The start of a new tax year on 6 April is often a key date for the introduction of new legislation and this year is no different with a number of changes to pensions legislation due to come into force later this week. In this Pensions Alert we provide an overview of some of the changes due to come into force on 6 April 2017 that may require trustees to take action. We also provide a reminder of a deadline of 5 April 2017 for trustees to make amendments to their rules on revaluation of Guaranteed Minimum Pensions.
In November 2016 the DWP published a consultation on draft regulations proposing further changes to the legislation about administering accrued contracted-out rights. The response to consultation and final form regulations were published in March and the changes include the following:
- A change to the fixed rate of revaluation to 3.5% for those who leave pensionable service on or after 6 April 2017. The final version of the regulations differs from the consultation draft which proposed a rate of 4%.
- Amendments to the provisions about survivors' GMPs consequential on changes to State bereavement benefits.
- Discretion for HMRC to extend notification and payment periods to allow late Contributions Equivalent Premiums identified as a result of the Scheme Reconciliation Service.
Schemes that contain contracted-out rights will need to ensure that they are ready to administer those rights in line with any relevant changes from 6 April.
The consultation had also proposed changes to the provisions about restrictions on alterations of scheme rules in relation to post-1997 contracted-out rights. However, in light of responses to the consultation, these changes have not been included in the final form of the regulations. The government will reflect further on what, if any, changes are needed, although any changes in this area would not be implemented before autumn 2017.
Pension advice allowance
From 6 April 2017 a new authorised payment is being introduced - the pension advice allowance payment - which will allow people to take up to £500 from their DC pension pot tax-free to pay for retirement financial advice. Individuals will be permitted three uses of the allowance in their lifetime (which means that a total of £1,500 can be withdrawn) but will only be able to use it once per tax year.
In February the Treasury published the response to its August 2016 consultation about the design of the pension advice allowance and HMRC published a technical consultation on draft regulations. The final form of the regulations was made in March setting out the conditions that a payment must meet in order to be a pension advice allowance payment. A summary of the conditions is set out below:
- The payment cannot exceed £500 and must be for "retirement financial advice" (defined as "advice in respect of the person's financial position, including their pension arrangements and the use of their pension funds") or the implementation of such advice. The February response to consultation provides some examples of the sorts of scenarios that will be in scope of the allowance.
- The payment is requested in writing. The written request must also contain a declaration from the person that the following conditions for a pension advice allowance payment are satisfied: (i) no more than two pension advice allowance payments have been requested and made in respect of them; (ii) no pension advice allowance payment has been requested and made in the tax year in which the request is made; and (iii) the advice is regulated financial advice provided by a financial adviser regulated and authorised by the Financial Conduct Authority to provide such advice.
- The payment must be made by the scheme directly to the financial adviser.
The pension advice allowance can be used alongside the tax exemption for employer-arranged pensions advice. It is worth noting that provision is being made in the Finance Bill 2017 to replace the current tax exemption for employer-arranged advice from 6 April 2017. Under the new exemption, provided certain conditions are met, if an employer provides pensions advice to its employees or pays or reimburses the costs of pensions advice incurred by the employee, the first £500 worth of this advice in a tax year will be exempt from income tax. The new exemption will allow advice not only on pensions but also on the general financial and tax issues relating to pensions.
It is not mandatory for schemes to permit members to take pension advice allowance payments but they may want to consider whether to do so. As the pension advice allowance payment can be made from a money purchase arrangement this is relevant not only for DC schemes but also for DC AVC arrangements in DB schemes. If schemes are planning to offer the pension advice allowance payment, issues that they will need to consider include the following:
- Whether the scheme rules are currently drafted broadly enough to permit such payments to be made or whether rule amendments will be needed. Schemes may also want to consider whether they want to place any restrictions on when the allowance can be used.
- The advisers to whom the scheme will permit payments to be made. The February response to consultation reports that some respondents said that they would appoint a panel of approved advisers but others said that choosing an adviser should be the explicit responsibility of the scheme member. The government notes that the design of the allowance will permit both of these options.
- While the individual has to declare that the limits on numbers of uses of the allowance have not been exceeded, the response to consultation states that providers, trustees and advisers are still expected to operate with basic due diligence to prevent misuse of the allowance. The response gives some examples including one concerning a provider which sees that an individual has already used the allowance three times for that scheme. If a scheme makes a payment and this breaches the restrictions on the number of uses of the allowance, this will be an unauthorised payment resulting in tax charges. Trustees may therefore want to consider what due diligence processes they will put in place, for example, checking the member's record for previous uses of the allowance.
- Trustees should consider any other changes needed to their administration processes to ensure that pension advice allowance payments are made in line with the regulations (for example, schemes may want to consider including a check that the adviser is regulated and authorised by the FCA) and what changes are needed to member communications.
- Where the restrictions on charges introduced in April 2015 or the ban on member-borne commission introduced in April 2016 apply to the arrangement from which the pension advice allowance payment will be made, trustees will also need to consider whether the provisions in that legislation for member agreement to certain charges need to be met.
HMRC has not published a response to its consultation on the draft regulations and no official guidance has yet been published on pension advice allowance payments. However, HMRC will be including information on this subject in the Pensions Tax Manual. Schemes may want to consider waiting until this has been issued before implementing any plans to allow pension advice allowance payments so that they can check that their processes are in line with HMRC's guidance.
Overseas scheme definitions
Following a consultation issued in December 2016, regulations were finalised in March which make changes to the conditions to be an 'overseas pension scheme' and a 'recognised overseas pension scheme'. These changes come into force on 6 April 2017 and are relevant to the question of whether an overseas scheme meets the criteria to be a QROPS such that a transfer to it will be an authorised payment. In particular it is important to note that the removal of the 70% criterion (described below) may mean that some schemes cease to be QROPS from 6 April 2017 and therefore a transfer would be an unauthorised payment. Schemes should review any outstanding transfer requests to check whether or not the changes have an impact on whether the transfer can be made and, more generally, should also consider reviewing and updating their processes for overseas transfers. A brief overview of the changes is set out below.
Overseas pension schemes
In order to meet the definition of an 'overseas pension scheme', one of the conditions that must be met is the "regulatory requirements test". Currently, this test requires that if there is a regulator of the type of pension scheme in the country in which the scheme is established, the scheme must be regulated by that body. However, if there is no such body, there are other ways the test can be met, one of which is that the scheme rules require that at least 70% of the member's UK tax-relieved funds will be used to provide them with an income for life. From 6 April 2017 the 70% criterion will be removed and how a scheme can satisfy the regulatory requirements test will depend on whether the scheme is an occupational or non-occupational pension scheme.
Recognised overseas pension schemes (ROPS)
Currently one of the conditions to be a ROPS can be satisfied if either a test concerning the location of the scheme is met or the 70% criterion is met. From 6 April 2017 the possibility of using the 70% criterion is removed but the regulations also expand the type of agreement that enables a country to be a prescribed country for the purposes of meeting the test concerning scheme location.
Another condition to be a ROPS is that schemes must meet the "pension age test" which currently provides that payments cannot be made to members if they are under the normal minimum pension age unless they are retiring due to ill health. From 6 April 2017 this test will be amended to allow schemes to make payments to members aged under 55 if the payment would be an authorised payment if it were made by a registered pension scheme.
- Following a consultation issued in November 2016, the government has confirmed that it will go ahead with its proposals to reduce the money purchase annual allowance (which applies when a member has accessed their benefits flexibly and wishes to make further DC contributions) from £10,000 to £4,000 from 6 April 2017. Provisions to give effect to this have been included in the Finance Bill 2017 which was published on 20 March.
- In relation to automatic enrolment, from 6 April 2017, the lower limit of the band of qualifying earnings on which the minimum contribution requirements are measured will increase from £5,824 to £5,876. This is also the earnings threshold which workers who are eligible to opt in must exceed if they are to be entitled to an employer contribution. The upper limit of the qualifying earnings band will increase from £43,000 to £45,000 from 6 April 2017.
A reminder on GMP revaluation - deadline 5 April 2017
When the new State Pension was introduced on 6 April 2016, a change was made to the legislation on administering contracted-out rights to change the point at which schemes may use fixed rate revaluation for Guaranteed Minimum Pensions (GMPs) instead of revaluation in line with earnings. The relevant point is now when the member leaves pensionable service rather than when they leave contracted-out employment. There is a statutory power for trustees to modify their scheme by resolution in order to choose to apply fixed rate revaluation from the day pensionable service ends for those who ceased to contract-out on 6 April 2016. Rule amendments using this resolution-making power must be made by 5 April 2017 at the latest. Depending on how scheme rules are currently drafted, there is a risk that, unless an amendment is made, members may be entitled to the better of fixed rate revaluation and revaluation in line with earnings.