UK Pensions Update

 

 

 

UK Pensions Update

In the words of the renowned Bob Dylan, ‘Times they are a changing’ – and never more so than in the UK pensions arena, with some very specific challenges for UK employers, employees, and advisers in 2016.

 

Automatic Enrolment and the smaller employer

We are now firmly in the Government’s planned time frame when smaller employers must auto-enrol their employees.  Although last month saw a 6 month easement on the time periods for AE contribution increases, staging dates (the date when their new duties start) remain unchanged.

Market capacity issue

Why were these dates put back? Quite simply the Government underestimated workloads and costs on smaller employers, and that there is a very real ‘capacity issue’ with pension providers struggling to meet demand for new AE pension schemes.  Many UK pension providers are now restricting their AE services, imposing charges, or only seeking larger schemes with contributions significantly higher than statutory minimums.  So, even if an employers’ staging date is some way off, it is vital that they start planning for AE now – or risk being driven down the Government backed NEST scheme route which has some significant restrictions, and is still unlikely to be immune from capacity issues.  

Adviser remuneration now fee based

The UK ‘Retail Distribution Review’ (‘RDR’) has created a fundamental culture change in the UK pensions industry, as advisers can no longer receive commissions paid by the pension provider and must now charge fees directly to employers for their advice and services.  Employers will therefore need to factor in these costs into their budget planning, in addition to their pension contribution payment responsibilities.

Changes to pension tax relief?

Substantial tax relief is given back to UK individuals who make personal contributions to their pension (circa £32bn per annum), with the lion’s share of this benefitting higher rate tax payers.  A consultation is in progress to review pension taxation, and it seems likely the government will be seeking to restrict tax relief for at least higher earners.  Higher rate individuals should consider increasing their pension contributions whilst additional rate tax relief remains available. 

Lifetime Allowance

From 6/4/2016 this is dropping from £1.25m to £1.0m and will likely double the number of individuals affected.  Some complex ‘protection’ options are available, and advice may be needed.

Salary sacrifice

Salary sacrifice generates National Insurance (‘NI’) savings by allowing employees to sacrifice some salary in exchange for employers making an equivalent pension contribution.  Rules were relaxed to accommodate AE but increased take-up is now having a detrimental impact on NI funding.  The government is now reviewing its stance on salary sacrifice schemes, and if withdrawn or restricted any ‘lost’ NI savings would be detrimental for employers and employees.     

Pension Scheme Governance

A statutory requirement for trust-based money purchase pension schemes since April 2015, a growing ‘best practice’ trend is for employers with ‘group personal pension’ arrangements to also consider installing a Governance framework.

 

How In2Matrix (UK) can help - early AE planning and employee communications

We work closely with employers to advise, plan and manage their AE process. We can also help design and facilitate a structured approach for employee communications which can include a benefits communication pack, group presentations, and one-to-one generic pension surgeries.  We can assist with the facilitation of a Governance Committee, structuring a meeting agenda, and attending meetings.  For employees requiring specific advice, we can agree relevant work and fees with them directly covering a range of services including pension transfer advice. 

 

To receive more updates, please contact:

Richard Birch FCII APMI APFS DipIEB

Chartered Insurance Practitioner

Director - Employee Benefits

In2Matrix (UK) Limited
101 Finsbury Pavement, London, EC2A 1RS

T: 0203 638 5152

D: 0203 638 5159

E-mail: richard.birch@in2matrix.com

 In2Matrix (UK) Limited is an appointed representative of In2 Consulting Limited, 

which is authorised and regulated by the Financial Conduct Authority

 

Guidance Guarantee Update

Guidance Guarantee Update

  

More information has been issued with regard to the Governments proposal to offer free impartial guidance at retirement to employee of Defined Contribution (DC_ Pensions.  HM Treasury has announced that the guidance service will be called “Pension wise”. The Treasury has also today provided further details of the operation of the service.

In Summary, the developments so far are: 

•    Access to the guidance by members will be available via a website, by telephone from the Pensions Advisory Service or face-to-face at Citizens Advice Bureau. 
•   All official guidance will bear the new “Pension wise” logo.
•  Guidance by telephone or in person will need to be booked in advance and the Government expects the booking service to be open from March.
• It will be a criminal offence to impersonate the guidance by using the same or a similar name and logo.
• The Financial Conduct Authority (FCA) has developed a framework for guidance providers and the standards they must adhere to. The Government’s initial view is that 45 minutes is the optimum length for guidance sessions.
• Both trustees and providers will have to ensure their retirement processes “signpost” their members to the Pension wise service. The FCA and the Pensions Regulator are working with other parties to develop material, including templates that can be used for this purpose but these are not yet available.
• Costs, other than for setting up the service, will be funded by a levy on regulated financial services firms. The estimated cost for 2015-16 is £35 million (to be confirmed in March). Any additional costs, due to increased demand in the first year of operation, will be met temporarily by HM Treasury but will then be recouped from subsequent levies. 

Next steps:

 The Government hopes to pilot, test and make available all aspects of the guidance service before April. Individuals can already register their interest in the service. Some of those who intend to take their benefits shortly after flexibility becomes available will be invited to take part in a pilot scheme with a view to helping the Government refine the service before it is rolled out more widely.

A formal evaluation of the service will be carried out before the end of 2015 to ensure it is meeting its aims.

What is not yet clear is how many times an individual will be able to access the telephone and face-to-face guidance. Will it be only once or will those who have several different DC pension pots be able to take up guidance every time they decide to put a pot into payment.

While some information has now been made available on the Pension wise guidance service, there remains a lot of work for trustees and providers to do in order that members will understand both the advantages of using the service and the limitation of its remit. Standard material to help trustees and providers point members to the guidance, with the information the member is likely to need for the session, is currently being developed by the FCA and The Pensions Regulator.

 In2Matrix (UK) Limited is an appointed representative of In2 Consulting Limited, 

which is authorised and regulated by the Financial Conduct Authority.

New ways for taking Pension Income and Tax Free Cash in Retirement

New ways for taking Pension Income and Tax Free Cash in Retirement

This article focuses on the ways the ‘Freedom and Choice in pensions’ reforms affect members of money purchase schemes when taking their benefits from April 2015. The details of the reforms have emerged piecemeal in the period between the initial announcements in the March Budget and the December Autumn Statement. The final details are still being resolved via the Taxation of Pensions Bill, which is still making its way through Parliament at the time of writing.

The Key Changes
FLEXI-ACCESS DRAWDOWN (FAD)

·         All new drawdown plans taken out from 6 April 2015 will be flexi-access drawdown (FAD).

·         There won’t be any limits on income levels, as with flexible drawdown under the current rules.

·         There won’t be any minimum secure pension income requirement.

·         The member can take 25% tax free cash from their designated drawdown fund, subject to having available lifetime allowance (LTA).

·         The balance of the fund can remain invested. It can be paid as a lump sum, when the member’s marginal rate of income tax applies. It can be used to provide flexible income, again subject to the marginal rate of income tax. Or any combination of these is possible.

·         Once any income is taken, the £10,000 money purchase annual allowance applies (see below).

·         All pre April 2015 flexible drawdown arrangements automatically become FAD.

CAPPED DRAWDOWN

• No new capped drawdown arrangements can be set up post April 2015.
• Any existing plans can remain in place. They will operate in the same way as currently, with three yearly reviews and income restricted to 150% of GAD.
• It will be possible to convert capped drawdown to FAD on the member’s request.
• Capped drawdown plans will automatically convert to FAD if the member takes income exceeding 150% GAD.
• The member retains the standard £40,000 annual allowance where their income remains within GAD limits. This is provided they don’t trigger the MPAA via any other arrangements.
• It will be possible to transfer existing capped drawdown plans from provider to provider.

Individuals aged 55 and over may want to consider designating some funds for capped drawdown before 6 April 2015, if they haven’t already done so. If their drawdown product allows, they’ll be able to designate further funds in the same arrangement post April 2015 and remain within the capped drawdown regime. This means they can retain the full £40,000 annual allowance for contributions, while being able to take drawdown income within the 150% GAD limits. However, the existing anti tax free cash recycling provisions will apply. Currently these provisions apply if someone takes at least £12,500 tax free cash (1% of the £1.25 million LTA) over a 12 month period, but this will reduce to £7,500 from April 2015.

UNCRYSTALLISED FUNDS PENSION LUMP SUM (UFPLS)

• This is a new concept: a lump sum drawn directly from uncrystallised money purchase pensions.
• 25% of the lump sum is paid tax-free.
• The balance of the lump sum is taxed at the member’s marginal rate of income tax.
• It’s possible to take a series of UFPLSs, each of which will be treated as a mix of 25% tax free cash and 75% taxable funds.
• The disadvantage is that unlike FAD, it isn’t possible to take the tax free cash without receiving taxable income.
• Once an individual takes a UFPLS, the £10,000 money purchase annual allowance applies (see below).
• Some restrictions apply to members with primary protection, enhanced protection or lifetime allowance enhancement factors affecting their tax free cash entitlement.
• 
  

NEW RULES FOR LIFETIME ANNUITIES

·         One of the lesser known features of the new flexibilities is that it will be possible for lifetime annuities to reduce as well as increase in value, outside of the existing limited range of prescribed circumstances. This may lead to providers developing new types of lifetime annuity to provide for long term care costs, for example.

·         Taking income from this new type of a lifetime annuity will trigger the MPAA, after concerns that it might provide a loophole in respect of the anti income recycling provisions that apply when someone uses UFPLS or takes income from FAD.

MONEY PURCHASE ANNUAL ALLOWANCE

• To prevent widespread abuse of the new flexibility, a new anti-avoidance measure will be introduced – the money purchase annual allowance (MPAA). It’s set at £10,000 a year from 6 April 2015.
• The MPAA applies:
• –  when income is taken from flexi-access drawdown (FAD),
• –  when income above 150% GAD is taken post 5 April 2015 from a capped drawdown fund,
• –  when an uncrystallised funds pension lump sum (UFPLS) is received,
• –  when a payment from a new style reducible lifetime annuity is taken,
• –  from 6 April 2015 for those already in flexible drawdown. Their situation improves, as they currently have no annual allowance.
• The MPAA doesn’t apply:
• –  where an individual commences FAD, but doesn’t receive any income, that is, they just take tax-free cash,
• –  where an individual is in capped drawdown (ie pre 6 April 2015) and doesn’t receive income above 150% GAD after 5 April 2015,
• –  when small pots are accessed.
• The MPAA only applies to money purchase contributions. Someone who’s affected can still fund a defined benefits scheme up to the normal £40,000 annual allowance limit, plus any carry forward allowance.
• The MPAA can’t be carried forward.

For more details on the operation of the MPAA, see ‘Closing in: the money purchase annual allowance’ which appeared in the November 2014 edition of Techtalk.

This article was based on the guidance and draft legislation issued as at 3 December 2014. It will not reflect any changes to the Taxation of Pensions Bill from that date.

 In2Matrix (UK) Limited is an appointed representative of In2 Consulting Limited,

 which is authorised and regulated by the Financial Conduct Authority.

Newsletter: No shocks for Pension in Autumn Statement 2014

Newsletter

No Shocks for Pension in Autumn statement 2014

Below is a summary of the key announcements in this years autumn statement:

No change to pensions tax relief or to the tax-free lump sum

Against a background of gathering political momentum for a widespread review of the pensions tax regime, none was announced. This may prove little more than a reprieve until after next year’s general election, but it is welcome nonetheless. Similarly, the 25% tax-free lump sum remains unscathed.

Level (tax) playing field on spouse’s annuities and draw-down – but not scheme pensions

As widely trailed, where an annuitant dies before age 75, there will be no income tax on any resulting dependant’s annuity. This change will apply to the first payment after 6 April 2015, even if the ‘original annuitant’ died before that date. The tax rules will also be changed to allow a joint life annuity to be passed on to any beneficiary, with the same income tax treatment. These changes bring annuities into line with unused draw-down funds. However, there is no such easement for dependants’ scheme pensions from defined contribution (DC) or defined benefit (DB) arrangements.

Individual savings accounts (ISAs)

The ISA limit for 2015-16 will increase to £15,240. More significantly, from today, when a married ISA-holder dies their spouse will be able to retain the tax advantage on ISAs they inherit.

State pension

The Basic State Pension payable from April 2015 will increase by 2.5% (£2.85 a week) to £115.95. The standard minimum income guarantee within the Pensions Credit will match the cash increase, taking the single tier State Pension – payable to those reaching State Pension Age from April 2016 – to at least £151.25 a week in 2015-16 terms. The actual amount will be set in autumn 2015.

Pensions and means-tested benefits

When determining entitlement to means-tested benefits in ‘retirement’, uncrystallised benefits and draw-down funds are considered as if they were delivering an income. This amount will be determined as 100% (it is currently 150%) of the equivalent annuity, or the actual income taken if higher. 

Pensioner bonds

From January 2015, pensioner bonds – intended to help pensioners hit by low savings interest rates – will be available. The interest rates will be confirmed on 12 December 2014. Bonds are expected to be restricted to maximum holdings of £10,000 and will be available only to those aged at least 65.

Income tax and National Insurance thresholds

The Income Tax personal allowance will increase to £10,600 from April 2015. The basic rate limit will be £31,785, with the higher rate (40%) threshold increasing to £42,385.

The National Insurance upper earnings limit will increase to stay in line with the higher rate threshold. The basic, higher and additional rates of Income Tax for 2015-16 will remain at their 2014-15 levels. It is not clear whether the earnings trigger for auto enrolment will continue to be aligned with the personal allowance. The Government recently consulted on four options for setting this limit.

 In2Matrix (UK) Limited is an appointed representative of In2Consulting Limited, 

which is authorised and regulated by the Financial Conduct Authority.

Newsletter: Employee Assistance Programme (EAP) survey results.

A survey done on behalf of The Health Insurance magazine suggests that employees who use an employee assistance programme (EAP) are more able to cope with the demands of their job, deal with their problems and boost interpersonal relationships.

A known insurance company surveyed users of a brand of EAP and found that employees were three and a half times more likely to feel able to cope with the demands of their job.

A fifth (21%) rated their ability as “good” or “very good” prior to receiving counselling, compared to 75% afterwards

The survey suggests that interpersonal relationships can also be improved – 46% of people rated their relationship with their colleagues as “good” or “very good”, and 50% with their managers, before using the service, compared to 79% and 68% respectively afterwards.

After receiving counselling from the EAP provider, the percentage of employees who felt they were unable to deal with their problems fell from 78% to just 7%.

Their overall satisfaction with life increased fourfold, rising from 15% to 62%.

This survey shows that while it is important to keep life at work and at home as distinct as possible, there is an inextricable link between the two. Events in either one can bleed across the barrier and start to affect the other, and in the worst cases this can create a vicious circle of negativity.

In2 Matrix believe companies should consider to provide their employees with the tools to break that cycle as it would bolster the employees performance in return.

If you wish to receive further information regarding EAP’s please do not hesitate to contact us.

In2Matrix (UK) Limited      

101 Finsbury Pavement 

London

EC2A 1RS

Tel:+44  (0) 203 638 5152      

Fax:+44  (0) 203 638 5158        

In2Matrix (UK) Limited is an appointed representative of In2 Consulting Limited, 

which is authorised and regulated by the Financial Conduct Authority.

Fixed Protection and Auto Enrolment

It is important to find out your future employees pension status before they join your company pension or Registered Group Life Scheme as they could be subject to additional tax charges by joining your company pension or group life scheme?

There are several types of protection offered to employees with larger pension values since the advent of A-day in April 2006.  These protections are designed to minimise the impact on employees who have pension savings in excess of limits imposed by the government.

Savings in excess of these government limits are taxed at penal rates through a lifetime allowance charge.  Therefore, it is important for you as a HR individual to understand the impact that joining your company pension scheme or registered group life scheme could have on an employee who has applied for these protections.

• Enhanced Protection
• Primary Protection
• Fixed Protection

On 6 April 2012 the lifetime allowance was reduced to £1.5 million from the £1.8 million it was in 2011-12. As members may have already built up savings of more than £1.5 million or have planned to do so in the expectation that the lifetime allowance would not reduce from the 2011-12 level, a new form of protection called “fixed protection” was set up.

If a member expected their pension savings may be more than £1.5 million (including taking into account past crystallisations) when they come to take their benefits they could use fixed protection to help reduce or mitigate the lifetime allowance charge.

Fixed protection allows individuals to crystallise benefits worth up to £1.8 million without paying the lifetime allowance charge, although the ability to accrue future benefits is limited. The fixed protection should been applied for prior to 6^thApril 2012 and you could not have fixed protection if you had either primary or enhanced protection.

Fixed Protection 2014

Fixed protection 2014 works in a similar way to the existing fixed protection regime introduced in April 2012. From 6 April 2014 the standard lifetime allowance was reduced from £1.5 million to £1.25 million but with fixed protection 2014 the lifetime allowance is fixed at £1.5 million. This means you can take pension savings worth up to £1.5 million without paying the lifetime allowance charge. You had to apply before 6^th April 2014 to get fixed protection 2014.

You could not have fixed protection 2014 if you already had primary, enhanced or fixed protection.

From 5^th April 2012 you could lose the fixed protection or fixed Protection 2014 if you:

·         have a contribution paid to any of your money purchase pension pots

·         build up new benefits in a defined benefits or cash balance pension pot above a set amount - find out more by following the link below

·         join a new pension scheme - unless you're only transferring pension savings from one of your existing schemes into the new scheme including an Auto-enrollment scheme

·         start saving in a new pension pot either under an existing pension scheme or a new pension scheme

Individual Protection 2014

 

As well as fixed protection 2014, the government introduced individual protection 2014, applicable from 6^th April 2014, for those with pension savings on 5 April 2014 valued at over £1.25 million.

Individual protection 2014 will give a protected lifetime allowance equal to the value of the pension rights on 5 April 2014 - up to an overall maximum of £1.5 million. An individual will not lose individual protection 2014 by making further savings in to a pension scheme but any pension savings in excess of the protected lifetime allowance will be subject to a lifetime allowance charge.

An individual will be able to apply for this from August 2014. HMRC must receive the application by 5 April 2017.

An individual can hold both fixed protection 2014 and individual protection 2014 but you can't apply for them at the same time. They can also hold individual protection while holding either enhanced protection or fixed protection but cannot apply for individual protection if you already hold primary protection.

Pensions Act 2008 provisions for automatic pension enrolment while having fixed protection

If an employer is subject to the automatic enrolment duty and automatically enrols an individual into a new pension scheme, they will have one month from the enrolment date to opt out of the new scheme.

If they opt out within that one month period then the law treats them as if they were never a member of the pension scheme.  So if after 6^th April 2014 an employee who has fixed protection who is subject to automatic enrolment and opted out within one month will keep their fixed protection.

If they do not opt out in time then they will lose their fixed protection. An employer will have a duty to automatically enrol those who have opted out every three years, so an individual will need to opt out within one month each time this happens.

If they change employer and the new employer is subject to the automatic enrolment duty, they will be required to automatically enrol the employee into their pension scheme. If the individual has fixed protection they will also need to 'opt out' of the new employer's pension scheme when they are automatically enrolled to avoid losing the fixed protection.

As a registered group life policy is also registered using pension rules, any payment into a Registered Group Life policy on behalf of an individual to cover the cost of premiums will also be treated as a payment for pension purposes and would lose pension protection.  It is important to consider the options available on Group Life Policies to ensure maximum cover of all risks.

 In2Matrix (UK) Limited is an appointed representative of In2Consulting Limited,

 which is authorised and regulated by the Financial Conduct Authority.

Newsletter: Important changes to Lifetime Allowance from 6th April 2014

Important Changes to Lifetime Allowance from 6^th April 2014

From 6 April 2014 the lifetime allowance will be reduced to £1.25 million. The lifetime allowance is the limit set by HMRC for the total value of all pensions and exceeding it could result in a tax charge.

A new form of protection called fixed protection 2014 is being introduced to protect those who have built up pension pots of more than £1.25m but no more than £1.5 million. People will be able to apply for fixed protection 2014 from August 2013.

Fixed protection 2014

Fixed protection 2014 will work in a similar way to the existing fixed protection regime introduced in April 2012. From 6 April 2014 the standard lifetime allowance will be reduced from £1.5 million to £1.25 million but with fixed protection 2014 you can fix your lifetime allowance at £1.5 million. This means you can take pension savings worth up to £1.5 million without paying the lifetime allowance charge. You'll have to apply before 6 April 2014 to get fixed protection 2014.

You can't have fixed protection 2014 if you already have primary, enhanced or fixed protection. You'll lose fixed protection 2014 if you:

·                     have a contribution paid to any of your money purchase pension pots

·                     build up new benefits in a defined benefits or cash balance pension pot above a set amount

·                     join a new pension scheme - unless you're only transferring pension savings from one of your existing schemes into the new scheme

·                     start saving in a new pension pot either under an existing pension scheme or a new pension scheme

If you're unsure of the value of your pension savings and don't know whether you need fixed protection 2014 contact your scheme administrator or financial adviser. You can also use the lifetime allowance checking tool (see the first link below) to help you decide whether to apply for fixed protection 2014 and also individual protection 2014.

Use the second link below to apply online for fixed protection 2014. This is the most secure route and offers the benefit of immediate confirmation of receipt. If you haven't got a National Insurance number you will need to apply by post.

Individual protection 2014

As well as fixed protection 2014, the government has announced that individual protection 2014 will be available when the lifetime allowance is reduced to £1.25 million for 2014-15. Individual protection 2014 will apply from 6 April 2014, for those with pension savings valued at over £1.25 million on 5 April 2014.

Individual protection 2014 will give a protected lifetime allowance equal to the value of your pension rights on 5 April 2014 - up to an overall maximum of £1.5 million. You will not lose individual protection 2014 by making further savings in to your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.

You'll be able to apply for individual protection 2014 from mid-August 2014. Your application must be received by HMRC no later than 5 April 2017.

You can hold both fixed protection 2014 and individual protection 2014 but you can't apply for them at the same time. You can also hold individual protection while holding either enhanced protection or fixed protection but you can't apply for individual protection if you already hold primary protection.

For more information on individual protection 2014 follow the link below.

Where can I get more information

Lifetime Allowance Checking tool - http://www.hmrc.gov.uk/tools/lifetimeallowance/index.htm 

Online application for fixed protection - http://www.hmrc.gov.uk/pensionschemes/fp14online.htm

Online guidance for fixed protection – http://www.hmrc.gov.uk/pensionschemes/fp2014guidance.pdf

Individual Protection Guidance Note - https://www.gov.uk/government/publications/pensions-individual-protection-2014

The information provided in this article is not intended to offer advice.

It is based on In2Matrix interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. In2Matrix cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

In2Matrix (UK) Limited is an appointed representative of In2 Consulting Limited,

 which is authorised and regulated by the Financial Conduct Authority.