Our regular roundup of the latest pensions news. This
month we look at changes to transfer rights, disclosure requirements for
members accessing their benefits flexibly, VAT treatment of pension
fund management services and proposed changes to automatic enrolment.
Transfer rights amended by Pension Schemes Bill
The Pension Schemes Bill has finished its stages through the House of Commons and is due to have its second reading in the House of Lords on 16 December 2014. The Bill brings in changes to legislation that are necessary to facilitate the defined contribution (DC) flexibility introduced under the Pensions Taxation Bill (see November’s Headlines).The Bill’s key change is to extend a member’s right to transfer money purchase and cash balance benefits up until the point that they are used to purchase a pension (or are designated for drawdown) - thereby allowing such members to transfer at retirement to a more flexible DC arrangement. This easement will not be apply to members with defined benefits (DB), who – broadly as now – only have a right under the legislation to transfer their DB rights up to a year before their normal pension age, although schemes can choose to allow their members to transfer up until retirement.
Safeguards will be put in place to protect schemes against the cost of repeated requests to transfer:
- The member must have ceased accruing the benefits that they wish to transfer.
- The member will also need to take independent financial advice if they wish to transfer DB rights in order to access flexibility. Usually, the member will need to pay for this advice, but, in a welcome easement, where the employer meets the cost, the member will not be taxed on this provided certain conditions are met.
Disclosure burden softened by Taxation of Pensions Bill changes
The Government has agreed to modify the proposed duties on members to disclose the fact that they have flexibly accessed defined contribution (DC) benefits under the new regime operating from April 2015.When a member first accesses DC funds flexibly, for example by taking part or all of their fund in a scheme as a taxable lump sum, they must notify other schemes of which they are a member, within a set period. This is to ensure that those other schemes are aware that any subsequent contributions paid by or in respect of the member to DC arrangements will be subject to the reduced £10,000 annual allowance. There is an initial £300 fine on the member for failure to do so, with powers to levy fines daily for ongoing failure.
The original proposal would have required members to recall and inform all schemes with which they have pension savings within 31 days (see last month’s Briefing). The Government has now acknowledged this was unnecessarily onerous and has made two amendments. The first increases the timescale to 91 days and the second restricts the schemes that need to be informed to those in which the member is accruing DC or cash balance rights (i.e. an active member). The changes are due to be considered at Report Stage of the Taxation of Pensions Bill, but given that they are not politically contentious and are Government amendments, they are unlikely to be defeated.
Simplifying the auto-enrolment process
The Department of Work and Pensions (DWP) is consulting on changes that it says will make it easier for employers to continue using their defined benefit (DB) schemes to meet the quality test for automatic enrolment when contracting out ceases in April 2016.Employers using a non-contracted out DB scheme for auto-enrolment must satisfy the test scheme standard (TSS) in relation to that jobholder or a new ‘cost of accruals’ test. The optional new test will require a minimum contribution rate that will broadly represent the cost of providing TSS benefits – the principal version requiring that the cost of accrual is at least 10% of qualifying earnings but with limited variations for DB schemes that use a different definition of pensionable earnings.
The DWP is also proposing to reduce the amount of information that must be provided by the employer to its employees. In particular, it has concluded that the requirement to send information to employees who are already active members of the scheme is of “little benefit to them or the employer”. Employers will not be obliged to change their existing processes.
The draft regulations will also enable employers to choose whether or not to automatically enrol certain categories of employees, namely:
- Those in a notice period
- Those who have chosen to leave their qualifying scheme within the previous 12 months
- Those who the employer has reason to believe have any form of lifetime allowance protection
- Former employees who are re-employed within 12 months of being paid a winding-up lump sum.
The consultation runs to 9 January 2015, with final regulations planned to take effect in April 2015.
VAT Treatment of pension fund management services
Her Majesty’s Revenue & Customs (HMRC) has published guidance on the VAT treatment of pension fund management costs following two rulings by the Court of Justice of the European Union; the Danish ATP case and the Dutch PPG case. The guidance raises the prospect of VAT refunds and VAT exemption but, in some cases, additional VAT costs. In both cases, the implications will depend on the scheme‘s VAT profile and its arrangements with the employer therefore any changes will need to be considered by their tax advisers.Brief no.43 relates to the PPG case and sets out HMRC’s position on the extent to which employers can recover VAT on services relating to schemes they sponsor. HMRC will no longer differentiate between ‘general management’ costs and ‘investment management’ costs, having previously allowed employers to recover VAT only in relation to the former. They also confirm that former 70/30 split will disappear after a transitional period. Employers may now be able to recover all of the VAT on all types of service but only where the “services in question are supplied to the employer”. HMRC state that this is likely to be the case where employers are a party to the contract for the service, the service is provided to them and they pay for it. However, there is a risk that none of the VAT relating to services will be reclaimable if HMRC’s conditions are not met. Consequently, employers and trustees will need to consult their tax advisers to review their current arrangements, decide whether retrospective VAT claims may be made and determine the most appropriate way to arrange for payment of services in future. HMRC has stated that it will provide further details in an updated version of VAT Notice 700/17.
Brief no.44 is concerned with whether defined contribution (DC) schemes qualify as Special Investment Funds for VAT purposes. It follows the ATP case in which it was held that DC schemes could be considered a ‘special investment fund’ and so management and administration services for these schemes could be exempt from VAT. HMRC has accepted that DC pension funds will be exempt if they are solely funded by the members, the members bear the investment risk, the fund contains several customers’ contributions and the risk is spread across a range of securities. The Brief leaves some questions unanswered and trustees of DC schemes and schemes with a DC element should consult their tax advisers to consider their position in the light of the HMRC’s statement.
Culled from Towers Watson
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