New 25% tax charge on QROPS transfers

Although the Budget speech only mentioned “foreign pensions” obliquely, there was quite a sting in the tail in the announcement of a new overseas transfer charge of 25% on transfers from UK registered pension schemes to “qualifying recognised overseas pension schemes” (QROPS).

Further detail is provided in a suite of documents, comprising two policy papers, HMRC guidance and draft legislation that will be taken forward in the Finance Bill.  One of the policy papers states that whilst the Government recognises that QROPS continue to have a legitimate purpose, “the QROPS regime is increasingly marketed and used as a way of gaining an unfair tax advantage on pension savings that have had UK tax relief”.

The tax will apply to certain transfers to QROPS requested on or after 9 March 2017.  HMRC states that a “request” for these purposes must be a substantive request to the scheme administrator to take action, ie to have given the administrator an instruction to transfer £X or X% of the member’s pension funds to a named overseas pension scheme.  HMRC emphasises that a casual enquiry is not a transfer request.

The overseas pension charge may be payable on transfers from both UK registered pension schemes and QROPS which have previously (on or after 9 March 2017) received a transfer of UK tax-relieved funds.  There are the following exemptions:

• Both the individual and the QROPS are in the same country after the transfer
• The QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA state after the transfer
• The QROPS is an occupational pension scheme sponsored by the individual’s employer
• The QROPS is an overseas public service pension scheme – an overseas government scheme as defined in the tax regulations and the individual is employed by one of the employers participating in the scheme; or
• The QROPS is a pension scheme established by an international organisation as defined in the tax regulations to provide benefits in respect of past service and the individual is employed by that international organisation

UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer.  UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer.

The scheme administrator of the registered pension scheme or the scheme manager of the QROPS making the transfer is jointly and severally liable to the tax charge and where there is a tax charge, they are required to deduct the tax charge and pay it to HMRC.  This applies to scheme managers of former QROPS that make transfers out of funds that have had UK tax relief, if the scheme is a QROPS on or after 14 April 2017 and at the time the transfer to the former QROPS is received.

The significance of the 14 April date is that existing QROPS are set a deadline of 13 April 2017 to provide a written undertaking to HMRC that they wish to continue to have QROPS status and that they will operate the new tax charge – both in terms of information reporting and paying any tax charges that arise on onward transfers or changes in the member’s status.  Failure to provide this undertaking will result in automatic loss of QROPS status with no right of appeal.

Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident

Where tax liability arises it will be joint and several between the member and the scheme administrator/manager.  Detailed procedures are set out in the HMRC guidance for reporting and settlement together with new member disclosure requirements.

Comment

This (completely un-signalled) measure will have an immediate and, we expect, drastic effect on QROPS transfer activity.  Where the tax charge does bite, which will be more often than not, it is difficult to see how an authorised financial adviser could recommend a transfer.

The measure will also place some quite burdensome compliance requirements on scheme administrators for reporting and member communications where QROPS transfers are requested.  Moreover, trustees and their administrators may have to make some quick decisions about transfer requests in train with members claiming that “requests” have been made in time.

Finally, we wonder if the exemption in respect of members and QROPS in the EEA will fall away in time after the UK leaves the EU.

HM Treasury raking in extra tax from “Freedom and Choice” regime

Buried on page 49 of the Budget policy costings paper is a rather astonishing paragraph detailing how much extra tax revenue the Government has received since the pension flexibility regime was introduced from April 2015.

In the Government’s own words this “was initially estimated to raise around £0.3 billion in 2015-16 and £0.6 billion in 2016-17 – estimates subject to considerable uncertainty.  In the event, the measure has raised far more than anticipated – £1.5 billion in 2015-16, while our latest estimate for 2016-17 is £1.1 billion”.

So the Government is on course to receive an extra £1.7 billion in the first two tax years of the new pensions tax regime.  The Government attributes this to different consumer behaviour than expected with individuals withdrawing their pension savings over shorter periods than anticipated.  The Government also notes that it now expects the peak year of yield to be 2017/18 (raising £1.6 billion) rather than 2018/19.

Comment

When the former Chancellor, George Osborne, launched the “Freedom and Choice” pensions tax regime many commentators questioned whether he was acting altruistically to unshackle savers from a pensions regime that many saw as too rigid and out of date, or whether the talk of freedom and choice was a smokescreen to disguise a tax-grab.  Whatever your views on that, hindsight shows that the Government has done well out of it.

Class 4 NICs to rise

Class 4 national insurance contributions paid by the self-employed will increase from 9% to 10% in April 2018, and to 11% in April 2019.  This is in order to reduce the differential between the rates of NICs paid by employees and those paid by the self-employed, particularly given that since April 2016, the self-employed have been able to build up the same State Pension as employees.  Further details are set out in a fact sheet.

Comment

This is not a surprise – the single tier state pension is very beneficial to the self-employed compared to the previous system and so it was only a matter of time before the Government took action.

Lifetime ISAs to go ahead from this April

The Budget documents confirm that the Lifetime ISA will be launched on 6 April 2017.  This follows finalised regulations being laid before Parliament a couple of weeks ago (see Pensions Bulletin 2017/09).

Comment

This is not surprising but some were lobbying for the introduction of the Lifetime ISA to be pushed back a year because it was only announced in last year’s Budget (see Pensions Bulletin 2016/11).  It will now be interesting to see what market develops and whether more potential providers will be ready from launch day.

Money purchase annual allowance reducing to £4,000

The money purchase annual allowance (MPAA), which applies in limited cases (see Comment), will reduce from £10,000 to £4,000 pa from 2017/18.  A policy paper published on Budget day confirms the go-ahead on this change which the Government proposed in the Autumn Statement (see Pensions Bulletin 2016/47).

Following a short consultation, the Government has decided that there will be no other change to the way the MPAA operates, and has also clarified that the change will apply to those already in the MPAA regime.  Appropriate clauses to effect the change will be introduced into the Finance Bill 2017 and a response to the consultation will be published on 20 March 2017.

Comment

The Government notes that the MPAA is its tool to counter individuals diverting pay into a pension scheme and then immediately withdrawing it 25% tax free; and that setting this to a £4,000 level is “fair and reasonable and should allow individuals who need to access their pension savings to rebuild them if they subsequently have opportunity to do so”.  One question in the autumn consultation was whether the reduction would allow the continued successful roll-out of automatic enrolment and presumably the Government concluded it would.

The MPAA (which operates in parallel to the main annual allowance) applies only for individuals who have at any stage drawn money purchase benefits using any of the Freedom and Choice money purchase routes that count as a “flexible payment” – but once it applies it applies for all their future money purchase savings in any scheme for all future tax years.  So any individual who is thinking about using a money purchase flexibility from any pension savings should think hard about the consequences before doing so if their current employer scheme is money purchase.  There are a good number of money purchase schemes where the regular joint contribution could exceed£4,000 pa, even for some individuals who are basic rate taxpayers.

Master trust tax registration

The Government is to amend the tax registration process for master trust pension schemes to align with the Pensions Regulator’s new authorisation and supervision regime.  The intention is to help boost consumer protection and improve compliance.

Comment

There are no further details beyond this high-level announcement.  The new Pensions Regulator’s regime referred to is that contained in the Pension Schemes Bill (see Pensions Bulletin 2016/43), currently nearing the end of its journey through Parliament.

Section 615 schemes – abolition legislation to be modified

It appears that the Finance Bill, which will effectively bring to an end the use of section 615 schemes from April 2017, is to be modified following the consultation on the draft clauses last December (see Pensions Bulletin 2016/49).  The new clauses will “set out the position” for defined benefit section 615 schemes and clarify that all lump sums paid out of funds built up before 6 April 2017 will be subject to the existing tax treatment.

Comment

The draft clauses that were presented for consultation were problematic on a number of technical fronts.  This latest development sounds like good news, but we will need to wait for publication of the Finance Bill to be sure.

Tax advantages for most non-pension salary sacrifice benefits abolished

As announced at the Autumn Statement (see Pensions Bulletin 2016/47) and clarified via the draft Finance Bill clauses (see Pensions Bulletin 2016/49), the  Government has now provided further confirmation that the income tax and NIC advantages of most benefits in kind provided through salary sacrifice (or other optional remuneration) arrangements will start to be removed from 6 April 2017.

Comment

We assume that the exemptions for employer-provided pensions and pensions advice (as well as childcare vouchers, employer-provided childcare, cycle to work schemes and ultra-low emissions cars) will remain, but we will need to wait until the Finance Bill is published to see whether there has been any further movement on the exceptions to the new treatment and indeed to the transitional protections.

Calls for evidence on taxation of benefits in kind and employee expenses

The Government is to issue calls for evidence on:

• Taxation of benefits in kind – to see whether the use of exemptions and valuation methodology for the income tax and employer NICs treatment of benefits in kind can be made fairer and more consistent
• Employee expenses – to better understand the use of income tax relief for employees’ expenses, including those that are not reimbursed by the employer

These calls for evidence will be published on 20 March 2017.

Pension Scams – Government will respond in the Spring

In the last Autumn Statement (see Pensions Bulletin 2016/47) the Government launched a (now updated) consultation on fighting pension scams.  The Government has now announced that it will respond in full “later in the Spring”.

Comment

We hope that this response is made soon so that the potentially very useful proposals in the consultation to tackle pension fraud can be enacted quickly to protect scheme members.

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.