Pensions Industry Update - March 2016
HMRC Newsletter 77
HMRC issued Newsletter 77 on 29 March 2016. This edition includes items on the following topics:
- Budget 2016
- Lifetime allowance reduction (applications for FP2016 and IP2016)
- Pension flexibility (reporting flexible payments using RTI, new tax repayment claim forms for pension lump sum death benefit payments and taxable pension death benefit lump sums paid to a trust)
- Secondary annuities market
- Annual allowance (mainly as regards the taper effective from 6 April 2016)
- Relief at source
Worthy of particular mention is Appendix 5 which sets out a number of model “messages” to help scheme members understand the changes to theannual allowance rules.
Budget 2016 – Pensions-related items
On 16 March, the Chancellor delivered a mercifully pensions-light budget. There were, however, a number of items of interest, including the introduction of the Lifetime ISA from April 2017 which many regard as the first stage in a fundamental change to the way that pensions are taxed. Here are some of the headline items.
The Lifetime ISA
The Lifetime ISA (LISA) is designed to help young people save flexibly throughout their lives. It will enable them to save simultaneously for a first home and for retirement.
From April 2017, individuals under 40 will be able to open a LISA and contribute up to £4,000 in each tax year. The government will add a bonus of 25% to these contributions at the end of the tax year. Savers will be able to make LISA contributions (and receive a bonus) from the age of 18 up to age 50. As such, savers will (over their lifetime) be able to have contributions of up to £128,000 matched by a government bonus of £32,000. They will also receive investment growth on both their own contributions and the government bonus.
The proceeds of a LISA (which are paid tax-free) can be used from twelve months after opening the account to buy a first home worth up to £450,000 or otherwise taken from age 60 for use in retirement. It may also be possible to draw funds at any time for reasons other than buying a first home, but subject to charges and/or loss of government bonuses.
The government is considering limiting the range of benefits that attract income tax and NICs advantages when provided through a salary sacrifice scheme. The government’s intention is, however, that pensions savings, childcare and health-related schemes, e.g. Cycle to Work, that are provided through salary sacrifice schemes would continue to enjoy these advantages.
The government will “ensure” that the pensions industry designs, funds and launches a pensions dashboard by 2019. A pensions dashboard is a digital interface which would allow consumers to see all of their retirement savings (possibly including State benefits) in one place. Interestingly, the Pensions Minister recently commented that, in her opinion, a pensions dashboard was a “decade or more away.”
Budget 2016 – Technical changes
Following on from the Budget, provisions have been included in the Finance (No. 2) Bill 2016 intended to:
- Remove the requirement that a serious ill-health lump sum can only be paid from an arrangement that has never been accessed
- Make serious ill-health lump sums taxable at an individual’s marginal rate (rather than at 45%) when paid in respect of individuals aged 75 or over
- Enable money purchase pensions in payment to be paid as a trivial commutation lump sum, where total pension savings would be under £30,000 (at the moment it looks as though this change will not apply to all money purchase pensions)
- Simplify the test that takes place when a dependant’s scheme pension is payable
- Ensure that a charge to inheritance tax will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death
- Align the pensions tax rules on bridging pensions with DWP legislation.
DWP updates State Pension information
The DWP has published a new factsheet entitled “Contracting Out and why we may have included a Contracted Out Pension Equivalent (COPE) amount when you used the online service” the link also has other factsheets that may be of use. They have also updated “Your State Pension explained” leaflets.
Financial Assistance Scheme (FAS) closing to new schemes
The Pension Protection Fund (PPF) has announced that FAS will close to notification and qualifications of new schemes from 1 September 2016. They feel they have completed the “majority of the schemes” that would qualify for FAS but have confirmed “We’d encourage trustees, advisors, former trustees and/or former advisors of any pension scheme they believe may be a qualifying scheme not yet notified to us to do so as soon as possible.”
DWP – Pension Benefits with a guarantee and the advice requirement
The DWP has produced a factsheet which summarises some of the principles for determining whether certain benefits with guarantees fall within the definition of safeguarded benefits. Remember safeguarded benefits with a value of £30,000 or more when being transferred to a flexible benefit scheme need appropriate independent advice before the transfer can proceed.
Member-borne Commission Ban in Occupational Pension Schemes
The DWP have published new regulations on Banning New Member-borne Commission that will prevent service providers from recovering from members the costs of commission payments paid to advisers for their advice or services.
This ban will apply to occupational schemes that provide money purchase benefits and that are being used as qualifying schemes for auto-enrolment purposes. The ban will apply to all members of a scheme, whether active or deferred. This new legislation will come into force on the 6 April 2016.
Annual Benefit Statements for Public Service Pension Schemes
The Pensions Regulator has published a Public Service Benefit Statement Guide that provides guidance for public services pension schemes on issuing benefit statements. The requirement was for the Local Government Pension Schemes to issue annual benefit statements to active members by the end of August 2015 and for all other public service schemes by the end of August 2016.