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.
Nigel Murdock, Managing Director
Small Pots Issue
For those of you thinking this article referred to crockery you will no doubt be disappointed when you read it has a pension bias.
With automatic enrolment, the DWP estimates that 50 million small pots could be built up by 2050 as people tend to move jobs every so often and leave their pension pots behind. It is estimated that there are currently in excess of one million small pots in the current system.
The Government is looking at the pension pot following the member meaning that when someone moves jobs, any pension fund below a certain amount, built up in the previous employer’s auto-enrolment scheme can be transferred to the new employer’s auto enrolment scheme. This could fundamentally change the advised transfer market as crucially, these transfers would happen automatically and without advice.
There are, of course, many issues with this model but arguably the most controversial issues of all are:
- What should the upper limit be for automatic transfers, and
- What exactly is a ‘small’ pot?
To help answer the first question, a response document contains estimates of the number of dormant pension pots that could be built up where different limits are used.
According the DWP, setting the limit at £2,000 would mean about 40 million dormant pots by 2050 while setting the limit at £20,000 would result in about 18 million dormant pots by 2050.
If the intention is to keep the number of dormant pension pots to a minimum, to the benefit of individuals the higher the limit, the better. So it may be likely that the Government, consumer organisations and trade unions will be pushing for a higher limit. Pension providers may push for a lower limit, so as to protect existing income streams.
The second question is perhaps more difficult to answer as there are many risks associated with transferring a pension pot automatically with absolutely no advice process in place.
For example, what if the new pension scheme has higher charges? What if the individual has made an ethical or religious investment choice that is not offered by the new scheme? There appears to be a general consensus that the lower the fund value, the lower the risks. And so there are calls to set the limit at something like £2,000.
But no matter what limits are decided, there will ultimately be ramifications.
While small pots could be automatically transferred without advice, people with larger pots may well be pointed towards financial advice. But if there is a system in place that allows them to automatically transfer their pension pots from job to job throughout their working life, they simply may not want to take advice or even think they need it.
The more cynical may say that, with the possible exceptions of consolidation at retirement and very large pension pots, if we are not careful, we could end up with a pension transfer market devoid of advice.
However, the radical Government plans to introduce an automatic pension transfer system have hit an early snag as the pension industry is refusing to pay up to £40m to build the infrastructure necessary to implement the reforms and instead wants the Government to fund between £20m and £40m to build a “central information hub” to facilitate auto-transfers.
When Are The ‘Self-Employed’ Not Deemed ‘Self-Employed’
At the risk of sounding like a cracked record, I have repeatedly mentioned that employers should be mindful of starting planning for auto-enrolment as soon as possible especially when it comes down to segregating their workforce as this can throw up some interesting situations as highlighted in the tribunal case involving a self-employed hair transplant surgeon.
Doctor Colin Westwood, a general practitioner in Timperley, Cheshire, also carried out hair transplant surgery at the Hospital Medical Group (HMG), a private practice for cosmetic and obesity treatment having joined HMG on a self-employed basis in 2005.
Westwood sought advice from an employment tribunal over “unlawful deductions in pay” when HMG terminated his agreement in 2010.
The tribunal agreed with Westwood as the private group was not a client of his, as HMG claimed; rather he provided services to the company’s clients, on behalf of the company.
Judge Peter Clark at the tribunal said its original decision was “plainly and unarguably right”.
Escalation by the company to the Court of Appeal was unsuccessful. The court said there was a difference between self-employed people with their own clients and those recruited by companies.
Judge Maurice Kay ruled those recruited by companies were workers in the eyes of the law.
He said the doctor would be “entitled to a substantial sum of money”.
This case shows how vital it is for companies to be sure who is, and who is not, a worker for auto-enrolment purposes with the decision meaning more people than expected need to be auto-enrolled, increasing cost to companies. This shows it is not necessarily clear cut who should be included, where there is a potential customer or client relationship between the parties.
Companies could be subjected to fines from the Pensions Regulator for failing to auto-enrol individuals correctly.
Staging Date Questions Answered
In response to a number of questions I have had on staging dates, I have highlighted the details below.
The employer duties will be introduced in stages from October 2012. Larger employers will generally have their staging date earlier than smaller employers.
It's based on the number of people in their largest Pay As You Earn (PAYE) scheme on 1 April 2012. Any changes to the size of the workforce after 1 April 2012 won't affect the staging date.
The staging date for employers with other PAYE structures are:
- Employers with less than 30 people in their PAYE scheme will have their staging date based on the last two characters of their PAYE reference.
- Employers with more than one PAYE scheme will have their staging date determined by the largest PAYE scheme.
- The staging date for employers who share a PAYE scheme will be based on the total size of that PAYE scheme.
- The staging date for employers with no PAYE scheme is 1 April 2017.
- New employers with PAYE income first payable between April 2012 and September 2017 have separate staging dates.
- Employers can choose to bring their staging date forward to coincide with other key company dates, such as end of year accounting. There's a list of available dates provided by The Pensions Regulator
- to bring a staging date forward companies must notify TPR at least one calendar month before the new chosen staging date.
Invoicing for the 2012/13 Pension Protection Fund (PPF) levy will begin from September. Further information is contained in the levy invoicing section of the PPF's website.
As this is the first year of operation of the new levy framework it is more important than ever for recipients to check promptly, with the assistance of their advisers if necessary that the levy invoices have been determined correctly. Any failure score, risk indicator, levy band or levy rate issues need to be raised with D&B and any other queries with the PPF, both within 28 days of the date of the invoice and simultaneously if matters are being raised with both bodies.
Higher Drawdown Pension Payments for Women
Women will, from 21 December 2012, be able to take a higher drawdown pension than at present, thanks to updated guidance from HM Revenue & Customs (HMRC).
The change follows the Test-Achats ruling by the European Court of Justice on 1 March 2011, which outlawed gender differences in individual annuity pricing from 21 December 2012.
HMRC intends to keep the unisex tables based on male rates until it becomes clearer how annuity providers will apply the judgment in practice.The new female rates will be the same as the current male rates.
In terms of determining the maximum drawdown pension that can be taken one might have expected a blended approach to have been announced, with women not gaining as much and men losing. There may be an adjustment of this sort in years to come, but until then, HMRC has given an unexpected boost to those women who are in a position to take a drawdown pension.
LGPS & Auto Enrolment
Local Government Pension Scheme (LGPS) regulatory changes, which have been implemented as a result of auto-enrolment, could have significant implications for private sector contractors, who enter into outsourcing agreements.
It is currently common practice to list all the transferring employees in an admission agreement as being eligible for LGPS membership, irrespective of whether they are active members of the LGPS immediately before the transfer. If the practice was to continue after 1 October 2012, all transferring employees would become active members of the LGPS on the date of admission agreement and this could have significant cost implications for contractors if more employees become members of the LGPS than they had anticipated.
It is understood that this change is intended to only apply to employees who are designated as being eligible on or after 1 October, the implication of this change for employees who have been designated as being eligible before 1 October under existing admission agreements, but who are not currently active members of the LGPS, is not entirely clear.