accrual in all registered pension schemes by 5 April this year (with limited exceptions).
Retirement ‘risk warnings’
Trustees of DC pension plans are now required by law to give members generic risk warnings at the time when they provide members with the means to access those benefits. Trustees also need to include a statement about the importance of reading the risk warnings and accessing pensions guidance and advice.
Ban on active member discounts
Trustees of pension plans used as qualifying schemes for auto-enrolment purposes are now prohibited from applying different charges to deferred members compared with those applied to active members.
However, this does not prevent an employer paying for some or all of the charges on behalf of its current employees, provided the overall charge applied to active and deferred members is the same. Similarly, trustees can apply different charges to different members provided a deferred member is not paying more than they would have done had they still been an active member.
Ban on member-borne commission
“Service providers” are now prevented from levying a charge on a member of a qualifying scheme, who is or was a worker of a scheme employer, to fund commission payments to advisers for advice or services provided to employers or members (with very limited exceptions).
This ban covers all money purchase benefits under a qualifying scheme, including additional voluntary contributions (AVCs) (even if these are the only form of money purchase benefit under the plan).
Initially, this ban only applies to commission arrangements entered into on or after 6 April 2016 and to pre-existing arrangements that are varied or renewed after that date. The Government intends to consult later this year on how to deal with existing arrangements.
New auto-enrolment exceptions
Employers can now choose whether or not to automatically enrol or re-enrol:
- company directors; and
- members of an LLP, who are in receipt of qualifying earnings and who are not treated as being employed by the LLP for income tax purposes.
(Note that under section 863A of the Income Tax (Trading and Other Income) Act 2005, salaried members of an LLP could be treated as employees for tax purposes and so not all salaried members are covered by the above provision.)
The Government also plans to introduce a similar exception as soon as possible for individuals who register for transitional protection following the reduction in the lifetime allowance – see above.
New single tier state pension
A new single tier state pension came into existence on 6 April of this year. Individuals who reach state pension age on or after this date will receive the new state pension. The starting rate of the full new state pension for a single person is £155.65 per week. Transitional rules apply to individuals who have built up entitlement under the current system.
ON THE HORIZON
New Lifetime ISA
In his budget speech, the Chancellor announced that from 6 April 2017 the Government will introduce a new Lifetime ISA. Key features will include:
- Individuals aged 18 to 39 will be able to open a Lifetime ISA and contribute up to £4,000 in each tax year. This will count towards a new total annual ISA limit of £20,000.
- Individuals will receive a £1 government bonus for every £4 that they save into a Lifetime ISA – equivalent to 20% basic rate tax relief.
- Savings can be used at any age towards payment of a deposit on a first home valued at no more than £450,000 (after a minimum of 12 months saving) or for any reason at or after age 60.
- Savings can also be withdrawn as a lump sum (tax-free) in the event of terminal illness at any age.
- Any other withdrawals before the age of 60 will mean forfeiting the government bonus on the part withdrawn (plus any interest or growth on that bonus), and will also attract a 5% charge.
New code of practice for DC schemes
The Pensions Regulator continues to focus on the governance of DC pension schemes. Following consultation, a new code of practice is expected to come into force in summer 2016. The code will raise the bar on governance for DC plans and explain how the Regulator expects trustees of such plans to fulfil their new legal duties.
Pensions advice allowance
The Government is to consult on introducing a Pensions Advice Allowance during Summer 2016 to allow savers to withdraw £500 tax-free before the age of 55 from their DC pensions to redeem against the cost of financial advice. The exact age at which such withdrawals will be permitted with be the subject of consultation.
Tax and NICs relief available for employer-arranged pension advice will increase from £150 to £500 from April 2017.
The Government is to ensure that the pensions industry designs, funds and launches a pensions “digital dashboard” by 2019, to enable members to view all their pensions savings in one place.
New pensions advice service
The Money Advice Service, The Pensions Advisory Service and Pension Wise are to be restructured to produce a “slimmed-down” money guidance service. Plus, there will be a new pensions guidance body which will enable consumers to have all their pensions questions answered in one place.