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CPI/RPI Switch to become a "Listed
Change" requiring employee consultation
The Pensions (Institute and Faculty of Actuaries and Consultation by Employers - Amendment) Regulations 2012 (the "2012 Regulations") have finally been laid before Parliament and are expected to come into force on 6 April 2012.
The 2012 Regulations make the switch in private sector pension schemes from increasing pensions in payment and revaluing deferred pensions by RPI to CPI a "listed change" under the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (SI 2012/349) requiring the employer to undertake a 60 day consultation with all affected active and prospective scheme members if making this change after 6 April 2012. This is in addition to checking that RPI is not hardcoded into the Rules of the scheme.
The requirement to consult will only apply where introducing the switch to CPI "would be, or would likely to be, less generous to members or members of a particular description". CPI is, on average, generally lower than RPI and therefore in the vast majority of cases a change in the method of indexation/revaluation to CPI is likely to be less generous.
Transitional measures in the 2012 Regulations means that these changes will not apply to any company that has already announced the change to CPI to its members before 6 April 2012.
Fixed Protection deadline is looming
The 5 April 2012 is the deadline for individuals to apply to HMRC for Fixed Protection of a Lifetime Allowance of £1.8 million. From 6 April 2012, the Lifetime Allowance (LTA) falls to £1.5 million. If the total value of an individual's accumulated pensions savings is then above £1.5 million, the excess will face a tax charge when they come to draw their benefits.
Whether an individual's pension savings will be in excess of £1.5million is a relatively straightforward calculation for savings in a DC scheme but for DB savings this is more complicated. Based on potential pensions in payment, HMRC have stated that if the individual's potential annual pension is either £75,000 or £65,000 plus any lump sum allowed under scheme rules, he will be liable to the tax charge.
Under s.215 Finance Act 2004 there is an excess tax charge of 55% if the excess is taken as a cash lump sum or a 25% tax charge if the excess is retained in the scheme and taken as a pension. The cash lump sum attracts a higher tax charge on the basis that this capital will not be taxed again at a later date, whereas amounts paid as pension are also subject to income tax. The consequences of not applying for Fixed Protection can therefore be high. It is very unlikely HMRC will be flexible on this deadline given how strictly they enforced the deadlines for applying for Primary/Enhanced Protection (see decision in Scurfield v Revenue and Customs  UKFTT 532 (TC)).
Individuals who already have Primary Protection cannot apply for Fixed Protection but those individuals who have Enhanced Protection only can give this up and opt for Fixed Protection instead. This is a complicated issue which may not necessarily yield a more favourable outcome and individuals have been advised to seek financial and legal advice as to their individual circumstances.
It is also important to note that once Fixed Protection has been granted, individuals will no longer be able to accrue further benefits (make or receive further contributions) in to any pension scheme or risk losing Fixed Protection and a LTA of £1.8 million.
More information on this topic can be found on the HMRC website by clicking here and the application form to apply for Fixed Protection can be found here. Alternatively, individuals can contact our specialist Tax team or our Pensions team for more information.
Pensions tax doesn't have to be taxing: Budget 2012
"Tax doesn't have to be taxing", so the old adage goes, but the pensions rumour mill pre-budget time certainly always is. These rumours included the usual: government plans to cut the higher rate tax relief of 40% on pension contributions to 20%, remove the 25% tax free pension commencement lump sum, and a claim that the Annual Allowance would be reduced by a further £10,000 to £40,000 or £30,000.
Currently, a 40% rate payer paying in £1 in to his pension receives a government contribution through tax relief of 40p. The plans would have cut tax relief and government contributions to 20p in line with the basic rate of income tax. The right for members to take a tax free lump sum on retirement has long been established but the right is presently contained in the Finance Act 2004 as supplemented by Income Tax (Earnings and Pension) Act 2003. The reduction in the Annual Allowance from £255,000 down to £50,000 was only made last year and a further cut to £40,000/£30,000 in this budget would have left little incentive for high net worth individuals to continue saving in pension schemes at all!
However, pension lawyers, schemes and individuals alike can rest assured that the 2012 Budget announced by George Osborne on the 21 March 2012 made none of these dramatic changes to pensions taxation at all. But the rumour mill, never one to rest on its laurels, instantly began making predictions for the 2013 budget with talks in the industry of a 2013 Budget that may reduce the Annual Allowance and restrict high rate tax relief. You would be forgiven for thinking it was Groundhog Day?
The key pensions aspects of the 2012 Budget are:
- Single Tier State pension - the State Second Pension (S2P) is to be scrapped (in line with the abolishment of Contracting-Out already underway) and replaced by a single level state pension for the future of around £140 per week. To be introduced early in the next parliament
- State Pension Age - to be reviewed automatically in line with increasing longevity going forward
- New investment opportunities - proposal for pension schemes to invest their funds in a new infrastructure investment platform. There will be a £2 billion investment platform beginning in early 2013. Many pension schemes already invest in infrastructure projects but at the post-completion stage. These changes could see schemes beginning to invest at the initiation stage
- From 6 April 2012 individuals aged 60 or over will be allowed to commute funds of £2,000 or less held in personal pensions into a lump sum. This is subject to a maximum of two commutations in an individual's lifetime
- GILTS - plans to consult on extending the current 50 year GILTS to a 100 year GILT or even perpetual GILTS were announced
- Employer contributions to spouses - payments made by an employer to a registered pension scheme in the name of a Spouse as part of an employee's remuneration package are to lose favourable tax relief
- Asset backed pension contributions - further amendments to the tax treatment of ABCs will be announced on 29 March 2012
Parizad [82720/2] - Ombudsman determines that Trustees committed
breach of trust by waiting 2 years to pay out death benefits
Mrs. Nooran Gholikhani (Nooran), an employee of Harvey Nichols, and a member of their pension scheme, died in 2005 leaving an expression of wish form for her lump sum death benefits to be paid to her two sisters - Mrs. Pooran Parizad (Pooran) and Mrs. Tooran Gholikhani (Tooran). Mrs. Parizad lived in Iran and was mentally ill and could not receive her share directly as, to do so, would be informing her of Nooran's death and risk her self harming.
This Pension Ombudsman claim was brought against The Trustees of the Harvey Nichols Pension Scheme (The Trustees) by Tooran in her own right and on behalf by her sister Pooran. The lump sum death benefit originally came to a value of £31,375 payable to Tooran and Pooran in equal shares. Tooran informed the Trustees of her sister's mental health problems and that it was not possible to pay over her share directly to her sister. Despite this information, the Trustees seemingly dithered and delayed taking no action for two years. At this point the lump sum became an unauthorised payment under HMRC rules and subject to a 55% tax charge leaving only a lump sum of £9,000 net of tax left.
The Trustees had power under the rules to pay the lump sum to one or more of 5 listed potential beneficiaries in such shares as in their absolute discretion they could decide. The Trustees were not bound to follow the expression of wish form but what they could not do was deliberately fail or decline to exercise their discretion within 24 months or breach the trust.
The Trustees had been made aware of the problem of paying directly to Pooran as early as 2005. They were also aware (or ought to have been aware) of the 24 month HMRC time limit which had been written into the rules; a consequence of which was the tax charge. The scheme rules allowed the Trustees to set up a trust to pay in Pooran's share of the lump sum death benefit. They were fully aware of this option but had chosen not to exercise the power to do so. Either the Trustees had a poor grasp of the scheme rules or wilfully ignored them - either way there was maladministration. The reduction in the lump sum is a direct result of Trustee's failure to avoid a tax charge under Finance Act 2004. The Trustees were directed to set up a trust for Pooran's share of the benefit to receive £31,375 plus interest payable from 2005 to the present date minus tax due to HMRC.
The lapse of time meant the Ombudsman was constrained by tax rules and could not order a payment £31,375 net of tax. This is unfortunate given the faultlessness of the Claimants set against the scathing opinion of the Trustees. However, to have done so would have decreased the amount of scheme funds available to pay benefits to a far greater number of innocent beneficiaries.
This case highlights the importance of Trustees not delaying in their decision making and ensuring that they are familiar with their powers under scheme rules and the rules themselves. Most of all it highlights the need for trustees to seek legal advice on paying out benefits where there are complicated issues to be considered.
Final Agreement on NHS, Civil Service, and
Teachers' Pension Reforms announced
On 9 March 2012, HM Treasury and the Government announced that Proposed Final Agreements had been reached with Trade Unions representing the main public sector pension schemes (NHSPS, TPS, and PCSPS).
These Final Agreements broadly reflect the Heads of Agreement agreed between the parties back in December 2011 which in turn had incorporated many of the recommendations made in the Lord Hutton report. The final agreement is:
- A move away from higher final salary schemes to lower career average revalued earnings schemes (CARE)
- A switch from the higher RPI to the lower CPI as the method of indexation/revaluation of deferred pensions/pensions in payment
- A Normal Pension Age (NPA) tracked to a rising State Pension Age (SPA)
- Higher member contributions effective from 1 April 2012 (on average: 5.6% increase in PCSPS by 2015, 9.8% increase in NHSPS by 2015 and 9.6% increase in TPS by 2015)
MMS is due to host a two day seminar in our London offices from the 26th - 27th April 2012 at which Gary Cullen, Head of Pensions Unit, will be giving a presentation on the history and future of these public sector pension scheme reforms.
Tesco pensioners to check-out at 67
On 13 March 2012, Tesco plc announced to members of its Tesco plc Final Salary Scheme that it would be changing its scheme rules to increase by two years, from 65 to 67, the age at which a full pension can be paid. The changes are due to take effect from 1 June 2012 and will not affect accrued service before that date. Members' normal pension age will remain at 65 but if they choose to retire early they will not receive their full benefit entitlement and it will be actuarially reduced.
For further information, please contact:
020 7634 8729
020 7634 8799
This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.