The Spending Review and Autumn Statement 2015 which was delivered by the Chancellor, George Osborne, on 25 November includes several important
- a six-month extension of the deadline for increases to minimum automatic enrolment contributions - the Government aims to simplify the administration of automatic enrolment, particularly for the smallest employers, by delaying the next two phases of minimum contribution increases from October of the relevant year to the following April. Originally, minimum contribution rates for employers were scheduled to rise from 1% to 2% in October 2017, and to 3% in October 2018. These dates have now been pushed back, to align them with the beginning of the tax year, to April 2018 and April 2019 respectively;
- pensions tax relief consultation - as reported in our July 2015 Update, the Government has consulted on whether there is a case for it to reform tax relief. It has raised the possibility of moving from an "EET" (exempt, exempt, taxed) model to a TEE (taxed, exempt, exempt) system, which would result in tax relief on pension contributions being removed. The Government is now considering the responses to the consultation and will publish its response at the time of the 2016 Budget;
- secondary market for annuities - the Government plans, as part of legislation planned for inclusion in the Finance Bill 2017, to remove the barriers to creating a secondary market for annuities, which will allow individuals to sell their existing annuities. A consultation response is expected to be published this month, in which the Government will set out details of the measure and a framework for consumer protection;
- dependants' scheme pensions - the Government has promised to introduce legislation (as part of the Finance Bill 2016 - see below) to simplify the test applying a limit to a Dependant's Scheme Pension;
- inheritance tax and undrawn funds in drawdown arrangements - as part of the Finance Bill 2016, the Government will introduce legislation to ensure that no inheritance tax charges arise when a member of a drawdown pension scheme designates funds for drawdown, but dies before all the funds are drawn down. The legislation will be backdated so that no charges arise from deaths on or after 6 April 2011.
The Government has also expressed its concern about the growing use of salary sacrifice arrangements as a device for reducing National Insurance contributions. It proposes to gather further evidence in order to determine what action, if any, it should take. Further details of the points above can be found by clicking here.
Finance (No. 2) Act 2015 receives Royal Assent
The Finance (No.2) Act 2015 received Royal Assent on 18 November 2015.It makes a number of changes to the tax legislation, including amendments relating to tax on lump sum death benefits and revisions to the annual allowance. The changes will come into effect on 6 April 2016, and include the following:
- Annual Allowance - taper - the Annual Allowance for high earners, who have an adjusted annual income (which includes both employee and employer pension contributions) greater than £150,000 (a "threshold" taxable income of £110,000 or more is also needed), will be tapered from 6 April 2016. Under the provisions, the Annual Allowance for these individuals will be reduced by £1 for every £2 of their adjusted income beyond £150,000. The Annual Allowance can be reduced by a maximum of £30,000, meaning the remaining Annual Allowance will be £10,000 if the adjusted annual income is at least £210,000. This will affect members of both DC and DB schemes. Anti-avoidance provisions will apply where individuals enter into arrangements which seek to reduce adjusted or threshold income;
- Annual Allowance - pension input periods - from 6 April 2016, the pension input period (PIP) for a pension scheme must be aligned with the tax year. As part of these measures, any PIP which was open on 9 July 2015 will be treated as having ended on 8 July 2015. A new PIP then begins on 9 July 2015 and then ends on 5 April 2016. The effects of this are that a new PIP will begin for all schemes on 6 April 2016 and that there will have been two PIPs during the 2015 to 2016 tax year. The first, leading up to 8 July 2015, is treated as having had an annual allowance of £80,000, while the second has an Annual Allowance of £0, but allows a carry-forward from the first PIP of up to £40,000 if that amount was unused on 8 July 2015. This will allow some members to make contributions of up to £80,000 for this tax year;
- lump sum death benefits - where lump sum death benefits are paid to an individual, the 45% tax charge which used to apply if the member had died after age 75 will be removed, where the lump sums in question are paid on or after 6 April 2016, and instead such payments will (with some exceptions) be taxed at the recipient's marginal tax rate.
The final form of the legislation can be found by clicking here.
Draft Finance Bill 2016 materials published
Materials for the draft Finance Bill 2016, including an overview of the draft legislation, and draft clauses and explanatory notes, has been published by the Government. The Bill is designed to implement changes announced in the Summer Budget in July and the Autumn Statement in November. Among the main points set out in the draft documentation are:
- reduction of the lifetime allowance - the lifetime allowance will be reduced from £1.25 million to £1 million from the tax year beginning 6 April 2016. It will then increase in line with increases in the consumer prices index each year from April 2018 onwards. The legislation will also put in place two transitional protection measures: fixed protection 2016 and individual protection 2016, for use by members whose benefits exceed £1 million, or are likely to do so when they take their benefits.
- dependants' scheme pensions - technical changes will be made to reduce the number of calculations required to determine whether an excessive amount has been set aside to pay dependants' scheme pensions compared with the amount for provision of the member's pension.
- bridging pensions - the legislation will allow scheme pensions to continue to be reduced after the payment of a bridging pension, following changes to the state pension.
The draft materials can be found here.
Revaluation rates for deferred pensions published
The Occupational Pensions (Revaluation) Order 2015 has now been laid before Parliament and will be coming into force on 1 January 2016. The Order sets out the revaluation percentages which will apply for deferred members who reach their scheme's retirement age in 2016. Both the higher and lower revaluation percentages for 1 January 2015 to 31 December 2015 are 0.0%, meaning no revaluation will apply during this year. The relevant revaluation percentage for a deferred member is dependant upon the number of complete years between a member leaving pensionable service and reaching his scheme's retirement age. The cumulative percentages are set out in the Order, which can be accessed by clicking here.
FCA consultation on proposed changes to the Financial Services Compensation Scheme
The Financial Conduct Authority has launched a consultation regarding proposed changes to the Compensation Sourcebook, which governs the operation of the Financial Services Compensation Scheme (FSCS).The proposals include changes to the eligibility of pension scheme trustees to claim compensation under the scheme, for example where a financial services provider is unable to pay compensation itself.
Eligibility for trustees of money purchase schemes is currently limited according to the size of the employer. Where an employer is "large", meaning partnerships or unincorporated associations with net assets of more than £1.4m, or companies which meet two of the following three criteria:
- more than 50 employees;
- turnover of more than £6.5 million; and
- balance sheet total of more than £3.26 million,
the trustees are not able to claim under the FSCS.Under the new proposals, such trustees would be eligible to claim (this would also apply to the trustees of master trusts).The FCA says this is because the size of the employer is not necessarily relevant where the scheme provides money purchase benefits, as the employer is not providing any guarantee of funding (unlike for a DB scheme).
Where a large employer sponsors a small self-administered scheme (SSAS), the trustees are currently able to claim under the FSCS whether the scheme provides money purchase or defined benefits.Under the proposals, trustees of a SSAS providing defined benefits would no longer be eligible to claim under the FSCS, bringing the position into line with that of trustees of other defined benefit schemes which have large employers.
The consultation document, which provides further details, can be found here.
Consultation begins on draft regulations to address DC flexibilities
The DWP has begun a consultation on three sets of draft regulations which would make changes taking into account the new DC flexibilities which were brought into effect in April 2015 and address some issues which have arisen since April. The draft regulations are:
- the Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2016, which would place requirements on trustees to provide generic risk warnings to scheme members who were considering taking their benefits flexibly. These risk warnings have been set out in the Pensions Regulator's good practice guidance for trustees, but have not been a statutory requirement. The Regulations would oblige trustees to ensure that members received these warnings and add an obligation to provide additional information to illustrate how poor decisions could adversely affect retirement income;
- the Pension Sharing and Attachment on Divorce etc. (Amendment) Regulations 2016, which propose to put in place a new duty on schemes which have pension attachment orders (or "earmarking" orders) in place to write to ex-spouses where a member confirms that they intend to access their benefits flexibly. Where benefits are earmarked, they remain in the scheme with the member, but a percentage of the benefit is paid to the ex- spouse when the benefits come into payment. The original legislation did not envisage the ability of a member to take pension benefits as a single lump sum or to draw down a series of lump sums, so alerting ex-spouses to such requests gives the ex-spouse time to apply to the Court for a variation of the original order. The draft Regulations would also make it clear that the requirement to provide advice which applies where a member seeks to transfer benefits of £30,000 or more to another scheme would also apply to ex-spouse pension credit members. Other proposed changes include further exclusions to what counts as a "shareable right" where a member leaves a pension scheme before receiving a preserved pension, and to clarify some points relating to pension rights arising from death benefits and reductions to transfer values owing to underfunding of the scheme;
- the Pension Protection Fund and Occupational Pension Schemes (Miscellaneous Amendments) Regulations 2016, which would make changes to Pension Protection Fund legislation. These include: permitting trustees of schemes which have begun to wind up to pay Uncrystallised Funds Pension Lump Sums (UFPLS) to members in order to discharge the schemes' liabilities; and amendments regarding which employers are eligible to use the alternative route for PPF entry when the employer cannot suffer an "insolvency event" for the purposes of the legislation.
The document also contains a call for evidence relating to proposed changes to the method for valuing guaranteed annuity rates (GARs) when calculating the value of a member's benefits. This is relevant, for example, in determining whether the value of the pot is over £30,000, where the independent advice requirement would be triggered.
The DWP has slightly extended the consultation period, and the consultation will now close on 15 January 2016. The consultation document, which includes in its appendices the wording of the draft Regulations and the call for evidence, can be found by clicking here.
Pensions Regulator publishes Integrated Risk Management Guidance
The Pensions Regulator has published guidance for trustees and employers of DB schemes on how to develop and implement a framework for integrated risk management (IRM).The guidance is part of a series designed to assist trustees with applying the Regulator's Code of Practice on Funding Defined Benefits. The Code of Practice sets out as a principle that trustees should take an integrated approach to managing risks, with a view to helping trustees understand and manage risks in order that they can engage with the employer to consider their own, and the employer's, appetite for risk.
The guidance itself provides practical help for trustees who are seeking to put an approach to IRM in place. The guidance is not prescriptive, but rather aims to assist trustees in shaping their own approach to risk management and using this as part of their strategy for funding their scheme. It explains what IRM means in practice, as a tool to help trustees to identify and manage risk factors which may affect the funding position of the scheme, focusing on the risks associated with funding, investment and the employer's covenant. The guidance states that the key benefits of IRM are risk identification, better decision making, collaboration with the employer, proportionality (to help trustees focus on the most important risks), efficiency, risk management planning and transparency.
The guidance can be found by clicking here, and the associated Code of Practice on Funding Defined Benefits can be found here.