Pensions Industry Update - January 2016
HMRC Newsletter 75
HMRC has produced newsletter 75 which contains the following items:
- The inheritance tax treatment of drawdown funds
- Pension flexibility
- Scottish Rate of Income Tax
- Relief at source – annual returns of information
- Lifetime Allowance reduction
- Annual Allowance
We would particularly draw your attention to item 2b (Pension flexibility – Defined Benefits Lump Sum Death Benefits (DBLSDB) on death of a member before age 75).
Currently, if a member dies before reaching age 75 and any DBLSDB payable as a result of that death is not paid within two years of notification of death, the payment is deemed by HMRC to be an unauthorised payment.
From 6 April 2016, where these payments are made to an individual, they will no longer be treated as unauthorised payments but will instead be taxed at the recipient’s highest marginal rate of tax. They will also need to be reported to HMRC via RTI.
Where such a payment is made to a non-individual, it is treated as a special lump sum death benefit and the special lump sum death benefits charge applies.
Protected Pension Age
The Pension Ombudsman (PO) has recently decided that the employer of a member with a Protected Pension Age should have provided information about the possible adverse tax consequences of becoming re-employed after starting to receive his pension.
If members have a Protected Pension Age (can retire before age 55) they can only take their benefits as authorised payments if they satisfy at least one of the additional following requirements:
- Must be at least a six month break in employment
- There has been at least a one-month break in employment and either the new employment is “materially different” from the previous employment or the scheme rules provide for abatement – that is, reduction of the member’s pension to reflect his earnings.
If neither condition is met, the member will lose his Protected Pension Age and all pension benefits paid will be treated as unauthorised payments.
End of contracting-out: leavers post-5 April 2016
After 5 April 2016, HMRC will no longer be updating their system to take account of leavers and transfers of contracted-out rights that take place after that date. As such, it will no longer be necessary to advise HMRC of these events.
HMRC will still need to be advised (well in advance of December 2018) of any movement or method of preservation of contracted-out rights that occurs before 6th April 2016.
DWP State Pension Projection
From 06/04/16 the New State Pension (nSP) is being introduced and it has always been one of the key ‘selling points’ that people should be better off than they would have been under the old rules. This report (published by the DWP) looks forward up to and including the year 2060. The data shows the long-term impact of the new State Pension on people’s pensions, with over 75% of women and over 70% of men gaining in the first 15 years of the new State Pension. However, the report notes that “this proportion then begins to gradually diminish over time, falling to around two thirds by 2040 and just over half by 2050.”
State Pension information
As nSP will be paid to people reaching state pension age on or after 06/04/2016 the DWP has been sending out statements that communicates the changes. One of the things included on the statement is the COPE. The COPE is the Contracted Out Pension Equivalent, this was mentioned in Countdown bulletin 12. It seems that the inclusion of COPE following feedback has been met with concern as the way it is referred to is misleading and confusing. Useful information for individuals in relation to COPE can be found in the the following:
The DWP may make some of the suggested changes to the statements which will hopefully include changes to the COPE so this may only affect some of the people that have received statements since September 15.