QUARTER LEGISLATIVE UPDATE

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1 QUARTER LEGISLATIVE UPDATE

2 Legislative update GUIDING YOU THROUGH THE LATEST CHANGES Our legislative update helps you make the most of changes to pensions law and regulation. Guiding you through the latest changes, we aim to give you confidence that your scheme will continue to meet your needs and deliver value for money and a good outcome for your employees. 2

3 Legislative update OCTOBER 2017 GOVERNMENT UPDATE MONEY PURCHASE ANNUAL ALLOWANCE EMPLOYER- FUNDED PENSION ADVICE STATE PENSION AGE REVIEW RETIREMENT OUTCOMES REVIEW GOVERNMENT REPAYS TAX ON PENSION WITHDRAWALS Page 4 Page 6 Page 7 Page 8 Page 9 REGULATORY UPDATE MISCELLANEOUS RESPONSE TO PENSION SCAMS CONSULTATION PUBLISHED Page 10 FCA CONSULTS ON DEFINED BENEFITS TRANSFER ADVICE Page 11 WALKER V INNOSPEC Page 12 3

4 Government update 01 MONEY PURCHASE ANNUAL ALLOWANCE 4,000 The new maximum pension contribution limit for those who have accessed their pension flexibly. The second Finance Bill for 2017 has now been published and contains draft legislation for a number of measures that were left out of the earlier Bill, due to the timing of the General Election. One of the key changes relating to pension planning is the reduction to the Money Purchase Annual Allowance (MPAA), which will be backdated to 6 th April 2017 once legislation has been passed. Introduced in April 2015, the MPAA aims to prevent any potential abuse of pension freedoms by imposing a lower limit on the amount of pension contributions that can be made by, or on behalf of, people who have drawn pension benefits flexibly. This includes partially encashing a pension or receiving an income payment from a flexi-access drawdown plan. This lower limit also covers contributions made by the employer. Those affected by the MPAA, typically older employees aged 55+, will be restricted to an annual allowance for money purchase pension plans of just 4,000, instead of the standard personal allowance of 40,000. This lower limit covers contributions made by their employer into a workplace pension, as well as any contributions they make into a personal pension. Those who have already drawn pension benefits flexibly and were subject to an MPAA of 10,000 are also affected by the reduction in the allowance. 4

5 Government update THOSE WHO HAVE ALREADY DRAWN PENSION BENEFITS FLEXIBLY ARE ALSO AFFECTED BY THE REDUCTION IN THE ALLOWANCE. An individual who has triggered the MPAA will have been informed by their pension provider if the MPAA applies to them. They face a tax charge at the highest rate of tax they pay if their total contributions exceed 4,000 in a tax year. Once triggered, the lower contribution limit also applies to subsequent tax years. Where an employee triggers the MPAA, their employer still has automatic enrolment duties towards them. This could potentially result in the employee facing a tax charge if they receive a generous pension provision from their employer, based on the level of their pensionable earnings. In this scenario, the employee could ask their employer if contributions could be reduced below 4,000. Or they might choose to opt out of the pension scheme altogether. In both cases, the employer would need to keep a record of this, as they would be required to re-enrol these employees into the scheme at its three-year anniversary. The MPAA doesn t directly affect employers and they don t need to take any action unless an affected employee approaches them. Employees affected by the MPAA wishing to discuss their options should be recommended to consult with a financial adviser in the first instance. 5

6 Government update 02 EMPLOYER-FUNDED PENSION ADVICE 500 Employees can now receive tax-free pensions advice of up to 500 through their employers. The latest Finance Bill also includes provision for an increase to the amount of tax-free pensions advice employers can arrange for employees from 150 to 500. This followed a recommendation in the Government s Financial Advice Market Review which concluded that a pensions advice gap exists. The Government is keen to encourage employers to facilitate advice for employees, to enable them to make informed decisions about their retirement savings. The increased exemption will apply to pension advice undertaken from 6 th April

7 Government update 03 STATE PENSION AGE REVIEW The Government has announced it intends to bring forward the date by which State Pension age increases to age 68 to between 2037 and 2039 seven years earlier than is currently provided for by legislation. This follows recommendations made by an independent review which took account of a continuing rise in life expectancy and the period of time typically spent receiving state pension. State Pension age has been increasing for women since 2010 and will be aligned with the State Pension age for men of 65 by November It will then increase to 66 by October Proposed dates between which the State Pension age increases to 68. Subject to parliamentary approval, these changes would affect people born between the dates 6 th April 1970 and 5 th April The Government has also said that it will provide a minimum of 10 years notice period for individuals affected by a change to their State Pension age. 7

8 Government update 04 RETIREMENT OUTCOMES REVIEW HOW PENSION FREEDOMS ARE SHAPING RETIREMENT 72% of pots were accessed by under 65s. 53% of pension pots were fully encashed. 94% An interim report published by the Financial Conduct Authority (FCA) looked into how the retirement income market is working for customers post pension freedoms. The report, which primarily focused on consumers who don t take financial advice, revealed that: Pensions are being accessed earlier 72% of pots accessed since pension freedoms have been accessed by those aged under 65 Over half of pensions pots have been accessed 53% were fully encashed and 90% of these were valued below 30,000 The vast majority (94%) of those taking a full withdrawal had alternative retirement income in addition to the state pension suggesting pension savings aren t being squandered More than half of fully withdrawn pots (52%) weren t spent but invested elsewhere raising some concerns that consumers may be paying too much tax or missing out on investment growth Twice as many people are moving into drawdown rather than buying an annuity. Before pension freedoms, more than 90% of pots were used to purchase annuities. The FCA is considering the findings with the introduction of some new measures expected. of those taking a full withdrawal had an alternative retirement income. 8

9 Government update 05 GOVERNMENT REPAYS TAX ON PENSION WITHDRAWALS When a large lump sum payment is taken from a pension, emergency tax may be applied by the provider due to the fact the PAYE system may treat a lump sum withdrawal as if it were a regular payment. This can often lead to an artificially high tax deduction being made up front. Those affected can submit an online request for a reclaim or wait until the end of the tax year when HMRC will refund any overpaid tax MILLION was repaid by HMRC in Q to people who were taxed in excess after withdrawing funds flexibly. HMRC s Pension Schemes Newsletter 89 revealed that 26.8 million in excess income tax taken from pension savers withdrawing funds flexibly was repaid by HMRC in Q an average repayment of 2,550. These figures prompted a call from within the pensions industry for the rules to be changed so that only basic rate tax is deducted from pension withdrawals with any extra tax being collected via the self-assessment process. 9

10 Regulatory update 06 RESPONSE TO PENSION SCAMS CONSULTATION PUBLISHED Following concerns regarding the impact of pension scams, the Government launched a consultation in December 2016 and has now published its response. The consultation considered three areas aimed at tackling this: limiting the statutory right to transfer a pension strengthening pension scheme registration a ban on cold calling in relation to pensions. The first measure limits the right to transfer a pension to only authorised personal pensions, authorised master trust schemes and occupational pension schemes with a genuine employment link. The Government expects trustees and managers to make all reasonable efforts to approve non-statutory transfers, subject to scheme rules permitting this, and conducting due diligence on the receiving scheme. The Government will work closely with stakeholders to shape the final details, with legislation expected in The second measure aims to make it harder to open fraudulent schemes. It does this by ensuring only active companies can register a pension scheme, and by de-registering schemes linked to dormant companies. The change will be included in a Finance Bill later in the year. The Government intends to proceed with the proposed ban on cold calling in relation to pensions for example those calls offering a free pension review or inducements to transfer a pension or to hold certain investments within a pension. It also intends to extend the ban to electronic communications such as s and text messages. Legitimate contact, such as calls where an existing client relationship is already in place, will be excluded from the ban. The Government intends to finalise the rules on how the ban will operate for publication in draft legislation in due course. THREE WAYS THE GOVERNMENT IS TACKLING PENSION SCAMS Limiting the statutory right to transfer a pension. Strengthening pension scheme registration. Ban on cold calling in relation to pensions. 10

11 Regulatory update 07 FCA CONSULTS ON DEFINED BENEFITS TRANSFER ADVICE THE AIM IS TO ENSURE THAT ADVISERS FULLY CONSIDER AN INDIVIDUAL S CIRCUMSTANCES AND OPTIONS. The FCA has issued a consultation covering the quality of advice given to people considering a transfer from a defined benefit pension to a defined contribution pension. Their aim is to ensure that financial advisers fully consider an individual s circumstances and also the options now available to them under pension freedoms. The consultation ran until 21 st September with the updated requirements expected in early

12 Miscellaneous 08 WALKER v INNOSPEC The landmark ruling in the above Supreme Court case ruled that a pension scheme member married to a same sex partner must be treated the same as if they had an opposite sex partner. An exemption in the Equality Act allowing schemes to exclude same-sex partners from spousal benefits, accrued before the law recognised gender-equal partnerships, was ruled to be discriminatory and in breach of EU equality laws. Scheme trustees and managers should check if any action is needed in respect of their scheme rules and benefits already paid. A PENSION SCHEME MEMBER MARRIED TO A SAME SEX PARTNER MUST BE TREATED THE SAME AS IF THEY HAD AN OPPOSITE SEX PARTNER. 12

13 HELPING YOU MAKE THE MOST OF CHANGE Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /17