Spring Budget 2023 announced that the LTA charge would cease to apply from 6 April 2023 and that the concept of the LTA would be removed from the pensions tax framework from 6 April 2024. Autumn Statement documentation confirms that the government remains committed to this date.
A phased approach was always necessary, given that the LTA is at the structural core of the pensions tax regime with many other aspects, for example tax-free lump sums (which will continue to be capped), linked to it. Removal of the LTA concept is a massive undertaking, and the industry pressed hard for the implementation date to be pushed back. It is hugely disappointing that the industry’s concerns appear to have gone unheard, perhaps particularly as the implementation date is not the “start” date. Legislation requires defined contribution (DC) members to be provided with retirement option statements four months ahead of intended retirement age. If implementation of the new regime takes place from 6 April 2024, option statements issued from 6 December 2023 will be subject to the new regime.
It is understandable that the government wishes to fulfil its Spring Budget commitment to abolish the LTA, but there is no compelling reason to rush this. When the pension LTA changes were announced they were warmly received and it was the first phase of these, removal of the LTA charge from 6 April 2023, that resonated with the public. For most people outside of the pension industry that was, quite simply, “the” change and to the extent that there is any public awareness of a second phase, few will see this as anything more than “tidying up”. Forcing this through from a date too soon for the industry to make the necessary changes to systems, procedures and communications risks undoing that good, with delays and confusion likely to be suffered by all. It is all too easy to see the positive publicity turning negative and retiring members facing increasing delays, including even payment of benefits, as we move closer to a General Election.
We will continue to engage with the government and make the case strongly for a delay. The commencement date has not been set in stone and there is potential opportunity to change this as the Finance Bill makes its way through Parliament. However, change will only be possible if the political will for this exists.
The government consulted on draft clauses relating to the LTA removal in July 2023. However, these were incomplete as they did not cover transitional provisions (often the most complex area of change), disclosure and reporting requirements or international issues. HMRC’s Pensions Newsletter published two days after release of the draft clauses also suggested that certain sections of the drafting would change.
HMRC held workshops with stakeholders throughout October 2023 at which it heard industry concerns and indicated the direction of travel/intent on the missing elements of the legislation. These were welcomed, but questions remained. The documentation published today fails to answer some fundamental questions such as how previous benefits will be treated, and we still have not seen draft legislation on those elements.
The legislative changes need to be analysed and understood before the processes of specifying, coding and user-testing of any amendments necessary can take place. Pension scheme administrators will also need to be trained on new requirements and procedures. This all takes a significant amount of time – often a minimum of six months. There are also competing priorities for available technical resource (eg Pensions Dashboards and dealing with issues that have arisen in relation to GMP equalisation). Once a change is being programmed to software or output documentation, it is usual for the process or document to be locked until the changes are made, tested, and switched live. Parallel changes for different regulatory changes to the same process or output document are not generally possible.
It was not practical for pension schemes and administrators to push through changes without the legislative detail. Making speculative (non-perfect) changes, only to have to repeat the exercise if the detail is found not to match precisely the intent would duplicate costs and may necessitate revisiting all cases administered throughout the imperfect knowledge period, with some then found to be wrong.
Until appropriate changes have been made to processes, IT systems and communications, manual intervention/processing will be necessary. Over recent years, huge efforts have been made to improve member service and most third-party administrators have invested heavily in automation to achieve this. They are now resourced appropriately for that level of automation, and it is not possible to recruit and train additional resource for manual processing in time for 6 April 2024.
The LTA is at the structural core of the pensions tax regime, with many other aspects linking to it. For example, almost all members are offered a tax-free lump sum (known as the pension commencement lump sum (PCLS)) at retirement, and this is limited by reference to a member’s unused LTA. Schemes need to establish this from members by asking about their LTA usage – the forms and processes are set up to do this.
Under the new regime, the PCLS will primarily be limited by a new control, the individual’s lump sum allowance (ILSA). The standard full ILSA will be £268,275 (25% of the current LTA). Going forwards, this will be reduced when individuals take certain tax-free lump sums. Pension schemes will correspondingly need to request new information from members in respect of post 6 April 2024 events to make this assessment. The ILSA will also be reduced in respect of benefits taken prior to 6 April 2024 – the industry meetings suggested a default of 25% of the LTA used up, but the policy paper states that members will have the option to reduce this if they have evidence that a lower tax-free lump sum was provided. We expect that schemes will not only need to continue to request LTA usage up to 6 April 2024, but also explain to members that they can challenge the reduction to the ILSA and additional data is needed to do so.
Similarly, many lump sums payable on death before age 75 can be paid tax free up to the LTA and there will be a new limit for these, the individual’s lump sum allowance and lump sum death benefit allowance (ILSDBA). The standard ILSDBA will be £1,073,100 - the current level of the LTA. This limit will be reduced by the tax-free lump sums that count against the ILSA and any serious ill-health lump sums or tax-free death benefit lump sums.
In order to support this new regime, the information that needs to be provided to HMRC and members will change.
All benefit claims where a tax-free lump sum is available – retirements and deaths – will be affected.
The issue attracting most press publicity following the publication of material in July 2023 was a change in tax treatment of uncrystallised defined contribution funds used to provide an annuity or designated for drawdown for a survivor following the death of a member prior to age 75, namely that the amounts payable from these would be subject to income tax. Today’s policy paper confirms that these amounts can continue to be paid tax-free (provided, as now, action is taken within the relevant two-year period).
Many defined benefit (DB) occupational pension schemes were more concerned by the proposals in the draft legislation that would have amounted to DB pension freedom. In essence, these allowed a member to take any level of lump sum, merely limiting the amount that could be paid tax-free. HMRC published a Pensions Newsletter two days after release of the draft clauses, stating that the “excess pension commencement lump sums” (i.e the proposed new taxable part of a PCLS) were “designed to accommodate the absence of the lifetime allowance excess lump sum" (LAELS) and that “it is not the government’s intention to significantly expand pension freedoms”.
The latest policy paper does not expressly state that this legislation has been changed. However, it confirms that the LAELS will be removed and replaced by a Pension Commencement Excess Lump Sum (PCELS), which is a different methodology to that featured in the draft legislation that was published in July. Currently, provided scheme rules permit, members can commute benefits in excess of the LTA for a LAELS and we expect that there will be a similar trigger for payment of a PCELS. However, we will have to await the details in the Finance Bill.
We welcome other changes to the draft legislation which will provide a consistent treatment to currently including:
There were three main areas which were absent from the July 2023 consultation.
Reporting and disclosure: Unsurprisingly, schemes will no longer need to report events which relate to the LTA (which ceases to exist) to HMRC. Instead, they will need to report if a lump sum is paid in excess of the new allowances, together with the marginal rate of tax paid. It appears that a report will also be required for members holding valid protections.
Transitional: This concerns the treatment of benefits taken before 6 April 2024. There is little detail here. It appears that there will be a default method, but that members will have the option to challenge that. If this is an accurate reflection of the legislation, it will make the transition far-more complex and is likely to result in many speculative enquiries to schemes seeking information on the amounts of PCLS previously paid. The transition can be the most complex aspect of legislative change and we welcome that HMRC will have powers to make amendments to primary legislation, if necessary, via statutory instruments – but only up to 5 April 2026.
Overseas: Lump sums in excess of the new allowances will be subject to marginal rate tax, where the lump sum arose from funds that have received UK tax relief. There will be a new ‘overseas transfer allowance’ set at the level of the member’s available ILSDBA. A transfer payment to a QROPS in excess of this allowance will be subject to the overseas tax charge.
The Finance Bill is expected to be published towards the end of next week. At that point we should see the full set of draft provisions relating to the abolition of the LTA. This would include matters that, ordinarily, would feature in regulations (such as transitional provisions), along with changes made to the draft provisions on which HMRC consulted over the summer.
However, even when the draft legislation is published in full, it is unlikely that this will be perfect. This is neither unreasonable nor unexpected and by way of example, the Association of Consulting Actuaries responses to the draft legislation consulted on over the summer extended to 61 pages.
We will report more fully on the new regime, once we have analysed the draft provisions in the Finance Bill.
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The rate at which NICs are charged on earnings between the primary threshold (the point at which earnings start to attract a NICs charge) and the upper earnings limit (UEL – the point at which earnings are charged to lower NICs) is reducing by 2% to 10% and this change will take effect before the start of the next tax year, from 6 January 2024.
There is no change to the threshold levels, which will remain as:
The maximum annual saving for an employee will, therefore, be £754 ((£50,270 - £12,570) x 0.02).
There is no change to the rate of NICs payable on earnings above the UEL, which remains at 2%.
As employee pension contributions are subject to NICs, payment of these will not impact the overall saving attributable to the NICs charge reduction.
Where contributions are made by salary sacrifice, these are not subject to NICs and the incentive to engage in salary sacrifice exercises may weaken marginally.
Employers pay 13.8% NICs on earnings above the secondary threshold (£9,100) and no changes are being made to these.
NICs are not payable on employer pension contributions.
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The Conservative Party’s 2019 manifesto made a commitment to maintain the ‘triple lock’ (uprating in line with the highest of inflation, earnings and 2.5%) for the duration of the current Parliament. The Office for National Statistics (ONS) data published in September (the usual reference point for the data) showed that annual growth in employees’ average total pay was 8.5%.
There had been some speculation that the government would seek to “fudge” this and, instead, to use the percentage increase that excluded bonuses, which stood at 7.8%.
However, the Autumn Statement confirmed that 8.5% will be used and, from 6 April 2024, the new levels will be:
Employer contributions to the public service pension schemes are changing from April 2024. The Autumn Statement confirms that where the employers are centrally funded, the Government will provide funding to cover the increase in the employer costs.
Back in December 2018, the McCloud judgement found that the transitional protections brought in when the benefits were changed as part of the 2015 reforms were age discriminatory. Since then various legislative amendments have been made to address this. The government has confirmed changes to the tax treatment of redress payments made following the McCloud judgement for members of the pension schemes for MPs, Scottish Parliament and Welsh Assembly. This will bring them in line with the wider public sector.
There are also measures for Local Government Pension Schemes related to the wider Mansion House proposals.
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Despite speculation that there might be a new “British ISA”, offering an additional ISA allowance, none materialised. How keen investors would have been in investing in that is debatable based on how UK companies have performed against other global companies, anyway.
The annual ISA investment limit will remain at £20,000, but there will be additional flexibility. From April 2024 individuals will be able to contribute to multiple ISAs of the same type within a tax year and to make partial transfers of ISA funds in-year between providers. This flexibility is likely to be welcomed, removing current challenges where a person invests inadvertently in more than one ISA, and enabling funds to be moved more easily, for example to obtain more favourable returns on cash investments.
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From April 2024, refunds of surplus to sponsors from DB schemes will be subject to tax at 25% rather than 35%. A consultation will be launched in the winter on making surplus extraction easier and the appropriate safeguards for members such as the levels at which surplus can be refunded, covenant strength, and giving consideration to the potential benefits of a 100% underpin from the PPF.
In its response to the recent call for evidence, the Government notes an intention to clarify in the revised funding and investment regulations that there is headroom for more productive investment.
The Government announced that it intends to establish a public sector consolidator by 2026 that is aimed at schemes which are unattractive to commercial providers and will consult on the design and eligibility this winter. This is likely to be focused on the smaller end of the DB landscape and appears to be a much more targeted measure aimed at addressing gaps in the market rather than the radical consolidation proposals put forward by the Tony Blair Institute for Global Change.
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The Government has taken a two-stage approach in relation to the proliferation of small, deferred DC pots,. The first considers the July 2023 proposal for a multiple default consolidator framework.
Regarding default consolidators, the Government has largely pressed ahead with its July 2023 proposals, having concluded that a central clearing house is its preferred approach and rejecting calls for relying on the pensions dashboards infrastructure. The latter being ‘member-initiated’ is “significantly different to what would be required from a clearing house – where action is taken without requiring member involvement”. It also implies that the clearing house might also support the second (longer-term) part of its small pots strategy – a ‘pot for life’ regime; more of which below.
Where a member has an existing chosen consolidator, this will be the default for any future consolidation. In the case of multiple pots with multiple consolidators, funds will be moved into that with the largest pot. The Government will develop an authorisation and supervisory regime for trust-based schemes and examine options for the contract-based market and the document cites some of the requirements including being able to demonstrate good levels of VFM and protection against flat-fee charges. As proposed, in scope pots will be those valued £1,000 or less where there have been no active contributions in the last 12 months.
The small pots industry group – to be launched in early 2024 – will consider the interaction between dashboards and consolidators and will publish its first interim report in Spring/Summer 2024 with a view to making firm proposals in late 2024.
Longer term, the Government is attracted to the idea of individuals being able to choose a pension for life, contrasting this with the historical premise that they would have a job for life. This part of the document is therefore couched as a call for evidence “Looking to the future: Greater member security and rebalancing risk” from which the Government can then distil further proposals. It expects the setting up of the small pots clearing house will help in developing the necessary architecture to support such a model. Moreover, the paper cites that “95% of savers in trust-based market are within around 30 Master Trusts”, so it might be reasonable to infer that the Government sees members choosing from a yet smaller number of Master Trust providers, rather than more widely from existing retail options.
The document recognises the risk of a recurrence of the ‘opt out’ scandal, by implying that there would be an exemption where the employer provides a better offering than the lifetime provider (including DB or CDC, higher than automatic enrolment minimum employer contributions and where members benefit from certain protections).
Bringing multiple strands together into a single panacea, the Government wants to understand “whether there is merit in considering a potential CDC lifetime provider model” resulting in a small number of “authorised providers that aggregate small pots, process AE contributions, and deliver decumulation choices”.
The call for evidence deadline is 24 January 2024.
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The Government continues to believe that “trust-based CDCs have the potential to be a promising future model for pensions”. It therefore sets out its expectation that the first CDC scheme is likely to go live in early 2024, regulations for multi-employer schemes will follow later in 2024 and that it will continue to work with the pensions industry to establish a CDC decumulation model that works in the UK (see also entry on small pots, where the Government considers CDC has role to play).
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In its response to the call for evidence, the Government announces the following ‘immediate actions’:
The Government will introduce legislation ‘when parliamentary time allows’ to require trustees of all trust-based schemes to offer a range of decumulation products and services to members at the point of access that are suitable for their members and consistent with pension freedoms. In doing so, the Government is relying on trustees’ fiduciary duty to act in the members best interests, but hints at greater intervention if necessary. Schemes will have to provide the service in-house or by partnering with a third-party provider – with no scheme-size restrictions. Schemes will be required to have a default position in place as a backstop for those that do not engage. The Government considered two options – an ‘opt in’ approach whereby the member has to actively opt in (or out) of a range of decumulation options on offer or an ‘opt out’ approach whereby a scheme-specific generic solution is implemented unless the member makes an active choice about what to do with their assets. It has chosen to proceed with the 'opt-out' approach.
The Government’s acknowledges that communication and guidance will remain a key element in supporting individuals in making the right decision. As previously announced, TPR will be hosting a series of virtual roundtables in 2024 to help inform the content of interim guidance on decumulation later that year.
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The Financial Conduct Authority has announced that it will consult in the spring on draft value for money (VFM) rules for contract-based schemes. While the Pensions Regulator welcomed this announcement, it did not indicate when to expect further development of the VFM framework for trust-based schemes. Instead, it stated that “trust-based schemes should engage with the FCA consultation so that there are no barriers to implementing the value for money framework in the trust-based environment.” To complement the framework, the Government proposes to work with TPR to produce supporting material for employers on “what factors should be assessed when they are selecting a pension scheme”, with the focus on value as well as cost.
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The DWP and TPR, with input from the FCA, have carried out a review of the Master Trust (MT) market and its authorisation and supervisory regime – “Evolving the regulatory approach to Master Trusts”. Overall, it considers the regime to be “fit for purpose at this stage”. However, it makes some recommendations for each of the DWP and TPR in the medium term. The main area of TPR’s focus is on investment governance, including more timely and enhanced reporting on asset management and information. This is intended to allow TPR to challenge schemes’ decision-making at key moments. In addition, TPR will “define and identify schemes reaching systemically important size and consider what additional oversight these schemes may require”. The document also covers a wide range of other elements pertinent to the Mansion House reforms, particularly with regards to MTs’ role in consolidation; both in terms of the number of MTs and the DC market as a whole.
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The Government has provided no steer for the new superfund legislative timetable (beyond, as has been previously stated: “as soon as parliamentary time allows”), while stating ‘we will establish a public sector consolidator by 2026, aimed at schemes that are unattractive to commercial providers’ (see entry for DB consolidation and the PPF).
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