Legislative Update. August Legislation ( Finance Act Pensions Act 2014

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1 Legislative Update August 2014 Legislation ( Finance Act 2014 The key provisions to note in this Act are: Withdrawal arrangements: From 27 March 2014, the annual cap on withdrawals for members with capped drawdown increased from 120% to 150% of a comparable annuity and the minimum income requirement for flexible drawdown fell to 12,000. Small lump sums: The maximum amount of a trivial commutation lump sum has been increased to 30,000 from 18,000 and the amount of a de minimis lump sum has risen from 2,000 to 10,000. PCLS: If members take a Pension Commencement Lump Sum ( PCLS ) from a money purchase arrangement between 19 September 2013 and 6 April 2015, they do not have to take the corresponding pension within six months but it must be taken before 6 October (See below in Tax) Liberation: Powers for HMRC to address pension liberation, including additional grounds on which registration can be refused, or schemes de-registered. Individual Protection 2014: Provisions on Individual Protection which will give individuals a personal lifetime allowance based on the value of their pension savings on 5 April 2014, subject to an overall limit of 1.5 million. Pensions Act 2014 The Act (most of which is not yet in force) covers a wide variety of issues, including: A 30 day vesting period for members of trust-based occupational pension schemes entitled to money purchase benefits only. Introduction of the single-tier state pension and the abolition of salary-related contracting out together with transitional provisions for existing state benefits. Increasing state pension age to 67 in Regulation making powers for automatic pot-follows member transfers. This is intended to apply to money purchase benefits where the pot is less than 10,000 and which accrued after a date to be specified. Trustees will need to try and find out whether a member has transferable benefits and, if so, request their transfer. Members will either be able to opt-out of or have to consent to such transfers. Auto-enrolment changes including: preventing hybrid schemes using DB transitional periods for members with no DB accrual; alternative quality requirements for DB schemes; and a regulation making power to allow exceptions to the employer autoenrolment duty.

2 Government ( Response to consultation on pension flexibility In March this year, the Government announced proposals to introduce greater flexibility in the pension landscape by allowing DC members to take their whole DC pot as a cash lump sum from April 2015 see May s legislative update. The Government has now provided more details on how these proposals will work: Transfers: To ensure that all DC members are able to make use of the new flexibilities (as schemes will not have to offer them), proposals will extend the statutory right to a transfer from a trust-based occupational pension scheme up to the scheme s normal retirement age (as opposed to one year before that age). The Government had consulted on the possibility of preventing DB to DC transfers but has decided to permit them (subject to conditions). Transferring trustees will need to ensure that members with pension savings in excess of 30,000 take financial advice before making a DB to DC transfer. Generally, the cost of this advice will be met by members except where a transfer is part of an employer-led incentive exercise, when it will be met by the employer. Minimum pension age: This will rise from age 55 to 57 in 2028 and remain 10 years below state pension age. Guidance guarantee: There will be an obligation on trustees to signpost DC members approaching retirement to independent third party guidance. The providers of the guidance will be monitored by, and the content must comply with, standards set by the Financial Conduct Authority. It appears that the guidance will be funded by a levy on regulated financial services firms rather than occupational pension schemes or employers having to meet the cost. Draft Taxation of Pensions Bill 2014 The Bill will make legislative changes necessary to implement DC flexibility. Features to note are: Drawdown: There are detailed provisions in relation to new flexi-access and dependant s flexi-access drawdown arrangements (drawdown without limits) and the treatment of existing drawdown arrangements under the new regime. Lump sums from DC pots: Uncrystallised funds pension lump sums (UFPLS) will be a new type of authorised payment. A UFPLS can generally be paid from a money purchase arrangement to members from age 55. There is no limit on the amount that can be paid and the member will be liable to income tax at their marginal rate on 75% of the UFPLS, with the remaining 25% paid tax-free. There are restrictions on the availability of a UFPLS for members who have transitional protections under the Finance Act Annual allowances: Where a member has accessed money purchase savings under the new arrangements, a 10,000 annual allowance may apply to future money purchase savings. Members will retain a defined benefit annual allowance of up to 40,000 (less the value of any money purchase savings). Unused annual allowance from earlier years cannot be used to increase the 10,000 annual allowance. Override: The Bill contains a statutory override which allows the trustees to pay a UFPLS; drawdown pension or purchase a short term annuity despite any provision of the rules of the scheme (however framed) prohibiting the making of the payment.

3 Other: The age at which schemes can pay a trivial commutation lump sum or small lump sum is reduced from 60 to 55 and a trivial commutation lump sum will only be payable from a DB arrangement. The limit for trivial commutation lump sum death benefits will rise to 30,000. Tax ( Pensions Flexibility from 27 March 2014: draft guidance HMRC has issued draft guidance on the temporary time limits which apply to PCLSs (discussed above) in advance of April The key points in the guidance are: Members taking a PCLS before 6 April 2015 do not have to take the associated pension entitlement within 6 months, but must take it before 6 October Members will be able to take their remaining entitlement as a lump sum (if the scheme permits) and they do so before 6 October Where the value of the pension pot has gone up between taking the PCLS and the pension, no additional PCLS can be taken. Where a PCLS was paid on or after 19 September 2013 but before 6 April 2015 (or before 19 September 2013 where a lifetime annuity contract is entered into, and that contract is cancelled on or after 19 March 2014) and that PCLS is repaid to the scheme, it will be treated as never having been paid. Under the transitional provisions, where there is a recognised transfer, the PCLS will remain an authorised payment provided that the pension is paid from the receiving scheme before 6 October 2015 (and certain other conditions are satisfied). There are also provisions on what scheme administrators need to do when making such transfers. Where a member has reached age 60 and took a PCLS before 27 March 2014, but would meet the requirements for a trivial commutation lump sum using the new 30,000 limit, they can take the rest of their pension savings as a lump sum. The PCLS will be treated as a special transitional lump sum (also tax free). There are similar provisions where the member falls into the small pot provision if the small pot lump sum is taken between 6 July 2014 and 6 April There is also guidance on the position of members with rights to protected lump sums and various new reporting requirements. Regulator ( Update on pensions liberation The Regulator has updated its Scorpion guidance on pension liberation. It says that around 495m of assets are now known to have been transferred into scams but it suspects that the true amount is significantly higher as many are not reported to it. The Regulator is asking all trustees and administrators to include the pension scams scorpion leaflet in their annual benefit statements and when issuing transfer packs to members.

4 May 2014 Government ( The Budget 2014 Trustees need to be aware of the far reaching changes announced in the 2014 Budget as many will have implications for the ways in which schemes are operated. The key changes to be aware of which came into force in March 2014 are: An increase in the trivial commutation threshold from 18,000 to 30,000; An increase in the amount that can be taken as a small pot from 2,000 to 10,000; and Changes to drawdown limits, so the guaranteed income required in flexible drawdown has fallen from 20,000 a year to 12,000 and the maximum amount that can be taken in capped drawdown has increased from 120% of an equivalent annuity to 150%. In addition, although not yet confirmed by legislation, it seems that it may be possible to take a pension commencement lump sum now and delay taking the corresponding pension until after April next year. The biggest changes are due to come into effect from April 2015 and will allow members with money purchase pots to take the whole pot as a cash lump sum. 25% of such a lump sum can be tax free (as currently) and the balance will be subject to income tax at whichever rate applies to the member. Members will need to be given a new form of face to face advice before exercising this option and details of what such advice will entail have yet to be given. Consultation on standards in DC schemes The Government is consulting on standards in DC schemes. Its main proposal is that there will be a cap on charges in auto-enrolment default funds of 0.75% (excluding transaction costs). Consultancy charges where members must pay for advice given to their employer will be prohibited from April 2015 along with payments for sales commission deducted from members pensions, and increased charges when members leave employment from April From April 2015, trustees will have new duties to consider and report on costs and charges. All schemes will need to have a chair of trustees with responsibility for saying how the scheme has complied with these governance requirements, and trustees will need to provide an independently audited statement of compliance. There will also be a requirement for providers of contract based schemes to operate independent governance committees to assess value for money, and report on how quality standards are met.

5 Regulator ( Guidance on reporting material payment failures in DC schemes Where there has been a material late payment of DC contributions by an employer, reports should be made to the Regulator via Exchange. There are alternative methods for reporting failures by one employer and failures by several. The guidance also sets out the information that trustees will need to make a report to the Regulator. Where trustees are looking to report a late payment, they should ensure that they have read this guidance and make the report in the correct way. Where trustees are not sure whether a payment failure is material, there is existing Regulator guidance on the factors to take into account. Tax ( Pensions Newsletter 60 February 2014 In relation to pensions liberation, the Newsletter reiterates that HMRC will respond to requests for confirmation of the registration status of a receiving scheme without seeking its consent. HMRC will only provide confirmation where the receiving scheme is both registered and the information held does not indicate a significant risk that the scheme was set up, or is being used, to facilitate pension liberation. Otherwise, a response will be issued setting out the conditions in which HMRC will confirm registration status and explain that one or both of the conditions are not satisfied (but not which condition is not satisfied). Pensions liberation HMRC guidance Pensions liberation was also dealt with in the Budget and in the Finance Bill. As a result, HMRC has issued guidance summarising the new provisions: From 20 March 2014 HMRC can.. ask for documents and other information from the pension scheme administrator and other persons tohelp HMRC decide whether or not to register a pension scheme. There are new penalties and appeals in respect of the application for registration and information notices. These include a new penalty if false information is provided in connection with an application for registration. There is also a new requirement that the pension scheme must be set up and maintained for the main purpose of providing authorised pension benefits. Where HMRC believe this is not the case, registration may be refused, or an existing pension scheme may be de-registered. These changes do not affect the process for dealing with applications from members for transfers to schemes which trustees believe may be being used for liberation but they may make it harder for such schemes to continue.

6 Legislation ( Revaluation of Earnings Factors Order 2014 Sets out how much earnings are to be revalued by for various purposes, including the calculation of GMPs. The percentage for the 2014/15 tax year is 0.9. The Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014 The lower earnings limit for 2014/15 is 111 per week ( 5,772 pa). The upper earnings limit is 805 per week ( 41,865 pa). The primary threshold (from where National Insurance contributions are paid) is 153 per week ( 7,956 pa). Auto-enrolment Government response to consultation on employer auto-enrolment duties Draft legislation contains a power to allow certain categories of employees to be exempted from the auto enrolment requirements. The Government has been consulting about which employees this should extend to. It has concluded that there is a strong case to permit employers not to enrol workers who: have tax protected status for existing pension savings (eg fixed and enhanced protection); are on the brink of leaving employment; have given notice of imminent retirement; recently cancelled membership after being contract joined. The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014 From 6 April 2014 the revised thresholds for auto-enrolment are: 10,000 for the earnings trigger, a rise from 9,440; 5,772 for the lower end of the qualifying earnings band, a rise from 5,668; 41,865 for the upper end of the qualifying earnings band, a rise from 41,450.

7 February 2014 Regulator ( Final DC Code of Practice and Guidance Draft versions of the new DC Code of Practice and DC Guidance finally came into force on 21 November Trustees of schemes that have any DC benefits in them (including DC AVCs) need to ensure that they are aware of the contents of the Code and Guidance and have appropriate procedures in place to ensure compliance. The Regulator has six principles that it expects to be followed in the running of DC schemes and these are underpinned by 31 quality features. The Code and Guidance provide details on what the Regulator expects schemes to do to comply with these quality features. They cover areas such as investment, member communications, administration, risk management and trustee knowledge. The Regulator also expects that trustees will produce a governance statement setting out the extent to which they have complied with the quality features. Much of the Code and Guidance reflects the content of existing publications so trustees should not find that they are having to do a lot of new things. Nevertheless, the documents may identify issues that trustees have not previously looked at and should be given careful consideration. Update on record-keeping The Regulator is urging schemes to continue the drive to improve the quality of their record-keeping by correcting errors in common data and by putting plans in place to improve the quality of conditional data and has said that it intends to review its record-keeping guidance later this year. It will not be setting targets for conditional data in the same way that we did for common data - but we absolutely expect schemes to be able to demonstrate that they have credible plans in place to improve this data. We may set targets around the timings for these plans to be implemented. N.B. The above relates primarily to trust-based occupational schemes. By using a Scottish Widows contract-based scheme you effectively delegate to Scottish Widows some of the duties you would otherwise face in operating a trust-based scheme. Tax ( Individual protection The Government has published further documents in relation to the form of individual protection ( IP2014 ) that will be available following the reduction of the lifetime allowance to 1.25 million in April 2014.

8 IP 2014 will give individuals a personalised lifetime allowance equal to the value of their pension savings on 5 April 2014 subject to a maximum of 1.5 million. If the standard lifetime allowance rises above an individual's personalised lifetime allowance, IP 2014 will cease to apply. It will be available to anyone with pensions savings in excess of 1.25 million on 5 April 2014, including those who already have enhanced and fixed protection. Applications for IP2014 must be received by HMRC by 5 April There will be a gap between the introduction of IP 2014 and the date on which individuals may apply for protection. There is draft guidance on what schemes might do where a member wants to take benefits after April 2014 but before IP 2014 has actually been granted. Commentators suggest that IP could provide a useful fall back for people where enhanced or fixed protection is accidentally lost. Update on Scottish tax reliefs The Scotland Act 2012 introduced the Scottish rate of Income Tax (SRIT), which is expected to be implemented in April The rate paid by Scottish taxpayers will be calculated by reducing the basic, higher and additional rates of Income Tax by 10% and adding a new Scottish rate set by the Scottish Parliament. The Government has decided that, in order to ensure that, as far as possible, Scottish taxpayers receive the correct amount of relief into their pension pot, relief at source ( RAS ) will be paid at Scottish rates for Scottish taxpayers. HMRC intends to provide information to pension scheme administrators to allow them to identify which of their members are Scottish taxpayers. Currently it is planned that from April 2018 industry should be ready to make RAS claims at the Scottish basic rate. In the meantime, to ensure that pension scheme members who are Scottish taxpayers are not disadvantaged, the Government has agreed that from April 2016 scheme administrators can continue to claim RAS at the UK basic rate of tax for all members and HMRC will identify Scottish taxpayers and make any adjustment, with the relief given direct to the scheme member. Legislation ( Same Sex Marriage Regulations Same sex marriages will be possible in the UK from 29 th March Scheme rules will not automatically include rights for same sex spouses but schemes will be obliged to provide survivor s benefits to them, at least in respect of pensionable service after 5 December It is worth noting that the Government is due to review the law relating to same sex survivor benefits by the summer and the legal position may therefore change. However, such changes may not come into force for some time.

9 Government ( Chancellor s autumn statement As had been anticipated, the main changes announced were in relation to state pension age. It will be increased from age 67 to 68 from the mid-2030s (a change from 2046). There is also a new formula for calculating state pension age based on average life expectancy which means that it is likely to rise to 69 by the late 2040s.