EB News Service

A fortnightly summary of the important changes in employee benefits law & practice

14th December 2010, London:

NEWS

Treasury may consult on early access by year end

The Treasury has confirmed speculation that it will issue a formal consultation on early access to pension savings before the end of the year. However, a spokesman added that consideration of the policy was at an early stage and that a consultation did not mean that existing rules were certain to be changed.

LEGISLATION

The Occupational Pensions (Revaluation) Order 2010 (SI 2010/2861)

This instrument sets out the percentages by which preserved pensions are to be revalued in final salary occupational pension schemes. For the first time, it is based on CPI rather than RPI. See - http://www.opsi.gov.uk/si/sis08-12.

CASES

'Pension compromises' clarified in IMG v German appeal - HR Trustees Ltd v German [2010]

The Court of Appeal has confirmed that section 91 of the Pensions Act 1995 (on inalienability of retirement benefits) is not a bar to compromising disputes over pension rights. This had been in question following the first-instance decision.

The court ruled that the language of s 91 of the 1995 Act was clear. It made inalienable the surrender of 'entitlement' and 'right'. It was directed to cases where there was a deliberate giving up of an actual existing entitlement or an actual existing right. It did not refer to alienating or giving up any right that a person might have.

RESEARCH

National Audit Office: The impact of the 2007-08 changes to public service pensions

According to a new NAO report, changes made in 2007-08 to public service pension schemes are on course to deliver savings and stabilise pension costs. However the value for money of the changes cannot be demonstrated in the absence of a strategic assessment of their long term impact on staff motivation and retention. See - http://www.nao.org.uk/publications/1011/public_service_pensions.aspx

Royal Society for the encouragement of Arts, Manufactures and Commerce: UK schemes ‘not fit for purpose' compared with rest of Europe

The value of people's pensions could be dramatically improved and pensioner poverty significantly reduced, without incurring any additional costs, according to new research published by the Royal Society for the encouragement of Arts, Manufactures and Commerce. In its report "Building the consensus for a People's Pension in Britain", the RSA discovered that:

  • A huge proportion of our pensions disappear in fees - with charges swallowing up to 40 per cent of the value of the pension.
  • If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 per cent higher income in retirement.
  • That minor changes to our regulatory framework could boost pension returns by 39 per cent.

Following two years of research, Building the consensus for a People's Pension in Britain describes what a "best practice" pension system would look like. It calls on the coalition government to build a broad cross party consensus in which political parties, employers, unions, and pension funds agree to implement a 'pensions architecture' that brings the UK in line with countries such as Holland and Denmark that enjoy the lowest levels of pensioner poverty in Europe. See - http://www.thersa.org/about-us/media/press-releases/going-dutch-how-to-double-the-value-of-british-pensions

Long Finance: Don't Stop Thinking about Tomorrow - the Future of Pensions

In this report by Con Keating, Brighton Rock, it is contended that it is a "misconception" that DC is cheaper for companies because DB can deliver two-thirds of an individual's final salary if they paid contributions equal to 20% of their salary over their working life. However, a DC scheme member would have to pay a 30% contribution over their working life to achieve the same level of pension, according to the report. See -

http://www.zyen.com/LongFinance/Long%20Finance_FutureofPensions.pdf

Pension Scheme Administration Costs

This summary report presents findings from a 2009 survey exploring the operating costs of trust-based occupational pension schemes. The report contains indicative figures on the range and scale of administrative costs that private sector employers and pension schemes face. See -

http://research.dwp.gov.uk/asd/asd5/report_abstracts/wp_abstracts/wpa_091.asp

Pensions Regulator: Recovery Plans - Assumptions and Triggers

This is an update to The Pensions Regulator's analysis of recovery plans which focuses on the technical assumptions, underlying funding targets and statistics relating to the regulator's triggers. It is produced in accordance with the UK Code for Official Statistics, which came into effect in January 2009. See -

http://www.thepensionsregulator.gov.uk/docs/recovery-plans-assumptions-triggers-2010.pdf

'OTHER'

DWP: Consultation on Using CPI for Private Sector Occupational Pension Schemes

This consultation looks at whether there is a case for making it easier for occupational pension schemes to move to using the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) to uprate pensions. The change has already been introduced for the state and public sector schemes from next April.

The consultation also seeks views on an amendment to the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006.

The consultation ends on 2 March 2011, and can be viewed at www.dwp.gov.uk/consultations/2010/cpi-private-pens-consultation.shtml.

DWP: Abolition of Contracting-out on a Defined Contribution Basis - Government response to consultation on draft consequential legislation

The Government response to this recent consultation has now been published. The main development is that the government has confirmed that, post-2012, transfers from contracted-out DB schemes to contracted-in DC arrangements will still be possible. See - http://www.dwp.gov.uk/consultations/2010/abolition-contracting-out-dc.shtml

HM Treasury : Finance Bill 2011 - A consultation on draft legislation

Further information has been published relating to the reduced annual allowance from 6 April 2011 and the reduced lifetime allowance from 6 April 2012. Details of anti-avoidance measures, transitional provisions and other employee benefit issues have also be released.

Annual allowance

As announced on 14 October, the annual allowance is to be reduced from its current level (£255,000) to £50,000 in respect of the tax year 2011/12 (with Treasury power to adjust it up or down for subsequent tax years). At the same time, the multiple to be applied to the starting rate of a defined benefit pension in order to value it for annual allowance purposes will be increased from 10 to 16.

In its 14 October announcement, the Government confirmed in effect that there would be no annual allowance liability arising under an arrangement if the individual died or became entitled to a serious (i.e. terminal) ill-health lump sum under the arrangement during that tax year. This is now relaxed so as also to cover ill-health cases where the individual is unlikely to be able to undertake gainful work (in any capacity) at any time in the future (otherwise than to an insignificant extent).

There are anti-avoidance provisions to deal with the situation where a defined benefit member arranges for his prospective pension to be increased at some future date after it has come into payment. In these cases, a valuation method based on the expected cost of the benefit is to be applied, instead of the new 16:1 conversion factor.

Lifetime allowance

The lifetime allowance is to be reduced from £1.8m to £1.5m from 6 April 2012. The current multiple of 20 applied to the starting rate of a defined benefit pension in order to value it for lifetime allowance purposes remains unchanged.

In certain circumstances, the current legislation allows small pension benefits to be commuted into a lump sum not exceeding 1% of the standard lifetime allowance. In these instances, the calculation link with the lifetime allowance is to be abandoned and replaced by a monetary figure of £18,000 (i.e. 1% of the lifetime allowance as it stands today).

Guidance

HMRC has published draft guidance to accompany the draft legislation. It provides information on the impact of changes to the AA and LTA, as well as the new fixed protection for pensions savings.

Transitional protections

Individuals who currently have primary or enhanced protection following the 6 April 2006 changes will not be affected by the reduction in the lifetime allowance.

There will be a new form of protection called "fixed protection", for those who expect to exceed the £1.5m figure when they come to take their benefits. This will provide protection from the lifetime allowance charge for benefits up to the £1.8m figure, so long as the individual registers for the protection by 5 April 2012. In order to benefit from fixed protection, however, the individual will need to comply with restrictions on future contributions, benefit accrual, transfers and new arrangements (akin to the restrictions that already apply to members relying on enhanced protection). Members who currently have primary or enhanced protection will not be able to apply for the new fixed protection.

Anti-avoidance and other employee benefit measures

  • Income tax to be payable on EFRBS (this will not affect unfunded schemes - 'UURBS')
  • Tax charge linked to Nest costs to be removed
  • Restriction on tax relief on childcare vouchers for higher-earners
  • Change to qualifying conditions for childcare vouchers

Link to all documents

See - http://www.hm-treasury.gov.uk/finance_bill_2011.htm

HM-Treasury: Consultation on 'scheme pays' option for annual allowance charge

The government has acknowledged that the new pensions annual allowance charge might, in some exceptional cases, lead to larger-than-intended tax charges arising. The Treasury has published a discussion document on possible options to meet these charges, with a view to publishing draft clauses by February 2011. Options include payment from pension benefits or by the pension scheme. See - www.hm-treasury.gov.uk/d/consult_pensions_301110.pdf.

HMRC: Online filing for Pension Schemes deadline news

HMRC have published information for those who need to submit a Registered Pension Scheme return or an Event Report for tax year ending 5 April 2010. See -

http://www.hmrc.gov.uk/news/pensions-online-filing-deadline.htm

HMRC: Scrapping the Age 75 rule

The government has published details of the changes it intends to introduce to remove the effective requirement to annuitise by age 75 from 6 April 2011.

Key points are:

  • Legislation will allow those with DC pension savings to choose never to take any income after taking tax-free cash - so no minimum income requirement, even from age 75, and short-term annuities will be able to continue after age 75
  • There will still be a maximum on yearly drawdown payment, except where the provider allows flexible drawdown
  • Flexible drawdown means there is no maximum for withdrawals on or after 6 April 2011 but is allowed only if the member has a lifetime pension income of at least £20,000 a year. Lifetime annuities and scheme pensions from UK registered pension schemes or the equivalent from overseas schemes - so including those from SIPPs and SSASs - and State pension all qualify as lifetime pension income
  • New pension savings for anyone in flexible drawdown will attract the annual allowance charge on all the value of the contribution
  • The altered withdrawal limits will have effect for all new drawdown plans made on or 6 April 2011
  • There is also provision for drawdown pension arrangements made before 6 April 2011
  • The tax rate on lump sum death benefits from drawdown contracts will be 55% for deaths on or after 6 April 2011 and free from IHT where trustee discretion applies (even for deaths after age 75). Where a member dies with no living dependants, unused drawdown funds may be paid tax-tree to a charity
  • The age 75 ceiling will be removed from most lump sums where entitlement arises on or after 6 April 2011 tax-free cash, triviality, ill-health lump sums.

See - http://www.hm-treasury.gov.uk/d/pensions_annuitisation.pdf

Pensions Regulator: New chair for TPR

The Department for Work and Pensions has announced that Michael O'Higgins has been appointed as chair of The Pensions Regulator.  He will take up his post from 1 January 2011 for a three-year term and replaces David Norgrove who has been chair since The Pensions Regulator was established.

Pensions Regulator: Final 'incentives' guidance

Final guidance for trustees and employers on conducting incentive exercises, including enhanced transfer value exercises (ETVs), has been published by The Pensions Regulator.

The guidance sets out principles which will enable employers and trustees to fully consider the risks associated with transferring benefits out of defined benefit (DB) schemes, or modifying benefits.

The guidance sets out that trustees should start from the presumption that such exercises and transfers are not in most members' interests and should therefore approach any exercise cautiously and actively. The regulator believes this reflects the majority of outcomes and is a sensible approach to ensure that scheme members are properly protected.

There will be a minority of members whose personal circumstances mean it is more likely they will benefit from accepting such an offer. High quality financial advice is key to identifying these members. See - http://www.thepensionsregulator.gov.uk/press/pn10-25.aspx

Pensions Regulator: Employer covenant guidance

Guidance encouraging trustees to take proactive steps to ensure there is adequate security for their pension scheme has been published following consultation with the industry.

The guidance sets out that the employer covenant - the employer's legal obligations to a defined benefit (DB) scheme, and its ability to meet them - is a crucial element in protecting members' benefits. The guidance, which was requested by the industry, provides information on what trustees should do to measure and monitor employer covenant - and any subsequent action that might be required to strengthen scheme security.

The guidance also provides information on how arrangements such as contingent assets can work alongside employer covenant to provide further safeguards, though these will not be appropriate for all schemes. The recently published Purple Book showed a 16% increase in the use of contingent assets recognised by the PPF. See -

http://www.thepensionsregulator.gov.uk/guidance/monitoring-employer-support.aspx

Consultation on the Discount Rate Used to Set Unfunded Public Service Pension Contributions

This consultation seeks views on the discount rate used to set contribution rates for the unfunded public service pension schemes. Responses are requested from public service unions, independent providers of public services, representative bodies, academics and others. See -

http://www.hm-treasury.gov.uk/consult_unfunded_pensions.htm

National Employment Savings Trust Corporation Regulations 2011: Consultation on draft amendment

This consultation seeks views on the effect of amending regulation five of The Pension Schemes (Investment) Regulations 2005. Responses are requested from the pensions industry, employers and organisations representing employers' interests and others. See -

http://www.dwp.gov.uk/consultations/2010/nest-regs-2011-consultation.shtml

Written Ministerial Statement: tax and tax credit rates and thresholds for 2011-12

Following decisions announced at the June Budget and the release of retail and consumer prices data for September, the government has confirmed 2011-12 rates and thresholds for income tax, NICs, and tax credits. The limit for ISAs for 2011-12 has also been confirmed.

Details are provided in the tables below, taken from - http://www.hm-treasury.gov.uk/tax_autumn_updates.htm

Tables confirming tax and tax credit rates and thresholds for 2011-12

 

Table 1.A: Bands of Taxable income

2010-11

£ a year

2011-12

£ a year

Basic1,2 rate (20 per cent)

0 - 37,400

Basic1,2 rate (20 per cent)

0 - 35,000

Higher2 rate (40 per cent)

37,401 - 1 50,000

Higher2 rate (40 per cent)

35,001 - 150,000

Additional rate (50 per cent)

over 150,000

Additional rate (50 per cent)

over 150,000

1 From 2008-09 there is a 10% starting rate for savings income only. The starting rate limit for savings is £2,440 for 2010-11 and will increase in line with RPI to £2,560 for 2011-12. If an individual's taxable non-savings income exceeds the starting rate limit, then the 10% starting rate for savings will not be available for savings income.

2 The rates available for dividends for the 2010-11 tax year are the 10 per cent dividend ordinary rate, 32.5 per cent dividend upper rate and the 42.5 per cent dividend additional rate. These rates will stay the same for the 2011-12 tax year.

Table 1.B: Income tax allowances

 

 

£ a year

 

 

2010-11

2011-12

Change

Personal allowance

 

 

 

age under 65

6,475

7,475

1,000

age 65-74

9,490

9,940

450

age 75 and over

9,640

10,090

450

Married couple's allowance1 maximum amount

6,965

7,295

330

minimum amount2

2,670

2,800

130

Income limit for under 65 personal allowance

100,000

100,000

0

Income limit for age-related allowances

22,900

24,000

1,100

Blind person's allowance

1,890

1,980

90

1 Available to people born before April 6 1935. Tax relief for this allowance is restricted to 10 per cent.

2This is also the maximum relief for maintenance payments where at least one of the parties is born before 6 April 1935.

Table 1.C: Class 1 National Insurance Contribution rates 2011-12

Employee (primary)

Employer (secondary)

Earnings1£ per week

NIC rate2per cent

Earnings1£ per week

NIC rate3per cent

Below £102 (LEL)

0

Below £136 (ST)

0

£102 to £139 (PT) 4

0

Above £136

13.8

£139 to £817 (UEL)

12

 

 

Above £817

2

 

 

1The limits are defined as LEL - lower earnings limit; PT - primary threshold; ST - secondary threshold; and UEL - upper earnings limit.

2 The contracted-out rebate for primary contributions in 2010-11 is 1.6 per cent of earnings between the LEL and the upper accrual point (UAP) of £770 for contracted-out salary-related schemes (COSRS) and contracted-out money purchase schemes (COMPS).

3 The contracted-out rebate for secondary contributions is 3.7 per cent of earnings between the LEL and UAP for COSRS and 1.4
per cent for COMPS. For COMPS, an additional age-related rebate is paid direct to the scheme following the end of the tax year.

4 No NICs are actually payable but a notional Class 1 NIC will be deemed to have been paid in respect of earnings between LEL and PT to protect contributory benefit entitlement.

Table 1.D: Self-employed National Insurance Contribution rates 2011-12

 

 

Self-employed NICs

 

Annual profits1£ per year

Class 22£ per week

Class 4 per cent

Below £5,315 (SEE)3

0.00

0

£5,315 to £7,225 (LPL)

2.50

0

£7,225 to £42,475 (UPL)

2.50

9

Above £42,475

2.50

2

1 The limits are defined as SEE - small earnings exception; LPL - lower profits limit and UPL - upper profits limit.

2 Class 2 NICs are paid at a weekly flat rate of £2.50 by all self employed persons unless they have applied for a small earnings exception.

3 The self-employed may apply for exception from paying Class 2 contributions if their earnings are less than, or expected to be less than, the level of the small earnings exception.

Table 1.E: Other NICs rates

 

 

2010-11

2011-12

Married Women's Reduced Rate (per cent)

4.85

5.85

Special Class 2 rate for share fishermen

£3.05 per week

£315 per week

Special Class 2 rate for volunteer development workers

£4.85 per week

£5.10 per week

Class 3 rate

£12.05 per week

£12.60 per week

1 Married Women's Reduced Rate is paid only by married women with valid reduced rate elections.

2 Class 3 NICs are paid by contributors to make the year a qualifying year for basic State Pension and Bereavement Benefit purposes.

Table 1.F: Working and Child Tax Credit rates and thresholds

 

 

£ a year

 

 

2010-11

2011-12

Change

Working Tax Credit

 

 

 

Basic Element

1,920

1,920

-

Couple and lone parent element

1,890

1,950

60

30 hour element

790

790

-

Disabled worker element

2,570

2,650

80

Severe disability element

1,095

1,130

35

50 plus element, 1 6 - 29 hours

1,320

1,365

45

50 plus element, 30+ hours

1,965

2,030

65

Childcare element

 

 

 

maximum eligible cost for one child

£175 per week

£175 per week

-

maximum eligible cost for two or more children

£300 per week

£300 per week

-

per cent of eligible costs covered

80%

70%

-10

Child Tax Credit1

 

 

 

Family element

545

545

 

Child element

2,300

2,555

255

Disabled child element

2,71 5

2,800

85

Severely disabled child element

1,095

1,130

35

Income thresholds and withdrawal rates

 

 

 

First income threshold

6,420

6,420

-

First withdrawal rate (per cent)

39%

41%

2

Second income threshold

50,000

40,000

-10,000

Second withdrawal rates (per cent)

6.67%

41%

34.33

First threshold for those entitled to Child Tax Credit only

16,190

15,860

-330

Income disregard

25,000

10,000

-1 5,000

1 As announced in Budget 2010, the baby element of the Child Tax Credit will be removed from April 2011.

Table 1 .G: Individual Savings Account (ISA)

Annual ISA subscription limit

£ a year

 

 

2010-11

2011-12

Overall limit

10,200

10,680

of which cash

5,100

5,340

of which stocks & shares

10,200

10,680

 

 

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