2016 - Another year of change for pensions
Wednesday 13th January 2016
The New Year is of course a time to look forward to what might happen in the next twelve months. And to make predictions that, as ever, may not look quite so clever by the end of the year.
1. Pension Taxation
At the start of 2015, and before the General Election with its surprise result, we were expecting (perhaps hoping) that it might be a quieter period for pensions, with the industry still digesting and processing the new member flexibilities and working through auto-enrolment. Instead, we’ve had a consultation on whether the decades-old system of tax relief for pensions should change. The announcement of what is going to happen is now going to be part of the March 16 Budget.
The current best estimate is that higher and standard rate tax reliefs will be replaced by a ‘flat rate’ tax relief, perhaps at a rate of about 33%. This would mean that no matter how much tax you pay, any pension tax relief will be at the same rate – a big bonus for standard rate taxpayers, a loss for higher-rate taxpayers. If you are lucky enough to earn more than £150,000, your annual allowance (the maximum you can pay in and benefit from tax relief) will still fall from April this year.
It’s also still possible that the shake-up will be even greater. As we’ve discussed before, one option is to move away from tax relief on contributions and (with some exceptions) investment returns, with pension benefits being tax-free instead. While many commentators are now suggesting that this is less likely, it could still happen.
Who knows what else will crop up in the course of 2016 that we didn’t expect?
Still, there are of course some things that we can predict with at least a fair amount of certainty.
2. End of contracting-out and the new state pension
Contracting-out for defined benefit (final salary-type) schemes ends this April. This means that these pension schemes can no longer provide a guaranteed level of pension in place of the old State Second Pension, in exchange for both members and employers paying lower National Insurance Contributions.
This is of course tied into the move to a single-tier state pension. As there is no longer any State Second Pension, there is nothing for private-sector schemes to replace.
3. Auto-enrolment and re-enrolment
Perhaps the biggest ongoing pension story however is that of auto-enrolment. A huge number of smaller employers and their employees will pass their staging dates this year, and we will see how the various systems and providers cope with it. And some of the larger employers who entered auto-enrolment first will pass the three-year anniversary of their staging dates, and will need to automatically re-enrol any employees who originally opted-out. Employees can of course opt-out again if they wish.
4. Europe – Institutions for Occupational Retirement Provision (IORP) Directive II
This has been bubbling for some time, but we’re expecting that the final text of this Directive will be agreed in the first part of the year. While it no longer appears that it will impose any changes on funding requirements for UK pension schemes (at some points it appeared it might have done), it is expected to impose new obligations regarding risk assessment, governance and information disclosure. Again, we will keep an eye on developments.
Author: Elspeth Beatty
Fire and Police Pension Schemes – Pensions Ombudsman publishes update
Thursday 3rd September 2015
Following from our blog of 18 June this year (which you can read here: http://www.brabners.com/blogs/pensions), the Pensions Ombudsman has published a detailed note on developments since the determination in the Milne complaint. This found that because of delays in updating calculation methods, Mr Milne’s tax free lump sum benefits were lower than they should have been.
Mr Milne was only one of a large number of people potentially affected. In fact, based on the retirement dates of members that the Ombudsman thinks will have been affected, there could be 34,000 people affected across the two schemes.
There has been a lot of interest since then, and the Ombudsman’s statement is intended to answer a lot of common questions, and no doubt to avoid a large proportion of those people making complaints to him.
In essence, he says that the two schemes will be dealing with the issue of correcting underpayments, and that pensioners will in due course receive payments as appropriate. According to the update, members of the Firefighters Pension Scheme who retired between 1 December 2001 and 21 August 2006, and members of the Police Pension Scheme who retired between 1 December 2001 and 30 November 2006 are those who will be included in the exercises.
He also recognises that the issues involved for the two schemes and the other parties are complex, and that the sheer number of members involved means that resolving it will take time. He will not accept at this point any complaints that the process is taking too long.
He has also received enquiries and complaints in respect of members who retired earlier than 1 December 2001, as to whether they have any rights to recalculated benefits. He says that the calculation methods themselves are not up to him to decide. The decision made by the previous Ombudsman simply stated that the methods were not reviewed and updated when they should have been. So it remains to be seen whether any members retiring before 1 December 2001 will be eligible for any additional payment.
The link below will take you to the full update.
Author: Elspeth Beatty
The Summer Budget - what does it mean for pensions?
Thursday 9th July 2015
There was a lot in the Chancellor’s July Budget that affected pensions. It seems that the industry’s hope for a period of relative peace and quiet, to let all the recent major changes settle down, is going to be dashed. It’s going to be another busy year for everyone involved with pensions.
Some of the changes were expected, some less so. This is a snapshot of our initial thoughts on some of the more headline-grabbing issues.
- Drop in annual allowance for higher earners
People paying tax at the additional rate of 45% from April 2016 will have a much reduced annual allowance, i.e. the amount that they can pay into a pension scheme each year and gain tax advantages. For every £2 earned above an ‘adjusted’ rate of £150,000, the allowance will drop by £1. So the allowance will be £10,000 for anyone with earnings of £210,000 or more.
It’s not quite that anyone earning £150,000 or more will lose annual allowance progressively until they reach £210,000 or more. It seems that there will be some detailed calculations to work out who will be affected, including taking into account employer contributions to a pension scheme, although no-one earning less than £110,000 should be caught.
This is complicated stuff. It could be seen as a disincentive to save in pension arrangements for those high-earning members who are often also the decision-makers at most employers. This therefore potentially means they will become uninterested in providing any form of pension benefit for their employees above and beyond the bare minimum required by auto-enrolment. And the sheer complexity of calculating who might be affected, and by how much, is going to add a further burden to payroll and HR functions and advisors, particularly accountants and independent financial advisors.
It may also be important to consider whether changes to high earners’ benefit packages are necessary, as pensions are going to be much less attractive from April 2016 onwards.
All of this will need to be planned well in advance of the changes coming into effect.
Of course, it’s possible that all of this might be swept away by the consultation on pension tax relief, as discussed below, but we will have to wait and see.
- Flexibilities – review of marketplace
In April this year the Government introduced much greater flexibility to how pension scheme members can take their benefits. Since then, there has been a lot of focus and publicity about the fact that many pension scheme providers, both trusts and insurers, haven’t been letting members use the flexibilities fully or at all within their schemes. For example, they may place restrictions on the number or type of transfers, or charge a large amount of money to use the flexibilities. There also costs associated with transferring funds to a product that offers flexibility.
In part this may be because of how fast the changes were introduced, meaning that schemes and providers haven’t managed to adapt to the new regime yet, but nevertheless the negative publicity rumbles on. The Government will consult ‘before the summer’ on whether it needs to take action to ensure that people can access their benefits flexibly.
It’s not an unexpected development. Again, we’ll have to see what comes of it. At the moment it is up to schemes and providers to decide how much flexibility they offer, and as a last resort members can usually transfer out to another scheme which offers the flexibilities if they wish. However, it seems that it is certain barriers on exit that are of most concern, and it is possible that providers could have cost caps imposed on them when making transfers.
- Taxation of death benefits with death after age 75
As well as the flexibilities discussed above, the Chancellor announced last autumn at the Conservative Party conference that it would be possible to use pension funds to leave money to the next generation in a very tax-efficient way.
He announced during the Budget that lump sum death benefits in respect of people who died after the age of 75 would be taxed at the recipient’s marginal rate, rather than the current flat 45% rate from 6 April 2016.
This was an expected change, and means that tax charges on such benefits will often now be much more tax-efficient.
- Consultation on pensions tax relief
This wasn’t a complete surprise, as rumours and suggestions had been floating around that a change in how pension tax relief was dealt with was coming. But it does seem that there may well be some major changes on the horizon – no Government spends this much time and trouble on a consultation document unless there’s a fairly strong desire for change.
Although there are no hard and fast options set out, the consultation wants to look at all aspects of tax relief, from maintaining (or simplifying) the current system, in which contributions and building-up a pension pot are generally tax free, to removing the tax exemption entirely on contributions, but perhaps making income in retirement tax free. That is the system in a number of countries already.
This doesn’t of course have any immediate implications, but could signal another huge change in the way that pension contributions are dealt with, and in particular on the tax incentives for pension savings. We will keep a close eye on progress, and Brabners LLP will be responding to the consultation directly, so any comments you may wish to feed into that process would be more than welcome.
This is of course only a short summary and commentary on the key points. Please contact the Pensions team if you would like to discuss anything in the Budget, or any other pensions matter, in more detail.
Author: Elspeth Beatty
Compensation for lump sums paid incorrectly under the Fire and Police Pension Schemes
Thursday 18th June 2015
A recent determination by the Pensions Ombudsman is likely to result in compensation being paid to certain fire and police officers who retired in the early 2000’s and took part of their benefits as a tax free cash lump sum instead of pension (known as ‘commutation’).
The case concerned Mr Milne, a member of the Firefighter’s Pension Scheme, who retired in November 2005. His cash lump sum payment was calculated on commutation terms that had not been reviewed since July 1998. The Government Actuary’s Department was responsible for reviewing the commutation terms and had recommended that a review was done in 2001. However, the next review only took place in 2006 and was not implemented until 2009, albeit backdated to dates in 2006 for each scheme.
The commutation terms are intended to take account of things such as improvements in life expectancy of the general population, and the failure to review the terms for such a long period of time was found to have resulted in lower cash lump sums being paid to members than would otherwise have been the case. Mr Milne was found to be entitled to an additional payment to reflect the recalculated benefit, together with interest on the back-dated payment. This case was just one of a number of similar complaints received by the Pensions Ombudsman in relation to both the Fire Scheme and the Police Pension Scheme. It is most likely to affect members of either scheme who retired and took cash lump sums from late 2001 onwards.
Although the facts of the case are specific to these schemes, all pension scheme trustees and administrators need to be comfortable that the terms and assumptions on which benefits are commuted for cash are reasonable. If they are not, they could be open to challenge. In particular, they should be reviewed regularly by the scheme’s actuary.
If you would like any further information or to discuss any other pensions law matter you may have, please click on the link below for my contact details, or get in touch with any of our Pensions team.
Author: Elspeth Beatty
Pensions - The New World - Seminars on 2 and 3 June 2015
Friday 5th June 2015
Liz Graham, partner and head of Brabners LLP’s pensions team, and I presented a seminar on the huge changes shaking the pensions world to audiences our offices in Manchester and Liverpool on Tuesday 2 and Wednesday 3 June.
It really is a new world. Auto-enrolment, the compulsory enrolment of workers into a qualifying pension scheme, is now impacting on the smaller employers, with fewer than 50 employees, who make up the vast majority of the United Kingdom’s employers. It is also the sector with the least participation in pensions amongst its workers, and probably the fewest resources to deal with auto-enrolment.
The challenge facing both employers and the pensions industry is to ensure that these workers gain access to pension provision when they are entitled to it. It won’t be easy.
The Government has also revolutionised how people deal with the pots that they have built up during their working lives. ‘Freedom and Choice’, also known as pensions flexibility, has given most people with a money-purchase pension pot the ability to do more with their money, from drawing it down directly from the fund over time to finance retirement to leaving it to the next generation, in some cases without even attracting tax on the income it provides.
Once, people either knew from the works pension scheme how much they would have to live on, based on how long they had worked and how much they’d earned, or had to take pot luck with their money-purchase pot at retirement, when they found out how much pension they could buy.
For most people outside of the public sector, such a generous works scheme is a thing of the past. Now, the restrictions on money purchase pots have largely been lifted. All of this needs engagement from both employers and employees to make sure that employees make the right decisions and can afford to retire when they want to.
We enjoyed discussing some very interesting questions and comments from the audience on all of these issues, and even managed to include the inevitable discussion about Lamborghinis.
We were delighted with the turn-out across the two days, suggesting that there is a real appetite for more information about pensions in general. We’re going to repeat the exercise on a regular basis, so look out for more invitations for a session in late November. Watch this space!
Author: Elspeth Beatty