This month's edition of snapshot summarises some of the key pensions law and tax changes that take effect from today.
The changes summarised in this edition are:
Today sees the start of the tapering AA. Generally, higher earners will have their £40,000 AA cut by £1 for every £2 that their “adjusted income” exceeds £150,000. There is a floor to the tapering so that individuals who have an adjusted income of more than £210,000 will retain a £10,000 AA.
Employers may wish to consider alternative remuneration structures for employees affected by these changes. In addition, employers should review their salary sacrifice arrangements carefully because the nature of those arrangements can, in certain circumstances, affect whether or not an individual would be subject to AA tapering.
The requirements concerning pension savings statements are not new but they have been adjusted for the 2015/16 tax year. In summary, scheme administrators must provide such a statement if a member's pension saving in the relevant pension input period exceeds the annual allowance. This requirement can also apply to deferred members of a DB scheme that have a salary link. Changes have been made to standardise pension input periods so that they conform to the standard tax year. As a result, for the 2015/16 tax year only, the requirement to issue a pension savings statement will bite if the member's pension input amount to the scheme during the whole tax year exceeds £80,000, or the inputs between 9 July 2015 and 5 April 2016 exceed £40,000.
The LTA drops to £1 million today (previously £1.25 million). Individuals affected by the change can apply for transitional protection to preserve a higher LTA. Such protection, particularly fixed protection, comes with a number of conditions. Employers should consider adjusting their procedures as a result of the decreasing LTA to help avoid situations where they could inadvertently cause an employee to lose his or her LTA protection.
A new single-tier state pension replaces the current basic state pension and the state second pension today. All DB schemes that were contracted-out on a salary related basis on 5 April 2016 will have now ceased to be contracted-out. Restrictions and protections will remain in place for contracted-out benefits that have accrued in DB schemes prior to 6 April 2016.
With the end of salary related contracting-out, a number of DB schemes will stop benefitting from an easement that enabled them to meet the automatic enrolment DB quality requirements. For a DB scheme to meet those quality requirements from today, the scheme will need to satisfy either a test scheme standard or the alternative quality requirements. The latter are designed to be less onerous to meet and additional transitional provisions will make compliance with those requirements easier for the next three years.
Two new exceptions to the duty on employers to auto-enrol and re-enrol their eligible jobholders into a qualifying scheme come into effect, so that employers who are:
- companies are no longer required to auto-enrol or re-enrol their jobholders who hold office as a director of the company; and
- LLPs are no longer required to auto-enrol or re-enrol their LLP members who are paid by the LLP and who are not treated as being employed by the LLP for income tax purposes.
Various new requirements in relation to occupational and personal pension schemes restrict how members of those schemes can be charged where those schemes are used as an automatic enrolment vehicle. The changes include:
- a ban on differential charges, meaning that it will not normally be possible to charge deferred members more than active members; and
- a ban on member-borne commission.
A new disclosure requirement is being imposed on occupational pension schemes to provide members with retirement risk warnings. The prescribed information must be provided within seven days of the trustees becoming aware that the member is thinking about accessing, or has decided to access, flexible benefits from the scheme.
HMRC's RTI requirements are being extended in a couple of areas that affect pensions payroll. The changes mean pension providers will now need to report:
- any flexible access payment that their scheme makes, such as uncrystallised funds pension lump sum or flexible drawdown payments; and
- any authorised lump-sum death benefits that are subject to tax (typically benefits that are paid where a member dies on or after their 75th birthday which, from today, will be subject to tax at the recipient's marginal rate).
The shakeup of pensions tax relief, trailed in the weeks preceding the Budget, did not come to pass. The topic now appears to be on the backburner, with the Government stating that there was no clear consensus on the best approach to pensions tax relief reform.
However, the Government did introduce a new retirement savings vehicle, the Lifetime ISA (LISA). Starting on 6 April 2017, LISAs will operate on a "tax exempt exempt" basis. In addition to attracting a generous 25% State bonus on LISA inputs, savers will be able to use their LISA fund for first time house purchases as well as for generating an income at retirement. There are, of course, a number of rules and limits that will apply.
The ABI and PLSA have raised concerns about the potential for LISAs to undermine the automatic enrolment regime. In light of these concerns, the Commons Work and Pensions Committee has reopened its enquiry into automatic enrolment to consider the LISA angle.
For further details on LISAs and other items from the Budget, see our Budget day snapshot here.