Pensions Newsletter January 2012
Inside this issue:
New staging dates confirmed
Following the DWP announcement that auto-enrolment will be delayed for small employers a revised timetable of staging dates has now been announced.
The timetable is such that only those employers with less than 250 employees will be affected. Anybody with 250 or more employees with an original staging date on or before 1 February 2014 will not be affected and their staging date still stands.
Medium sized employers with between 50 and 249 employees will be allocated a new staging date which falls from 1 April 2014 to 1 April 2015, employers with 30 to 49 employees a new date between 1 August 2015 and 1 October 2015 and for those with less than 30 employees a new date between1 January 2016 and 1 April 2017.
It has also been proposed that the increase in minimum employer contributions from 1% to 2% of earnings will be delayed by one year to 1 October 2017 and the increase to 3% is now expected to occur from 1 October 2018.
More detail will be made available in a consultation document and impact assessment that will be published shortly by the DWP
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How small is a small pension pot?
That is one of the questions that the DWP are asking in their recently published consultation, Meeting future workplace pension challenges – improving transfers and dealing with small pensions pots.
Their current thinking is that their new “small pot” proposals should apply to funds of £10,000 or less on the basis that a fund of this size would allow a member better access to the open market to purchase an annuity than a member with a smaller fund.
The proposal is aimed at reducing the number of small pension pots that are inaccessible either due to transfer and advisory costs, or people simply not knowing that they still exist or how to get their hands on them. It is considered that an increasing number of small pots is set to be a side effect of auto-enrolment. Accordingly, pressure is on to get an appropriate system for dealing with these in place prior to new employees starting to be auto-enrolled.
There are three main proposals in the consultation (which is open for comments until 23 March 2012) as follows:
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Changing the current voluntary system to make processes simpler and improve member outcomes. This may involve a number of measures including:
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Providing information to members to encourage them to transfer their pension when they move employer, possibly by introduction of enhanced disclosure requirements.
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Making transfers easier by provision of standardised forms.
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Requiring schemes to accept all transfers in.
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Reducing the costs of administering small pots.
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Promoting the Pensions Tracing Service to help people to track down existing pension pots.
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Establishing an automatic transfer process into an aggregator scheme, possibly NEST, to which would be transferred the pension pot, by default, when the member leaves their current employer.
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Establishing an automatic transfer process into the auto-enrolment scheme of the individual’s new employer. Once a person is automatically enrolled into a new employer’s scheme, their pension follows them and is, by default, transferred into the scheme relating to their new employment.
It is proposed that automatic transfer options, if implemented, would need to include a right to opt out, which would allow people who wish greater engagement to make their own choices, for example, if keeping a small pot with their previous employer due to low charges or certain other advantageous features of the scheme is desirable.
Short service refunds are also addressed in the paper and are stated to be in conflict with the principles of the auto-enrolment system. The possibility to make refunds of this type will be removed, potentially as early as 2014.
Stranded pots which are either too small to annuitise or where an individual has already taken a lifetime trivial commutation are highlighted in the paper which comments that draft legislation due to take effect from April 2012 should prevent problems of this type by allowing an individual to commute up to 2 small personal pension pots of £2000 or less as lump sums.
Government response to the consultation is expected to be issued by summer 2012.
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Pension Unlocking Schemes – “not investment but disinvestment”
The case of Dalriada Trustees Ltd v Faulds & Ors has confirmed that arrangements made giving people early access to their pensions savings through pension unlocking schemes constituted unauthorised member payments and as they were outside the powers of the scheme trustees void in equity.
The claimant in this case was Dalriada Trustees Ltd who had been appointed as independent trustee to the schemes by the Pensions Regulator who was concerned about the use by the schemes of a pension reciprocation plan which allowed members access to their pension savings prior to retirement.
In this case the pension reciprocation plan broadly operated by setting up arrangements whereby the scheme of one member (Member A) lent up to 50% of its value to a member of another scheme (Member B) and in return Member B’s scheme lent value to Member A.
The purpose of this type of arrangement was to attempt to avoid the rules in the Finance Act 2004 that provide that any payments which fall into the definition of being unauthorised attract a tax charge. Section 173 sets out that a scheme will be treated as making an unauthorised payment to a person who is or was a member of the scheme where an asset of the scheme is used to provide a benefit, other than payment, to a person and this case largely centred on the interpretation of this section.
The trustees claimed that as payments were made into and out of the separate, unsegregated schemes and members were not paired up as such that these were not payments “in respect of a person” under the legislation. They argued that this meant that there was not an identifiable individual to whom a payment had been made which they claimed was required in order for the loan to fall into the definition of being an unauthorised payment.
This argument was rejected. The use of the phrase “is used to provide” in the legislation was interpreted by Mr Justice Bean as meaning that indirect causation of the payment was sufficient to make the payment unauthorised and that any lack of precise matching of payments was not required.
Given that the loans were unauthorised member payments these were outwith the powers of the trustees and therefore void and incapable of being validated. The judge, however, went on to address further arguments relating to the loans on the basis that this matter may be taken further.
The court was asked to look at whether the loans were in breach of the Trustees investment power under the trust deed and rules. It was held that the purpose of the pension reciprocation plan was “not investment but disinvestment” as the aim of this was not to obtain a return for the lender, but to procure a loan for them and this was outwith the scope of the investment power.
The court was also asked to address whether the loans constituted a fraud on the power of investment meaning that the power of investment had been used for a purpose or with an intention beyond that intended by the trust deed and rules. It was decided that this was a fraud on the power which simply permitted “investment”, the loans fell outwith this power and were made for an “ulterior purpose”.
It was also noted, in relation to attempts by the Trustees to amend the scheme to insert a specific power into the trust deed allowing the loan arrangements, that as these were unauthorised payments nothing could be done to validate these either retrospectively or prospectively. The judge went on to state that even if he was incorrect in concluding that the loans were unauthorised payments, the amendment would still fail as it was designed to rewrite history and validate acts which at the time they were committed were a breach of trust and would therefore be ineffective.
An application for permission to appeal this case is currently listed to be heard in March 2012.
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Can we fix it?
The deadline to apply for fixed protection in relation to the reduction of the Lifetime Allowance from £1.8m to £1.5m is fast approaching and is now less than 3 months away. It is important to assess pensions savings now to ensure that you apply for any required fixed protection in plenty of time as HMRC have made clear that there is no flexibility on the deadline for this and any late applications will be refused.
Fixed protection offers you continued access to the higher lifetime allowance limit of £1.8m. This can provide significant tax savings if you expect the value of your pension to exceed £1.5m when you retire and you do not already have enhanced or primary protection under the Finance Act 2004 which you would have applied for before 6 April 2006.
Once fixed protection has been granted you have a number of responsibilities in relation to this. It is your responsibility to ensure that this protection is not lost and if this protection is lost then it is your responsibility to inform HMRC of this.
Fixed protection will be lost if you continue to accrue benefits in a registered pension scheme. This means that you cannot make any contributions to a money purchase scheme or have any contributions made on your behalf and the value of any pension rights in a defined benefit scheme cannot increase by more than a specified percentage in each tax year. This percentage will either be the rate set out in the rules of your scheme by which deferred benefits are increased, or if there is no provision made in the scheme rules, the percentage increase in the Consumer Prices Index in the preceding tax year.
There are particular issues with the auto enrolment regime as in effect you will be automatically enrolled into a pension scheme when you change job, or every 3 years by your employer if you remain with the same employer. HMRC have stated that so long as you opt out of this within one month each time it occurs, you will not lose fixed protection, but the onus is on you to ensure that you opt out.
Applications can be made by completing the APSS227 form that is available on the HMRC website, but this cannot be submitted online, it must be posted and received by HMRC no later than 5 April 2012.
Once an application is received within the deadline it appears that HMRC will automatically grant a certificate of fixed protection, unless the application did not contain the required information, was not on the prescribed form, or was not signed and dated by the member. It is accordingly important to take care with any applications made.
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The information contained in these articles is given for general information only, reflects the current law on the date of the article, and does not constitute legal advice on any specific matter