4th March 2010 Issue No: 9 Pensions Bulletin Restricting pensions tax relief for high income individuals Consultation has now closed on the Government s proposals on implementing its controversial plans to restrict pensions tax relief to the basic rate for high income individuals. Unsurprisingly it has brought forward a storm of protest. Lane Clark & Peacock (LCP) says in its response that, for those affected, the Government s plans will damage the fundamental principle behind saving for a pension by diluting, or removing entirely, any incentive to lock away pension savings for a long period to retirement. This is echoed, by amongst others, the respected Institute of Fiscal Studies that slams the proposals as complex, unfair, inefficient and (for some) avoidable. LCP s response was informed by feedback received from clients since the plans were announced in the Pre-Budget Report (see Pensions Bulletin 2009/50). LCP believes that the plans may be self-defeating as high earners access alternative tax-efficient long-term savings vehicles, and urges the Government not to proceed with the proposals set out in the consultation paper. The Association of Consulting Actuaries (ACA) has submitted a detailed response to the Government s plans with a view to making a flawed policy less bad. Comment Rarely has the pensions industry been so strongly opposed to Government proposals, with many parts of the industry suggesting an alternative approach based on a radically reduced Annual Allowance. The issue at hand is not about whether high-earners receive excessive tax relief on pension contributions but the unintended consequences which will result from the Government's proposals, as well as the heavy costs to be borne by employers, pension schemes and individuals in complying with these proposals were they to come in as planned. It should also be remembered in all of this that pensions are taxed in payment: the phrase tax relief applied to pension contributions is a misnomer, tax deferral is more accurate. As LCP s response points out, the proposals mean that income tax will be paid when pensions are paid, as before, but the proposals introduce the taxation of pension savings during the years before retirement. Anti-forestalling Further legislation There have been three developments in the area of anti-forestalling. The long-awaited pipeline and change of provider regulations have been finalised. Following the Pre-Budget Report last December, draft legislation changing the relevant income threshold from 150,000 to 130,000 has been published. And finally, the Order that gives effect to the Pre-Budget Report announcement that for high income individuals subject to the anti-forestalling provisions, the special annual allowance charge for pensions savings taxed in 2010/11 will be levied at the appropriate rate has been laid before Parliament. The Special Annual Allowance Charge (Protected Pension Input Amounts) Order (SI 2010/429) extends protection against the Special Annual Allowance charge in three circumstances: www.lcp.uk.com
Where there is a change in pension provider on or after 22nd April 2009: subject to certain conditions, the regulations preserve protection the individual would have had but for the change and as well as for example a simple change of money purchase vehicle, the regulations cover the very important area of individuals moving pension schemes because their employer restructures the business; Where payments are made by the employer for an individual to which the employer was contractually committed on or before 22nd April 2009 but had not actually been paid or commenced by 22nd April 2009 (this applies both to single contributions and new regular contributions); and Where lump sum payments were made on 22nd April 2009 (extending, by one day, the protection for contributions paid between 6th April 2009 to 21st April 2009 that are of the type that are paid less frequently than quarterly and made in relation to money purchase arrangements (excluding cash balance arrangements)). Please also see the explanatory memorandum and a brief guidance note published by HM Revenue and Customs (HMRC). Draft legislative clauses have been published which are intended to reduce the relevant income threshold for anti-forestalling from 150,000 to 130,000 (see Pensions Bulletin 2009/50) and include a protection for those newly caught, in respect of contributions made or started up before 9th December 2009 when the change was announced. The Special Annual Allowance Charge (Variation of Rate) Order 2010 (SI 2010/572) sets the rate of the special annual allowance (SAA) charge for 2010/11: see also the explanatory memorandum and Pensions Bulletin 2010/02. Comment The regulations extending protection are welcome but we advise clients to seek expert advice concerning their interpretation before relying on these complex provisions. NEST Administration contract awarded The Personal Accounts Delivery Authority (PADA) has announced that it has completed its procurement for the scheme administration services for the National Employment Savings Trust (NEST). The contract has been awarded to Tata Consultancy Services Limited (TCS) and PADA plans to sign the contract with TCS later this month. The 10-year contract has two stages. The first stage runs to October 2010, and enables TCS to begin the activity required to set up and administer NEST. A further decision will be made by October on whether to proceed with the second stage of the contract for the remainder of the term. The contract also includes possible extensions for up to a further five years. Moral Hazard Bulk transfers that trigger a contribution notice Draft regulations have been laid before Parliament, following consultation during the autumn (see Pensions Bulletin 2009/43), that set out how the Pensions Regulator is to calculate the sum specified in a contribution Page 2
notice issued to a defined benefit scheme, where a transfer of the accrued pension rights of two or more members to a defined contribution pension scheme triggers the requirement for one (see also the explanatory memorandum). There have been no material changes made as a result of the consultation although the Department for Work and Pensions has also published a summary of the issues raised during the consultation and how these have been reflected in the draft regulations above. Pension Protection Fund Schemes with a partial Crown guarantee Following the laying of Regulations that remove the partial exemption from Pension Protection Fund (PPF) levies where the scheme s Crown guarantee constitutes incompatible state aid (see Pensions Bulletin 2010/06), some further draft regulations have been laid before Parliament. The draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2010 ensure that following the treatment of the scheme for PPF levy purposes as two separate eligible schemes, both parts must pay the full PPF administration levy. The Regulations also ensure that where a scheme becomes an eligible scheme part way through a financial year and the incompatible State aid condition is met, it must pay the PPF administration levy for the whole of that financial year and not just for the part during which it was eligible (see also the explanatory memorandum). Finance Act 2004 Scheme re-organisations An Order has been laid before Parliament that extends the scope of transitional protection where there are transfers following a scheme reorganisation or on the winding up of schemes. The Pension Schemes (Transfers, Reorganisations and Winding Up) (Transitional Provisions) (Amendment) Order 2010 (SI 2010/529), which has effect retrospectively from 6th April 2006 (A-day) extends, for those transfers following scheme reorganisations between 10th December 2003 and A-day, the protection of early pension age entitlements to those transferring: whose rights were not wholly transferred in a single transaction because of the contracting-out legislation; or where the employee was a former employee of a former sponsoring employer of the transferring scheme. The Order also prevents the loss of transitional protections if an annuity contract is assigned to a member during wind up (with such contracts becoming registered pension schemes at the point they are assigned to the member, where certain conditions are met). Finally, the Order also introduces a new easement to permit Stand-alone Lump Sum rights to be retained following a transfer from a scheme being wound up. The requirements vary depending on whether the scheme started to wind up before or after A-day and when the member joined the scheme (see also the explanatory memorandum). Page 3
Comment This Order makes amendments to already complex legislation. Readers are advised to seek expert advice in interpreting them. Finance Act 2004 Provision of information by registered pension schemes Regulations have been made that make two amendments to the Provision of Information Regulations from 6th April 2010. The Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2010 (SI 2010/581 see also the explanatory memorandum) provide for the following: A new requirement for scheme administrators to provide HM Revenue and Customs (HMRC) with certain information where, on or after 6th April 2010, there is unauthorised borrowing in the scheme. HMRC will use this to determine the scheme sanction charge. For certain annuity contracts that are assigned to members as part of a scheme winding up, not to have to inform HMRC that they are registered pension schemes being wound up. Pension Protection Fund Payments from the Fraud Compensation Fund An Order and a set of Regulations have been laid before Parliament, introducing fraud compensation transfer payments, which will assist the Pension Protection Fund (PPF) Board with managing certain schemes though their assessment period. The PPF Board is responsible for two distinct funds the Pension Protection Fund and the Fraud Compensation Fund. As they serve separate purposes they are not permitted to make payments between each other. However, this does not recognise that there can be situations where payments are due to the scheme from the Compensation Fund whilst the scheme itself is to be taken into the PPF. This will be rectified from 6th April 2010, as the PPF Board will be able to make payments from the Fraud Compensation Fund into the Pension Protection Fund where it believes that the assets of a scheme for which it has assumed responsibility were fraudulently reduced before it had issued its transfer notice. The Board will not be able to make such payments until all reasonable attempts have been made to recover the loss. These payments will allow the PPF Board to transfer schemes into the PPF without waiting for the Fraud Compensation Fund to make any payment to the scheme. The payments can also be made where the PPF Board learns of the loss of assets of a scheme after the scheme has been transferred into the PPF. The relevant provisions of the Pensions Act 2004 are turned on by the Pensions Act 2004 (Commencement No. 14) Order 2010 (SI 2010/443). The Occupational Pension Schemes (Fraud Compensation Payments and Miscellaneous Amendments) (Amendment) Regulations 2010 (SI 2010/483) then set out how fraud compensation transfer payments will be calculated (see also the explanatory memorandum). They cannot exceed the difference between the amount of assets lost through fraud and the recoveries made. Page 4
2010/11 low earnings threshold for State Second Pension set The Social Security Pensions (Low Earnings Threshold) Order 2010 (SI 2010/468) confirms the Low Earnings Threshold (LET) for 2010/11 as 14,100 (see also the explanatory memorandum). The LET forms the earnings boundary between the 40% and 10% accrual segments of the State Second Pension (S2P). Consequently, the upper threshold (which used to be the boundary between the 10% and 20% accrual segments of S2P) should be 32,200. Revaluation of earnings factors Section 148 orders The rates of revaluation for the 2010/11 tax year for SERPS/S2P benefits accrued in each of the tax years 1978/79 to 2009/10 have been confirmed. Such revaluation also applies to GMPs accrued between 1978/79 and 1996/97, other than for early leavers where alternative forms of revaluation are permissible. The earnings factors are contained within the Social Security Revaluation of Earnings Factors Order 2010 (SI 2010/470). 2009/10 earnings are uplifted by 1.2% (see also the explanatory memorandum). This Pensions Bulletin should not be relied upon for detailed advice or taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you. Page 5