Among the numerous fiscal and legal changes that 6 April heralds every year, pensions usually sees its fair share. This year’s smorgasbord includes the end of Defined Benefit (DB) contracting-out, further restrictions in tax allowances for pension saving and new requirements for corporate trustees.
Farewell to contracting-out
Pensions Act 2014 comes into force, abolishing DB contracting-out to reflect the introduction of a single-tier State Pension.
The main practical issue for employers is the loss of the contracted-out rebate of 3.4% on national insurance contributions, and the benefit design changes to compensate for this that employers may wish to seek to implement. Employees who cease to be contracted-out will also see an increase in national insurance contributions.
An overriding unilateral statutory power for employers to make changes (to increase the employee contribution rate or to make future accruals less generous) was introduced last year. Employers wishing to avoid difficulties in using the scheme’s amendment power may choose this option. However the employers’ funding costs saved by any such change must be actuarially certified as not exceeding the employer’s increased costs as a result of the loss of the contracted-out rebate.
In relation to accrued contracted-out rights, most concepts of the contracting-out regime are preserved after 6 April. In addition employees and trustees will want to consider how Guaranteed Minimum Pensions (GMPs) should be revalued, particularly if they currently use fixed-rate revaluation under the GMP legislation.
Under the April 2016 legislation, fixed-rate revaluation (where used) applies from the date of a member ceases to be in contracted-out employment. If schemes want fixed-rate revaluation to apply at the date of leaving pensionable service instead, there is an overriding statutory power for trustees to amend the rules to effect this by way of a resolution to be passed before 1 April 2017.
Tapering of Annual Allowance (AA) for higher earners
Tax relief on pension contributions will be restricted for individuals with ‘adjusted income’ (i.e. taxable earnings including pension contributions) above £150,000. For every £2 of adjusted income over £150,000 an individual earns, that individual’s AA will be reduced by £1, subject to a maximum reduction of £30,000. Therefore, anyone with adjusted income exceeding £210,000 will have an AA of just £10,000.
Pension savers whose ‘Threshold income’ (which excludes pension contributions) does not exceed the ‘Threshold income’ of £110,000 will be unaffected.
To simplify the introduction of AA tapering, the ‘pension input period’ (PIP) over which pension savings are measured against the AA is being aligned to the tax year. As a transitional measure to avoid adverse effects on some members of this realignment of PIPs, adjustments have been made for the 2015/16 year. Generally, these will mean that for the 2015-16 tax year only, affected members would have an AA between £40,000 and £80,000. However, anyone potentially affected should seek advice, as these provisions are complex and depend on specific personal circumstances.
Reduced Lifetime Allowance (LTA)
The standard LTA will drop to from £1.25 million to £1 million. As with previous reductions, protections will be available for those with pension rights exceeding or approaching the £1 million level. Individuals wishing to rely on these must apply online to HMRC before taking any benefits after 6 April, although there is no specific cut-off point for applying. Potential applicants should also note that this online system will not be available until the summer.
Corporate trustees – requirements to identify Persons of Significant Control (PSC)
A new regime will require most UK companies (including pension trustee companies) to maintain a register of individuals with significant control over that company. This legislation is aimed at creating greater transparency over the membership and control of UK companies. A failure to have a register in place will be a criminal offence. In addition from 30 June 2016, companies will need to supply Companies House with the information on their PSC register along with the company’s confirmation statement, which will replace the annual return. From that date, new companies will need to supply this information on incorporation so that it can be made publicly available.
For many corporate trustees this will be straightforward as the shares in the trustee company will be held by the sponsoring employer, which itself will be required to hold a PSC register, and therefore in these cases the trustee’s register will need to record the record the employer as the ‘relevant registrable legal entity’.