Welcome to Pension Matters, produced by Torquil Clark.
Every month I will update you on the latest legislation and news surrounding corporate and personal pension planning. To find out more about the topics covered in this edition, please call 01902 576707.
Ian Hill, Pensions Technical Manager
Key pension points from Budget 2012
The key pension announcements from the 21st March Budget are set out below.
Although what seems to be rumored annually, there was no abolition of higher rate tax relief with the Chancellor stating that he did not "intend to make any significant changes to pensions relief in this Budget".
No abolition or new cap on 'tax free lump sums'. Again this seems to be on the agenda annually as far as rumors are concerned.
There was no alteration in the Annual Allowance.
A new single-tier pension based on contributions is to be introduced "early in the next Parliament". It will be worth approximately £140 a week, with further details will be set out in a White Paper to be published in the spring. With some people having contracted out and some paying to make up National Insurance contributions, it will be equitable enough across generations and circumstances will be challenging. This spells the end of SERPS/S2P.
State Pension Age will be reviewed automatically in order to ensure that it keeps pace with increasing longevity. The move by the Chancellor to create an automatic link between longevity and the pension age means that tens of millions of people under 50 who expected to retire in their middle to late 60s will have their state pension pushed between one and three years further back. Analysis by the country's leading experts in longevity, suggest that a child born today will have to wait until 74 at the earliest for a state pension. Currently life expectancy is rising by around 2.5 years every decade, meaning ever increasing costs. This rate of increase is expected to continue for the next 10 years before slowing. Ministers argue that the pension system will become unaffordable without reform.
Government will legislate to ensure that arrangements where an employer pays a pension contribution into a registered pension scheme for an employee's spouse or family member as part of their employee's flexible remuneration package cannot be used to obtain tax and NIC advantages for the employee or the employer.
From April 2013, age-related allowances will no longer be available and existing age-related allowances to be frozen at the 2012/2013 levels until they align with the personal allowance.
The Government will support the creation of a Pension Infrastructure Platform, which will be owned and operated by UK pension funds and will make an initial £2bn investment in UK infrastructure in 2013. A separate group of pension fund investors has also presented proposals to the Treasury for increasing pension plan investment in infrastructure in the construction phase.
Chancellor confirms, after approval from European Commission, that the transfer of the Royal Mail pension fund's assets and liabilities to the Treasury will be going ahead. The Government plans to transfer the scheme's liabilities into the Royal Mail Statutory Pension Scheme, a newly established unfunded public pension scheme.
Government will consult on integrating the operation of income tax and NICs. From a pensions perspective the main issue to watch out for is the potential ending of salary sacrifice schemes.
Auto-Enrolment Fears For Directors
Directors and senior executives are at risk of inadvertently losing protection on their pension savings by being auto-enrolled into a work place pension scheme.
Auto-enrolment will mean all eligible workers being automatically enrolled into their employer's qualifying workplace pension scheme. This process starts from 1 October 2012 and employers must provide auto-enrolment for all eligible workers and for all new workers when they become eligible.
For those affected, there is the danger of their pension savings in excess of the lifetime allowance incurring a tax charge of up to 55%. This can affect not only those who have applied for fixed protection with effect from 6 April 2012, but also those who currently enjoy enhanced protection granted following the introduction of the lifetime allowance in April 2006.
The Lifetime Allowance was first introduced in April 2006 and at that time those potentially affected were able to opt for 'enhanced protection'. Enhanced protection fully protects an individual's pension savings from any future LTA tax charge, providing there has been no further pension accrual or pension contributions after April 2006.
Losing either of these forms of protection could be extremely costly. Whilst the loss of fixed protection could see a tax bill of up to £165,000 (55% of the difference between £1.8m and £1.5m) the loss of enhanced protection may be even higher, as all pension savings over £1.5 million will be taxed.
Auto-enrolment could invalidate this protection unless prompt action is taken to opt out of their workplace pension scheme within one month of their auto enrolment. With firms having to re apply auto enrolment requirements to those who opt out every three years, these individuals affected will need to monitor this regularly.
Directors will need to keep a close eye on their remuneration packages and their employer's auto-enrolment process if they are to avoid losing their pension protection and face a tax charge up to 55% of their pension savings in excess of the new reduced LTA of £1.5m.
DWP Confirm Earning Bands & Auto-Enrolment Earnings Trigger
The Department for Work and Pensions (DWP) has reviewed the lower and upper limits of the qualifying earnings band and the earnings trigger for auto-enrolment.
The DWP has decided to go ahead with alignment of the bands and trigger with existing payroll thresholds from April 2012. However, there is no guarantee of alignment for future years, as the flexible annual review of these thresholds has been designed to enable the Government to react to prevailing economic conditions and savings habits.
- £8,105 for the auto-enrolment earnings trigger (also the income tax personal allowance for 2012/13)
- £5,564 for the lower limit of the qualifying earnings band (also the lower earnings limit for national insurance contributions in 2012/13)
- £42,475 for the upper limit (also the upper earnings limit for national insurance contributions in 2012/13). This differs from the proposed £39,853 (the 2006/07 figure uprated with average earnings.
- The DWP is also to set pay reference periods over which proportionate versions of the above parameters will be applied. They are to be one, two and four weeks and one, three, four and six months. So if an individual paid weekly earns more than £155 in a particular week they may be subject to auto-enrolment. Pay reference periods of less than a week are not recognised. If they had been then young people doing Saturday jobs as an example might have found that they needed to be auto-enrolled.
Further Recommendations On Auto-Enrolment
It has been suggested by the House of Commons' Work and Pensions Select Committee that by the end of 2012 the pensions industry should establish a clear, accessible and universally adopted model to allow the comparison of auto-enrolment provider charges.
Other points include;
A review to examine how to promote saving above the 8% statutory minimum and whether to increase this minimum over the longer term by October 2014.
The Government and the pensions industry should create a model that helps protect employers against the risk that they will, inadvertently, select a scheme that offers poor value for money for their employees
The Government should monitor the pension market to ensure that scale and competition between providers is effective in keeping charges at a low level. The Government, or the Pensions Regulator, should publish a report every two years on the value for money of pension scheme charges, including an assessment of the levels of fee applied under auto-enrolment
From 2013 onwards, if it transpires that some auto-enrolment providers are applying hidden charges, or charges that represent poor value for money, the Government should use its powers to intervene
The Government should intervene if pension providers fail to operate a fair balance between the pension scheme charges for active and deferred members
As highlighted in previous editions, there could be significant alterations to auto-enrolment policy over the coming years and it , will not be long before investment performance and benefit choice as well as charges are under the spotlight.
Fixed Protection & Death Benefits
From 6 April 2012, the lifetime allowance will have been reduced from £1.8m to £1.5m.
A member may have protected his or her current pension savings against the reduction in the lifetime allowance by applying for fixed protection. Fixed protection will allow a member to crystallise pension benefits worth up to £1.8m without being subject to the lifetime allowance charge.
In order to obtain fixed protection, a member must satisfy various conditions. These conditions include that:
- the hard copy application form must have been received by HMRC by 5 April 2012 (late applications are not be accepted); and
- the member must have no further "relevant benefit accrual".
HMRC guidance provides that, in most cases, continued life cover provided from 6 April 2012 will not be regarded as "benefit accrual" which would cause fixed protection to be lost.
It was suggested that, where pension scheme rules provide for the life cover benefit to be restricted to the amount paid out by an insurance policy, this would cause the life cover benefit to cease to be a "defined benefit" meaning that paying life assurance premiums would then be treated as "benefit accrual"; result loss of protection.
As an update, where a defined benefit lump sum death benefit is backed by an insurance policy which may result in an amount being payable which is less (but not more) than that lump sum, HMRC suggests that payment of premiums for such insurance would not in fact prejudice fixed protection where, broadly, the lump sum paid “after the restriction is applied can itself be expressed as a defined benefit” (for example, as a percentage, pro rata or lower amount).
Court Of Appeal Dismisses Unions' Appeal Over Switch To CPI
The Court of Appeal has confirmed that the government's decision to use the Consumer Prices Index instead of Retail Prices Index as the basis on which public service pensions are annually adjusted to take account of inflation was lawful.
New Ideas On 'Work Place Pensions'
Pensions minister Steve Webb has proposed a new type of work place pension scheme which seems to be a version of with-profits.
Steve Webb met with major pension providers early March 2012 to discuss plans for a ‘defined aspiration’ scheme which would sit somewhere between defined benefit (DB) and defined contribution (DC) schemes currently in existence.
Under the proposed DA scheme an employee would be told what pension they and their employers were aiming to produce, but this would not be guaranteed, and expectations would be re-set over the years depending on the performance of investments.
Increase In Income Tax Thresholds & Auto-Enrolment
The government aims to increase the income tax threshold to £10,000 before the next election, which was key Liberal Democrat policy standpoint.
The move may have unintended consequences and create an additional burden for employers.
The current earnings threshold for auto-enrolment is £8,105, which is the same level as the personal allowance for 2012/13.
The Chancellor's commitment to increasing the personal income tax allowance to over £9,000 by April 2013 could reduce the number of employees eligible for auto-enrolment.
Trivial Pension Payments For Personal Pensions
Individuals will be able to access those savings held in small personal pension schemes, i.e. £2,000 or less, by way of lump sum payment (commutation).
From 6 April 2012, it will be possible to pay out funds in this way to individuals aged 60 or over, as an authorised payment. These payments can be made regardless of the value of the individual's total pension savings and can be made provided the individual has received no more than one other such trivial lump sum payment.
The measure will help individuals aged 60 or over, who cannot otherwise use the lifetime trivial commutation rules, to access a very small personal pension pot, and also some who have already taken a trivial commutation lump sum and later discover small benefit rights in a personal pension scheme.
Previous changes to the tax rules that enabled small occupational pension pots (up to £2,000) to be taken as a lump sum at or after age 60 did not extend to non-occupational pension schemes (such as personal pension contracts and section 32 buy-out policies).
PPF Caps From 1 April 2012
The ceiling for the 2012/13 pension protection levy will be £918,854,855 which is an increase of 3% on the previous year.
The pension compensation cap from 1 April 2012 will be £34,049.84, an increase of 2.5% from the previous year.
As regards the new pension compensation cap, this means that when applying the 90% provision, the maximum level of compensation available from the PPF to those at age 65 who are subject to the cap will be £30,644.86.
Both the increase in the levy ceiling and the compensation cap have been made with regard to the annual increase in the general level of earnings, but whereas the increase in the levy ceiling is by reference to the increase in earnings to July 2011, the increase in the compensation cap is by reference to the increase in earnings to April 2011.