Regulator finalises its DB to DC transfers and conversions guidance

Following consultation which ended only on 17 March (see Pensions Bulletin 2015/08) the Pensions Regulator has swiftly finalised its guidance to assist trustees of DB schemes when managing member requests for post 5 April 2015 transfers into DC schemes and conversion of benefits within the same scheme.  It has also issued its response to the consultation.

The now settled guidance is a significant improvement and development on the draft and given the subject matter should be required reading for trustees, their delegates and their advisers.  This is because it aims to provide a high level summary of the main requirements in this area, along with the Regulator’s expectations in relation to these.

Although the guidance continues to focus on the management of statutory transfers, it now contains sections on non-statutory (including partial) transfers and conversions.  The material describing the “appropriate independent advice” requirements is now consistent with the settled regulations and there is a useful appendix setting out a timeline for statutory transfers over £30,000 accompanied by a table giving more detail on what happens at each point in the time line (including for statutory transfers below £30,000).  There is also a new section on when the employer must pay for the advice.

When it comes to the Regulator’s expectations there are some helpful points, including the following:

• It is not the trustees’ role to second-guess the member's individual circumstances and choice to transfer, or to prevent a member from making decisions which the trustees might consider to be inappropriate
• Where trustees consider it appropriate to offer non-statutory and partial transfers, there should generally be a consistency of approach with the statutory process
• Conversion of safeguarded benefits into flexible benefits within the same scheme is likely to be subject to requirements under section 67 of the Pensions Act 1995
• Trustees should not request a copy of the “appropriate independent advice” the member has received, or make enquiries about the substance of the advice
• In relation to checking that the appropriate independent advice has been received from an adviser on the FCA register with permission to provide such advice, trustees need to keep a record of who conducted the check, when this was conducted along with evidence such as a screen shot of the register at the relevant date – ie before the transfer is made
• The response document confirms that if the transfer is to a qualifying recognised overseas pension scheme, the appropriate independent advice requirements are exactly the same as if the transfer was to a UK scheme; and
• Trustees need to be alert to the risk of fraudulent communications confirming that appropriate independent advice has been provided

The guidance also says that routine communications from trustees that simply explain to members their options – potentially including pre-retirement material or annual benefit statements that routinely include transfer values – should not trigger the requirement for the employer to pay for advice.  However, where the employer has requested that the trustees include transfer information in a member communication, trustees should consider the reason for the request and take advice as appropriate.

Comment

The speed with which this document has been settled is to be commended – it is likely to be called on time and time again in the coming weeks and months.  But employers will need to be careful that where they make a specific request for trustees to add information about transfer values to member communications it is not misinterpreted as an exercise for which they would be obliged to pay for individual financial advice for members.

HMRC explains taxation of DC flexible benefits again

As reported in our Bulletins many times, there are two main tax challenges when it comes to the new taxable flexible benefits available from DC funds (the “uncrystallised funds payment lump sum” (UFPLS) and payments from flexi access drawdown funds (FAD)).

• The first is that members need to understand that drawing a lot of their pension fund in one tax year may push them into a higher tax band – so they may have to pay more tax than if they spread part of the withdrawal into another tax year
• The second is that what the member received from the scheme will usually not be the payment less the actual tax due:  HMRC requires schemes to deduct tax from payments using PAYE and a coding protocol which will usually mean deducting more or less than the due tax.  The member and HMRC then have to liaise to arrange the adjustment – and hence a long delay is likely before the member has the net amount he expected in his hands

These challenges are underlined once more by the latest lengths that HMRC goes to in their Newsletter 68 (adding to previous Newsletters 66 and 67).

Part 6 of the Newsletter provides examples of how tax will be deducted depending on whether or not the pension provider holds a current P45 form for the member making the withdrawal – and depending on whether or not withdrawals extinguish the member’s fund.  In many situations the provider will have to deduct “too much tax”.

Part 7 of the Newsletter adds to and revises details already released on reporting flexi-access pension payments on the Real Time Information (RTI) PAYE system – emphasising the need to “separately identify and quantify the flexibly accessed element of any payment”.  Amongst other matters, HMRC has revised its previous requirement for reporting of the 25% tax-free element of an UFPLS.  And where an individual is drawing irregular payments, the Newsletter outlines a process by which (if the payroll systems allow) the member’s tax position will be corrected in-scheme by the end of the tax year.

But in many cases, the individual will have to wait until after the end of the tax year for HMRC to work out and make the adjustment – unless the individual can pro-actively claim overpaid tax back during the same tax year:  Part 7 also announces the new P50Z, P53Z and P55 forms that individuals can use to claim back overpayments of tax on pension flexibility payments taxed at emergency code.

Finally the Newsletter contains an Annex written by HMRC with the intention that schemes can point members to this or use the text, to illustrate the two challenges we set out above.

Comment

Schemes that allow UFPLS or payment from FAD will need to make sure their payroll provider understands the requirements and choices, and can cope.

HMRC’s annex could be helpful for scheme administrators looking for ways to tell their members about these tax issues; but perhaps the best summary we have seen from an HMRC webpage is “You may have to pay Income Tax at a higher rate if you take a large amount from your pension pot - and you may owe extra tax at the end of the tax year.”  We would add “If you plan carefully and take advice, you might be able to manage both”.

HMRC Newsletter 68 – other matters

HMRC Newsletter 68 contains other matters apart from the tax due and the tax to deduct on flexible benefits as discussed above.   New information covered includes:

• HMRC promises updated guidance soon about the latest measures to combat pension liberation (including new information obligations from April 2015 on scheme administrators when a scheme changes structure or range of number of members), following its recently published pension liberation newsletter
• For registered schemes operating relief at source there has been a delay in HMRC issuing the 2014/15 annual return notice but they should be issued this month (April).  HMRC also reminds such pension schemes that they should not accept contributions as relievable contributions where the scheme has not received the relevant declarations/statements of basic personal information including the individual’s National Insurance number.  If a scheme does so then HMRC is entitled to ask for the claimed relief at source to be repaid
• HMRC will be publishing further guidance for scheme members and administrators in the new tax year and reminds readers that you can register for e-mail alerts using this link:  https://www.gov.uk/business-tax/pension-scheme-administration/email-signup

And HMRC explains the £10K money purchase pitfall on drawing DC flexible benefits too

With the start of the Freedom and Choice regime, 6 April saw an overhaul of the plain English guidance to pension taxation that appears on the gov.uk. website.  Among other things, it highlights yet another pitfall of using some of the new flexibilities (as well as the tax pitfalls noted above) – that a member may well be subject to a £10,000 annual allowance for any money purchase contributions made thereafter, with penalty tax applying on excess contributions over the Allowance.

Comment

Trustees might want to point employees and members to these pages.  They include an explanation of the special adjusted check that applies in the tax year during which the member triggered the regime.  Very broadly, the £10k test looks at (deep breath…) contributions made in the pension input periods that end in the tax year concerned, but ignoring contributions made before the trigger; unless the arrangement is cash balance in which case the calculation is different.  A brave and useful attempt by the website writers but it remains to be seen whether pension savers will be able to understand any of this.

Your pension: it’s time to choose

The Money Advice Service has published a comprehensive guide designed to assist those who wish to access retirement income under the new flexible benefit rules applicable to DC savings that came into force on 6 April 2015.

The guide discusses the various options available and the benefits and risks of each choice.  It also explains key actions to take when planning to draw benefits and how to access free and impartial guidance from Pension Wise.

Under the recently updated disclosure regulations those who wish to access their flexible benefits and have the opportunity to transfer them to another scheme, must in certain situations be supplied with a copy of a guide, prepared or approved by the Pensions Regulator that explains the various options available, or be given a statement that gives materially the same information.  The MAS guide is intended to assist trustees in fulfilling this obligation.

Printed versions of the guide are available to order on the MAS website.

Comment

There is a lot of information for those with DC benefits to digest in this lengthy but well written guide.  But those who take the trouble to read and reflect on it before taking retirement income decisions should be better equipped to deal with the responsibilities that go hand in hand with the new DC freedoms.

How might taking flexible benefits impact means-tested benefit entitlements?

One area that has not yet been sufficiently addressed is how the new pension flexibilities might affect income-related (ie means-tested) state benefits.  The Department for Work and Pensions has now started the ball rolling with a short fact sheet setting out the headline issues.

In summary it seems that little will change in how pension benefits are taken into account in assessing means-tested benefits – except that where a benefit claimant chooses to use the new flexibilities to make ad hoc withdrawals from a pension pot or indeed withdraw the whole pot, the sum withdrawn would be treated as capital when assessing the claimant’s entitlement to benefit.  Where a claimant chooses to draw down amounts on a regular basis or purchase an annuity, the amounts paid would continue to be treated as income for the purposes of means-testing.  The other material change is that for claimants who are over Pension Credit qualifying age and have a pension pot but do not apply to make use of it, the “notional income” taken into account when assessing entitlement to benefit will be calculated as 100% of the annuity that the pot could potentially purchase (using tables complied by the Government Actuary’s Department) rather than the 150% figure currently used.

In particular it is interesting to note that the “deprivation rules” will not be changing – and the fact sheet does specifically note that the DWP will consider whether by spending, transferring or giving away any money taken from a pension pot a claimant has “deliberately deprived” themselves in order to increase their entitlement to benefits – and if so, assume they still have that money when working out entitlement to benefit.

Comment

Although the means-testing rules are altering only slightly, they are likely to be applied to pension benefits to a far greater extent than hitherto.  In particular, DWP decision makers may have their work cut out if they are going to look into the ultimate destination of pot withdrawals to assess whether some or all of it falls foul of the deprivation rules.

“Transfer report” rules for funded public sector DB schemes now available

Regulations recently laid before Parliament fill in the necessary detail for certain public sector DB schemes to reduce transfer values.

The Pension Schemes Act 2015 provides for such schemes to be “designated” by a “relevant person” if certain conditions hold as the first step in reducing transfer values – with each designation period running for no more than two years.  The conditions are that (a) there is a likelihood that increased payments out of public funds will have to be made into the scheme so that it can meet its liabilities, and (b) this increased likelihood is connected with the exercise or expected future exercise of rights to take a cash equivalent.

The Funded Public Service Pension Schemes (Reduction of Cash Equivalents) Regulations 2015 (SI 2015/892) require a designated scheme to obtain a “transfer report” from an actuary, set out the content of this report and require the trustees or managers of the scheme to reduce the transfer value of any non-money purchase benefit by the “insufficiency percentage” contained within that report where the intention behind the transfer is to obtain flexible benefits in another scheme.  In certain situations a lower reduction can be applied.

Comment

These regulations contain a number of similarities to the existing law used in private sector schemes for reducing cash equivalents following receipt of an “insufficiency report”, but are much more prescriptive in nature.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.