Diana Bruce, senior policy liaison officer at the Chartered Institute of Payroll Professionals, rounds up the ever-changing world of pension legislation.
In payroll we are used to one constant – change. The burden of ever-changing legislation holds the same administrative challenges for the pensions industry, and of course many payroll professionals deal with pensions admin too; the prime example being automatic enrolment (AE).
Planned AE changes
2017 will see the largest number of staging dates for small and micro employers since AE began in October 2012. The thresholds change for 2017-18: the lower qualifying earnings band is to increase from £5,824 to £5,876, and the upper qualifying earnings band is to increase from £43,000 to £45,000 (in line with the increase to the higher rate tax threshold in April 2017).
From April 2018, employers will need to make arrangements to ensure that their qualifying pension schemes comply with the increases in the legal minimum contribution rates (phasing). Currently employers only need to contribute 1% (2% total), but for the 2018-19 tax year this will double to 2% (5% total), and from 2019-20 onwards this will increase again to 3% (8% total). The minimum total contributions are the figures in brackets, so employees’ contributions may also need to increase.
A consultation is currently open until 3 March which seeks views on two changes for new employers (known as post-staging employers) who become subject to AE duties from April 2017. The two changes proposed in draft regulations are:
- a change to the duties trigger date set out in legislation for post-staging employers to the day on which the first worker begins to be employed by the employer; and
- extending to post-staging employers the option to defer AE for their workers (currently this postponement is available only to employers in the staging profile). This will be known as the ‘deferral’ period.
The regulations package is being made in advance of the outcome of the 2017 Automatic Enrolment Review. The measures need to be in place before the existing provisions in the Employers’ Duties (Implementation) Regulations 2010 start to apply to new employers in April 2017.
Automatic enrolment review
A review of AE was always planned for 2017 by the Department for Work and Pensions (DWP) and is now well underway, but the one thing it does not include in its scope is any increase to total contributions beyond 8%.
Increasing minimum contributions is becoming a common recommendation, with analysis showing that the current minimum under AE will not return an adequate retirement income for most.
However, the scope of the review does say that it will be an opportunity to strengthen the evidence around appropriate future contributions into workplace pensions, and it will also consider how engagement with individuals can be improved so that savers are better enabled to maximise savings; but the DWP do not expect to make policy decisions on these areas during 2017.
The main focus of the review will be to ensure that AE continues to meet the needs of individual savers. The existing coverage of the policy will be looked at and the needs of those not currently benefiting from AE will be considered, such as employees with multiple jobs and the self-employed.
Also under examination will be the thresholds: namely, the earnings trigger, the qualifying earning bands and the age criteria required by legislation. The technical operation will also be considered to ensure it is working as intended and also any further admin simplifications for employers.
Interested parties can still send views about the review and have until 22 March 2017 to do so. The DWP will publish a final report later this year setting out policy recommendations.
Money purchase annual allowance
From April 2017 the money purchase annual allowance (MPAA) will be reduced. The pension flexibilities introduced in April 2015 gave savers the ability to access their pension savings flexibly, as best suits their needs. Once a person has accessed pension savings flexibly, if they wish to make any further contributions to a defined contribution pension, tax-relieved contributions are restricted to a specific cap – the MPAA.
The current MPAA is £10,000, and the government consulted on the proposal to reduce it to £4,000 with effect from April 2017. The change is to limit the extent to which pension savings can be recycled to take advantage of tax relief.
Before an individual accesses their private pension saving for the first time, the annual allowance permits up to £40,000 to be saved tax free each year into one or more pensions. The government has made no changes to this limit.
GOV.UK hosts a tool to check your pension annual allowance. You can use this service if you have to pay tax on your pension savings and you have any unused pension annual allowances that you could carry forward and offset any tax you owe. However you cannot use this calculator if you are a member of a hybrid scheme, or you’ve had a valid declaration for flexible drawdown accepted by your pension schemes administrator.
The amount that can be saved across an individual’s lifetime into pensions – the lifetime allowance – has also remained the same at £1m.
Savers may be able to protect their pension(s) from previous reductions in the lifetime allowance. The deadline for applying for individual protection 2014 (IP2014) is 5 April 2017. Members who want to apply for this must do so through the lifetime allowance online service.
Tax-free pension advice allowance
April 2017 will see the introduction of the new pension advice allowance, which will enable people to withdraw £500 on up to three occasions from their pension pots tax-free to put towards the cost of pensions and retirement advice.
The allowance can only be used once in a tax year and will be available at any age. It can be redeemed against the cost of regulated financial advice and will be available to holders of ‘defined contribution’ pensions and hybrid pensions with a defined contribution element, but not ‘defined benefit’ or final salary type schemes.
From 6 April 2017 the government is also introducing a new income tax exemption to cover the first £500 worth of pensions advice provided to an employee in a tax year. It will allow advice not only on pensions, but also on the general financial and tax issues relating to pensions.
The changes replace existing provisions that limited the exemption solely to pensions advice, and was capped at £150 per employee per tax year. It will be possible to combine this tax exemption with the pensions advice allowance to enable individuals to access up to £1,000 of tax advantaged financial advice. The use of one exemption does not prevent an individual from accessing the other.
QROPS (Qualifying Recognised Overseas Pension Schemes)
The online service for managing QROPS will close on 5 April 2017. Managers and administrators of overseas pension schemes must report information to HMRC about these pension schemes, including transfers to and payments from QROPS. Changes to QROPS forms in recent years mean that the system no longer captures the correct information so HMRC is closing the online facility.
Legislation has been introduced making changes to the Registered Pension Schemes (Provision of Information) Regulations 2006. When a taxable lump sum death benefit is paid to a trust, regulations that came into force on 6 February 2017 require scheme administrators to provide information to the trustee on the amount of lump sum death benefit and tax paid by the scheme administrator.
The regulations also require trustees to pass on the information if the trustees then use the lump sum death benefit to make a payment to an individual beneficiary of the trust. This makes sure that the trust beneficiary has the information they need in order to claim a refund of the excess tax paid by the scheme administrator over and above the tax at their marginal rate.
HMRC will be updating the pensions tax manual to include these requirements and developing two new forms to help scheme administrators and trusts to provide the information required by the new regulations.
These are just some of the modifications that come from the progression of AE and government pensions policy; there are a host of other considerations in the pensions arena. Pension freedoms, the decline in defined benefit schemes, state pension changes, LGPS (Local Government Pension Scheme) changes, case law to consider, the arrival of the pensions dashboard…and the list goes on.
Another certainty is that there is never a shortage of something to write about in the world of payroll and pensions.