On 22 June 2010 the Government announced two major changes to the legislation governing private pension schemes (see Aries article). This article covers what has since happened and clarifies the Government's timescale.
First we must step back a little; for this year, unusually, we have had more than one Finance Bill. The first, published on 1 April 2010, became The Finance Act 2010 on 8 April. It covers some of the proposals announced by the previous Government in the Pre Budget Report on 9 December 2009 and in the Budget on 24 March 2010 (see Aries article); notably the much-criticised High Income Excess Relief (HIER) Charge.
Since the new Parliament was formed after the General Election on 6 May, two further Finance Bills have been published. Because the first one falls into a new Parliamentary session, HMRC is also referring to this as Finance Bill 2010, although confusingly the Parliament website labels it Finance Bill 2010-11. A Committee of the Whole House of Commons is due to report today on this Bill, before Third Reading. Royal Assent is expected before Parliament rises for the summer recess on Thursday 29 July. If the legislation follows the pattern of similar events in 2005 (see Aries article) it will be named the Finance (No 2) Act 2010.
The two key pensions provisions in the Bill currently before Parliament are
- enabling powers to repeal the HIER charge in FA 2010 s.23 & Sch 2; and
- transitional legislation delaying the latest pension vesting date to age 77.
Publication of draft technical guidance on the latter was reported here on 2 July. This move predictably has generated a lot of interest from SIPP members and providers* in particular.
*in response, the latest update of the Aries SIPP System allows drawdown to continue to age 77 rather than age 75, for clients whose 75th birthday falls later than 21 June 2010.
The second new Finance Bill, currently in gestation, is officially referred to as Finance (No2) Bill 2010. On 12 July an informal consultation was launched on draft legislation covering technical tax measures inherited from the previous government (most of which, we imagine, were casualties of the 'wash-up', ie measures which had to be abandoned to get the FA 2010 onto the statute book before the dissolution). The Bill is to be introduced to Parliament in the autumn, and might eventually be enacted as Finance (No 3) Act 2010.
The only element listed on the Finance (No2) Bill consultation webpage which directly concerns pensions is the already-heralded provision which declares that NEST is an occupational pension scheme for tax purposes. Without this technical measure, the scheme administrator would not be able to make an application to HMRC to register NEST. Comments are requested by 3 September 2010.
This is all very well, but the industry's concern is now focused on what legislation is to replace the rules which are to be scrapped. The Treasury has already stated in the 22 June Emergency Budget that something else must be created to generate the tax it had anticipated would arise from the introduction of the HIER charge in April 2011. The plan is to significantly lower the annual allowance, to somewhere in the range £30,000 - £45,000. This week HMRC began a series of workshops to discuss how this might be achievable in practice. To date there is no more detail available, particularly on the most difficult subject of valuation of DB accrual; age-related factors might be used. Much will depend upon the scale and extent of exemptions such as for inflation and carve-outs to cover cases such as large one-off increases in pension accrual arising from salary increases on promotion, or substantial redundancy payments. At this stage, it remains to be seen whether the Government will in fact use the power in the Finance Bill currently before Parliament to abolish the HIER charge.
On the other outstanding matter, ie what is to replace the 'age 75' rule from April 2011, we are a little further on with the publication on 15 July of a consultation document. This proposes that on attaining age 75, instead of ASP as the alternative to annuitisation, the pension scheme member should have a choice (scheme rules permitting) between "capped drawdown" - effectively USP extended beyond age 75 - and a more generous 'flexible drawdown' allowing amounts above the maximum to be taken, subject to demonstration of a sufficient level of secured income (the Minimum Income Requirement, or MIR). This provision is to protect the Exchequer against the risk that the individual exhausts their reserves and falls back on state benefits. On death the residual fund will be taxable at 55%, which though more than the 35% levied on USP funds on death before age 75 is much more reasonable than the 82% which ASP funds can suffer.
Attention is now focused on the level at which the MIR should be set, as this is clearly going to be crucial to the perceived utility or otherwise of the new option. The condoc makes it clear that both a basic State Pension and additional State Pension in payment will count towards the MIR, as will any scheme pension in payment from an occupational pension which is uprated annually at least in line with LPI. The MIR is very unlikely to be set below the level of the Guarantee Credit (£132.60 per week for a single person) and could be much higher: consultants Towers Watson have suggested it could require a DC pot of £300,000. It might be age-related. Whether it should be different for individuals and how often it should be reviewed are among other questions posed by the consultation.
Responses are requested by 10 September 2010. It is intended that legislation will be in Finance Bill 2011.
Footnote
The consultation is curiously silent on an existing alternative to ASP or annuitisation at age 75, namely a scheme pension. Where scheme rules allow this option, and provided the member is willing to pay for triennial actuarial assessment, it can provide a higher income than ASP and minimal funds left on death. A 10-year guarantee is also permissible. This option, offered by a handful of specialist SIPP providers (see article in the Investors Chronicle), is likely to be attractive to individuals whose opposition to annuitisation is founded more on grounds of loss of funds on early death than upon a strong bequest motive. Those who have no need of the money in their pension fund on reaching age 75, and would like to pass it on entirely outside their estate, will be disappointed that the age 75 rule is not simply being abolished and nothing put in its place. There will be no change to the rule that an LTA test must be conducted at age 75: where an individual reaches that age without having drawn benefits, either a BCE 1 or a BCE 5, depending on whether it is a DC or a DB arrangement, is deemed to occur immediately before their 75th birthday.
