Personal Finance Society news update from 6 May 2015 - 19 May
2015 on taxation, retirement planning, and investments.
Taxation and Trusts
Taxation and trusts
HMRC provides updated guidance on income from property
HMRC has updated its Property Rental Toolkit aimed at providing
guidance to tax agents and advisers on the errors that most
commonly occur in relation to property rental in tax returns.
The updated version of the toolkit, which was published at the
beginning of May 2015, makes the following important points:
- Where a person receives rental income in different capacities
(e.g. as an individual property owner and as a member of a
partnership that lets property) letting in each of these capacities
represents a separate rental business. A loss on one rental
business cannot be set against a profit on another.
- Capital allowances can be claimed on certain items that belong
to the landlord and are used within the property rental business,
for example tools, ladders, motor vehicles (subject to any
adjustment for private use), but cannot be claimed on plant and
machinery on residential property unless it is a furnished holiday
- Deposits taken from tenants should be recognised in accordance
with generally accepted accounting practice, normally by being
deferred and matched with the costs of providing the services or
carrying out repairs. Deposits not refunded at the end of a tenancy
or amounts claimed against bonds should normally be included as
income unless they have already been recognised.
- Repairs are allowable as a deduction against rental income,
whereas any capital expenditure should be claimed, if appropriate,
against any future capital gains when the property is sold
Not only will the updated guidance be useful for tax agents and
advisers, it will also be helpful to anyone who is completing a
self-assessment tax return as it outlines the risks associated with
claiming expenses and capital allowances, and limits on offsetting
earnings from buy-to-let properties.
The Third Parties (Rights Against Insurers) Act 2010
And the case of a struck off grantee company
Whilst we are waiting for the above mentioned Act to come into
force, a recent decision in the case of P. Rai v Legal and General
Assurance Society Ltd  EWHC 170 (Comm) highlights the
potential problems that may arise when a grantee company ceases to
Despite receiving Royal Assent in March 2010, the
above-mentioned Act is not yet in force, although some recent
amendments have indicated that it may well be brought into force by
the Autumn of this year. One of the main benefits of the Act, when
in force, will be to allow a creditor with a claim against an
insolvent company or individual to proceed against the insolvent's
insurer directly, without having to first establish the liability
of the insured. The insured's liability will have to be established
before those rights against the insurer can actually be enforced,
but this will be possible by a declaration of the Court rather than
a separate Court case to establish the liability. So, once the Act
is implemented, there will be no need for multiple sets of
proceedings and instead the third party will be able to resolve all
issues relating to the claim against the insurer within those
What happens generally if a limited company is the insured party
and that company has been dissolved or struck off? Under current
law in order to commence an action against such a company, the
company must be restored to the companies' register. This obviously
will require the cooperation of the former company's directors and
it may not always be possible. Therefore, once the Act comes into
effect and such needs will no longer exist, clearly proceedings
will be much simplified.
The above-mentioned case concerned a group life assurance scheme
effected by a company and a subsequent claim by Mrs Rai, who was
the widow and sole beneficiary of Mr Rai, an employee and member of
this scheme, who died as a result of a road traffic accident in
India in 2008, when the policy was still in force.
Following a take-over, the company in question was struck off
the companies' register on the application of its directors in
2012. One of the conditions of the policy was that in order for the
insurance company to be liable, the employee had to be, at the time
of death, ordinarily employed and resident in the United Kingdom.
On facts, the Judge decided that Mr Rai was not ordinarily employed
and resident in the United Kingdom, having been transferred to
India in order to help expand the company's business there. A claim
was made almost immediately after Mr Rai's death in 2008 and
rejected on the grounds that he was not ordinarily employed or
resident in the UK. However, the claim was subsequently renewed
with the added contention that Mr Rai was covered under the
temporary absence provision.
While the circumstances and arguments as far as the issue of Mr
Rai's residence is concerned are not relevant to the general issue
of a non-existent grantee, there are a couple of important points
that are relevant to life assurers as well as policyholders that
were highlighted by the decision in the Rai case. The first was
that, whilst the original group scheme effected by the employer was
with another company, this was subsequently transferred to L&G.
The policy provided that the benefits payable under the policy were
payable to "the grantees" and these were defined as "the trustees
under the scheme". Unfortunately, neither party was able to produce
any scheme document or deed of trust. Apparently L&G's practice
at the time was not to require production of the scheme document by
an applicant when L&G were taking over the insurance of an
existing scheme. Clearly, there is a lesson here somewhere for
insurance companies to ensure that, when a policy is being issued
to trustees, the company satisfy themselves that a trust actually
It is interesting that even though it was accepted that a trust
existed, the argument proceeded on the basis that the payment would
be made to the company as the trustee. As indicated above, the
company itself was struck off the companies' register and therefore
didn't exist. It seems that, in such circumstances, the first thing
to do is to reinstate the company to the register so that it can
act. Interestingly, the Judge did not contemplate the possibility
of a beneficiary of the trust applying to the court for an
appointment of a trustee, a remedy that would be possible under
general trust law. This may be because in the end the Judge decided
that Mrs Rai did not have a claim under the policy. Indeed, the
Judge in his decision said that had he reached a different
conclusion on substance, the matter could still not have been
properly and fairly resolved without restoring the company to the
register and joining it to the action. Strictly this is a result of
the current law applicable to rights of third parties (currently
under the Third Parties (Rights Against Insurers) Act 1930 which
continues to apply until the 2010 Act comes into effect.
Particularly with the growth of relevant life policy (RLP)
business, it is likely that situations similar to the above will
arise, where the corporate grantee of the policy, also acting as a
sole trustee, is struck off for whatever reason. With a RLP policy
it perhaps emphasises the need for an appointment of a second
trustee to act with the employer company. In such a case, the fact
that one of the trustees has ceased to exist will not preclude
payment of the claim to the continuing trustees. The Rai case also
emphasises the importance of ensuring that all the documentation is
correctly completed and, in respect of existing trust deeds,
verified before the contract is completed.
It should also be noted that it is, in theory, possible for a
contract to be enforceable by a third party by virtue of the
Contracts (Rights of Third Parties) Act 1999. However, in the above
case, as is the case in almost all insurance policies ever issued,
the application of this Act was specifically excluded by the policy
A Conservative government
To the surprise of virtually every political pundit and
pollster, the Conservatives are set to form the next government.
What does that mean in terms of tax policies and planning?
The Conservatives are set to form the next government and will
be apurelyConservative affair, not a coalition. That means the
party's manifesto is more likely (but not guaranteed) to become
reality. It also has implications for what was announced in March's
Budget, but not legislated for in that month's 'wash up' Finance
The Manifesto proposed many measures which had
echoes in the other parties' promises:
Income tax By 2020/21 (the end of the forthcoming
Parliament), the personal allowance would rise to £12,500 (cf
£10,600) and the higher rate threshold rise to £50,000 (cf
£42,385). In practice the Finance Act 2015 has legislated personal
allowance increases for 2016/17 (£10,800) and 2017/18 (£11,000). Mr
Osborne promised higher rate taxpayers would benefit fully from the
increase, taking the higher rate threshold up to £42,700 in 2016/17
and £43,300 in 2017/18. Of course, the Chancellor could (as usual)
change this, but the implication is that income tax reductions will
be modest until 2018/19.
Pensions The Conservatives said they would reduce
the annual allowance for pension contributions for those with
incomes of over £150,000 by £1 for each £2 of excess income, down
to a minimum allowance of £10,000 at incomes of £210,000 and above.
On the basis of earlier changes to the annual allowance,
contributions made before anygovernmentannouncement will not be
affected, so high earners may want to consider contributions as
soon as possible.
Main residence IHT allowance The annual allowance
cut was designed to finance a main residence IHT exemption of
£175,000, transferable between spouses and civil partners and
phased out at the rate of £1 for each £2 of estate value over £2m
(so gone by £2.35m). The effect for a couple is to give a total IHT
exemption of up to £1m (2 x [£325,000 nil rate band + £175,000 main
residence exemption]), assuming they own a home worth at least
£350,000. It is unclear how this would operate if the home had to
be sold because of a need for long-term care.
Non-domicile The Conservatives said they would
further increase the tax on non-domiciled (increases came into
effect this year), but gave no numbers.
Anti-evasion and anti-avoidance measures Like the
other main parties, the Conservatives pledged to raise a
considerable sum (£5bn a year by 2017/18) from anti-evasion and
avoidance measures. Also, in line with the other parties, they gave
very little indication how this would be achieved. Many experts
feel that with all the measures taken to date, another £5bn is a
very tall order.
Annual investment allowance This is currently due
to fall from £500,000 to £25,000 in 2016. The Conservatives have
promised to set a 'new, significantly higher, permanent level for
the Annual Investment Allowance', but following the line Mr Osborne
adopted in the Budget, do not say what this would be.
The Budget - Finance Act gaps
Although the Finance Act 2015 was over 300 pages long, it left
out some of the measures announced in the Budget. These will now
presumably be legislated for, possibly in a second Finance Bill
this year, including:
Lifetime allowance This is set to fall to £1m from
2016/17, with another raft of transitional protections introduced.
There is scope now for some people near or over that limit to top
up ahead of this change and then claim the latest protection for
Personal savings allowance From 2016/17 this measure
would give basic rate taxpayers an allowance of £1,000 for savings
income (basically interest, but also offshore bond gains). Higher
rate taxpayers would receive an allowance of £500 - worth the same
£200 tax-saving, but additional rate taxpayers get nothing. The
main planning point is to consider, when making deposits (or
realising offshore gains), when the income/gains will arise.
Pension annuity sales This controversial idea is
currently out for consultation, but with the Conservatives back in
power it should now become a reality from 2016/17.
The investment market's initial reaction has been to jump on the
unexpected result. However, the new Conservative government will
not be in a position to make tax giveaways: the deficit is set to
come in at £75bn in the current year and the Chancellor's aim is to
turn this into a surplus by 2018/19. By that time total government
borrowing is projected to still be around 75% of GDP. Thus personal
financial planning rather than government largesse will remain the
primary route to taming tax bills.
Another budget in July
Given the timing of the March Budget, the ending of the
last Parliament and the election it was inevitable
- some Budget proposals that were not 'legislated' for in the
Finance Act would need a second Finance Bill, and
- post-election there would be some form of second Budget or
George Osborne has now announced that a second Budget will
indeed take place on 8 July.
He said, "On the 8th of July I am going to take the unusual step
of having a second Budget of the year - because I don't want to
wait to turn the promises we made in the election into a reality …
And I can tell you it will be a Budget for working people."
So exactly what does he have in mind?
He has said he will look to make the changes laid out in the
Conservative Party's manifesto, including spending cuts and reforms
to welfare and pensions.
Key measures are likely to include laws to prevent rises in
income tax, VAT and National Insurance - the so-called
"triple-lock". So he may give more details of how he plans to raise
the tax-free personal allowance to £12,500 and increase the higher
rate tax threshold to £50,000.
The Conservative Party has also
pledged to introduce a 'main residence nil rate band' (of £175,000)
which would be available in addition to the existing nil rate band
in circumstances where a main residence is left to a direct
descendant of the deceased. This additional nil rate band would be
reduced by £1 for every £2 that the property value exceeds £2m
until it is extinguished at £2.35m.
No doubt we will learn more about the potential content of the
Budget in the time leading up to 8 July and, as it's a Budget, a
few surprises shouldn't be ruled out!
Divorcing wife awarded sum from trust created by
The Court of Appeal has upheld a decision to award a substantial
sum to a divorcing wife from a trust under which her husband was
the primary beneficiary. The husband's father, who was the settlor,
opposed the award on the grounds that the trust was not a nuptial
In the case of P v P  EWCA Civ 447 the England and Wales
Court of Appeal has upheld an award of £157,000 made by the Family
Court to a divorcing wife from a trust created by her husband's
father. Although the trust was a discretionary trust, under which
the husband was just one of several possible beneficiaries, the
Court took the view that it met the criteria for a nuptial
settlement that could be varied under section 24 of the Matrimonial
Causes Act 1973to make provision for the wife.In making this
finding the Court relied upon a letter written by the settlor to
his bank shortly before the trust was created with a view to having
the intended trust property (a farmhouse) released from a mortgage
prior to it being transferred into trust. In the letter, the
settlor spoke of "the transfer of [the farmhouse] into trust to
make provision for a home there for our younger son …and his
While there is no statutory guidance on what constitutes a
nuptial settlement, there must be evidence of the trust being
connected to the parties in their capacity as husband and wife for
it to be considered as such by the Courts. The motive and identity
of the settlor are irrelevant in this respect.
Section 24(1)(c) of the Matrimonial Causes Act 1973 states that
the Court may make "an order varying for the benefit of the parties
to the marriage and of the children of the family or either or any
of them any ante-nuptial or post-nuptial settlement…made on the
parties to the marriage."
Therefore, should a trust be found to have any sort of
connection to the parties in their married capacity, and thus be
declared a nuptial settlement, the Court may vary the terms of that
trust in any way it considers to be necessary to reach a fair
result in the matrimonial proceedings.
Family fail to overturn suspicious will
The family of a deceased man have failed to have his Will
overturned on the grounds of lack of knowledge and approval despite
the fact that he left his entire estate to a builder with whom he
had been friends only a short time.
The High Court has dismissed a claim by the family of a 75-year
old man who left his entire estate of £472,000 to a local builder
with whom he had become acquainted in the years leading up to his
death. Despite the fact that the provisions of the deceased's last
Will (made just two months prior to his death in March 2013) were
inconsistent with those contained in previous Wills (which left
everything to family and close friends), the Judge found that there
was nothing suspicious about the preparation and execution of the
new Will and that it had been made with the testator's full
knowledge and approval. The rationale for the decision was
- The form of the 2013 Will was consistent with that of the
testator's previous Wills, which he made personally in 1991, 2003
and 2011 in that all four were prepared and executed without a
solicitor using widely available templates
- The Will was short, straightforward and capable of being
readily understood by the testator who was educated and of full
- The testator asked his financial advisor and another person to
witness his Will
- The new beneficiary, even if not a close friend, was someone
who had regularly visited the deceased and been kind to him
- The testator had himself shown the Will to the beneficiary and
read it to him before handing it to him some weeks later.
The Judge duly pronounced for probate of the 2013 Will.
'Want of knowledge and approval' allegations are attractive to
claimants because, provided there are suspicious circumstances
about how the Will came to be made, the onus will be on the party
seeking to rely on the disputed Will to prove that the document
represents the testamentary intentions of the testator. In this
case, however, the Court found that the new beneficiary had amply
rebutted any possible prima facie case that the facts should
'excite the suspicion of the Court'.
March Investment Association Statistics
The latest Investment Association (IA) statistics show net
retail inflow in March 2015 was less that of a year ago, with UK
equity funds experiencing their largest ever net retail
The month of March can usually be relied upon to produce some
reasonable numbers in terms of net retail fund sales as Joe Public
has still not learned that the time to invest in ISAs is the start
of the tax year, not the end of it. However, on this occasion the
ISA rescue failed to give a substantial boost.
March net retail sales were £1.146bn, up from £990m in February,
but less than half the March 2014 figure of £2.489bn and below the
£1.75bn monthly average for 2014. You can tell it was not a great
month when the first bullet on the Investment Association (IA) press release is that net retail tracker fund
sales were a record at £938m. The other, arguably more interesting
features of the month's data were:
- The rise in net retail sales for the month again highlights the
difference-between-two-big-numbers nature of this widely quoted
statistic. In fact there was a £4.44bn increase ingrossretail sales
to £17.16bn, but retail repurchases almost kept pace, rising by
£4.29bn to £16.02bn. Both gross sales and repurchases were at the
highest level in the past 12 months.
- Property continued as the most popular asset class in terms of
net retail sales, with a net inflow of £294m, down marginally from
February. Mixed Asset funds came in second (£194m), with third
place going to Fixed Income (£128m).
- The most popular sector in terms of net retail sales was Europe
Excluding UK. The IA notes that the last time this sector came top
was August 2000. Second, third and fourth most popular were
Property, Targeted Absolute Return and UK Equity Income.
- For 2014/15 ISAs, the most popular sector was UK Equity Income
(£1.2bn net sales), followed by Property (£600m) and Mixed
Investment (20%-60% shares) (£451m). Total net ISA sales for
2014/15 were £2.6bn, up from £2.2bn in 2013/14. The higher overall
figure reflects sales earlier in the tax year - from 1 January to 5
April 2015 net ISA sales were 43% of last year's level.
- 12 of the IA's 36 sectors had net retail outflows. The UK All
Companies sector saw £980m disappear, but the sector is still
valued at £163.3bn.
- The total value of tracker funds has now passed £100bn and now
represents 11.5% of overall IA funds, up from 9.8% of a year
- Institutional net sales were negative for the third consecutive
These numbers underline the continued march of tracker funds
which, on the IA's favoured yardstick, accounted for 82% of net
Suddenly bond yields are rising around the world. It is
not clear why.
Government Bond Yield %
Take a look at the table above, which shows the
redemption yields for various country's 10 year government bonds.
All have risen, with the ironic exception of Greece, which has
dropped marginally (but still remains comfortably in double
figures). The yield on Bunds (German government bonds) has doubled,
which translates into a price fall of 2.84%. However, as one wag
remarked, anybody who bought the bond at a yield of 0.28% a week
ago had just lost about ten years' worth of income…
It is unclear why yields have suddenly snapped
upwards, albeit mostly only to levels of a couple of months ago.
There have been suggestions that the markets have decided that the
bizarre world of negative rates (which still apply on short-term
euro and Swiss France bonds) cannot last, with the result that
longer dated yields have moved up to reflect an expected return to
'normal'. That seems to ignore the European Central Bank's current
commitment to keep going with QE until September 2016, buying bonds
with yields as low as -0.2%. It also goes against the latest signs
from the USA that June is no longer the favoured month for the
first hike in the Fed Funds rate.
Another reason given for the yield rise is that
the fears of deflation are starting to look overdone. Brent Crude
Oil is back at $70 a barrel, a strong bounce from its January low
of just under $46. In the Eurozone, the flash figures recently
suggested that April saw an end to deflation - the January reading
of -0.6% now looks an oil-induced blip.
This is an area to watch. There has been much concern expressed
about the way bond market liquidity has shrunk since 2007, just as
bond issuance has increased. If selling pressure grows, there could
be some turbulent times ahead.
New rules on disguised investment management
(AF4, RO2, CF2)
Finance Act 2015 introduced new rules which apply to "disguised
fees" arising to investment managers on or after 6 April 2015. Fee
paying arrangements may need to be considered carefully, including
existing arrangements as there is no grandfathering.
The first announcement of the new rules was made in the Autumn
Statement and the draft legislation was published in December 2014,
which was followed by consultation with HMRC. The amended
legislation was included in the Finance Bill, published on 24
March, and is now included in section 21 Finance Act 2015 which
introduced ITA 2007 Part 13 Chapter 5E which applies to "disguised
fees" arising to individuals providing investment management
services on or after 6 April 2015. Alongside the new legislation
HMRC published a Technical Note dated 29 March 2015 which provides
guidance on the new rules.
The aim of the new rules is to ensure that certain sums which
arise to investment fund managers for their services are charged to
income tax where the relevant manager has entered into an
arrangement involving a partnership.
The rules potentially catch any sum treated as arising to an
individual who performs "investment management services" in
relation to an "investment scheme" involving at least one
partnership, to the extent that the said individual is not already
subject to tax on such sum as either employment income or profits
of a trade.
The "investment schemes" include not just collective investment
schemes within the meaning of section 235 of FISMA 2000, but any
investment vehicle which has the aim of spreading risk and whose
shares are traded, other than REITS and venture capital trusts.
This means that approved investment trusts and offshore investment
trusts are also within the scope, provided a partnership is
involved in these structures.
Typically, the rules are intended to catch anything that is
effectively similar to an annual management fee, for example 1.5%
to 2% or other fixed sum, which is not already taxed either as a
trading income, eg. management fees in a management LLP, or as
employment income in the hands of the individual manager. This
would, for example, include annual fees extracted as "priority
profit share". It doesn't matter whether the actual purpose of the
arrangement was to avoid tax.
The rules are in particular aimed at arrangements where profit
share is taxed as capital or where prior profit shares are funded
by way of loans in the early years of partnership (where there are
early year losses) as these loans would otherwise escape tax unless
and until there were underlying taxable partnership profits
available to repay the loans.
There are some specific exclusions to the rules, namely
repayment of an investment made by the manager in the investment
scheme, an arm's length return on an investment made by the manager
in the scheme of the same kind and on terms reasonably comparable
with that of external investors and certain types of carried
interest that are compliant with the Memorandum of Understanding
between the British Venture Capital Association and HMRC of
25th July 2003.
More details are included in the HMRC technical note dated 29 March mentioned
above and clearly investment fund managers should familiarise
themselves with the specific rules. As explained above, the new tax
will apply to any sums arising on or after 6 April and these can
arise from historical arrangements. It may therefore be necessary
to review existing arrangements and perhaps amend them to ensure
that they fall within specific exclusions.
Interest rate rises: not this year
The new Bank of England Quarterly Bulletin has reduced growth
forecasts and marginally nudged up interest rate expectations
The May Bank of England Quarterly Inflation Report (QIR)has been
awaited with interest to see how the Bank would react to two months
of zero inflation and recent volatility on global bond markets.
Mark Carney, the Bank's Governor, made some
interesting points in his presentation of the latest QIR, some of
which will not be especially welcome to the new government:
- The Bank's take on zero inflation is one of little concern. It
points out that the figure is driven by factors, such as the oil
price drop, which will disappear from the annual comparisons as the
year progresses. To quote Mr Carney "The MPC expects the impact of
past falls in commodity prices to be relatively short lived and
will therefore look through them in setting policy. Although it
could temporarily turn negative in the near term, inflation is
expected to pick up notably towards the end of the year as the past
falls in prices drop out of the annual comparison".
- The Bank has cut its expectation of growth in the current year
from 2.9% to 2.4%, bringing it more into line with other
forecasters and reflecting the poor Q1 GDP numbers. The OBR Budget
forecast was 2.5%.
- The cut in growth forecast is attributed by the Bank to several
factors, including the strength of sterling, which Mr Carney
observed "has risen around 6% in the past year and 18% since its
- Another factor which was seen as constraining growth is the
UK's poor productivity performance, something which has come into
focus as spare capacity has shrunk. The Bank now reckons that the
'slack' in the economy is around 0.5%, which it expects to be
absorbed "within the next year". Like many others, the Bank sees UK
productivity growing "only modestly in the year ahead, before
returning towards, but remaining below, past average growth rates".
That is bad news for the incoming government as the OBR numbers for
deficit reduction are heavily dependent on productivity growth.
Real wage growth will also be held back if productivity growth is
- On interest rates, the Bank is relaxed about the money market's
expectation that the first rate rise will be in early 2016, but
only to 1.4% in three years from now. Looking further out, the Bank
expects rates to rise higher and notes that the recent jump in
longer term bond yields is, as a consequence, "not particularly
It now looks like it could be a lucky seven (years) for 0.5%
Amendments to provisions about the annual allowance
(AF3, CF4, RO4, JO5, FA2)
Back in January 2015, the Finance Act 2004 (Registered Pension Schemes and
Annual Allowance Charge) (Amendment) Order SI (2015/80). These
regulation made a number of changes to Finance 2004.
The change that will be of most interest to Financial Planners
will be the amendments that have been made to section 233 FA 2004.
The took effect from 28 January 2015 but with effect in relation to
payments of a refund of excess contributions lump sum made in
pension input periods ending in tax year 2014-15 and subsequent tax
What it means is that when calculating the pension input amount
in respect of "a money purchase arrangement"you do not include any
amount which is a refund of excess contributions lump sum has been
made. Prior to this, even where contributions were refunded, they
would still have counted towards the individual's annual allowance
and potentially to a tax charge.
The following example will help to demonstrate this point:
William wish to make a contribution to his platform SIPP by
selling some funds in his GIA and investing in the SIPP. When
giving the instruction to the platform there was a typo and instead
of the contribution being the £15,000 intended, the actual
contributions made was £150,000.
When the error came to light, the scheme administrator
agreed to make a refund of excess contributions lump sum. However,
this can only be made to the extent that the member contributions
exceeded 100% of his relevant UK earnings, in this case £120,000.
The refund was made (as explained in PTM045000).
William's PIA will therefore be £120,000 and not £150,000.
However, prior to this legislative change the PIA would have been
the full £150,000 irrespective of the refund.
The changes in full are as follows:
- Articles 1 to 9 provide for when this Order comes into force
and the times and events from which provisions of this Order take
effect. The amendments mentioned in articles 2 and 6 apply in
relation to past times. When read with article 3 they do not
increase any person's liability to tax. This accords with section
282(A1) of the Act which provides that an Order that is made under
Part 4 of the Act (which includes section 238A under which this
Order is made) may include provision having effect in relation to
times before the Order is made, if that provision does not increase
any person's liability to tax.
- Article 11 inserts a new section into the Act. It concerns
where a first pension input period ("PIP") ends in tax year
2011-12, 2012-13 or 2013-14. The new section has the effect that
unused annual allowance is to be available to be carried forward
for those tax years. This applies in relation to so called defined
benefits, cash balance and some hybrid pension arrangements.
- Articles 12 and 15 make amendments which affect the calculation
of the "pension input amount" ("PIA"). They apply to a cash balance
or defined benefits pension arrangement. PIA is the increase in the
value of the individual's pension rights which is relevant for
determining the annual allowance charge. When calculating the PIA
for the first PIP, the opening balance is based on benefits that
are available under the arrangement just before the PIP (see
articles 12(a) and 15(a)). A "deferred member" - a member who only
has accrued rights - will not stop being a deferred member merely
because additional rights are granted to that member under a new
pension scheme in respect of funds transferred from their old
pension scheme. That transfer must however meet conditions in new
sections 230(5BC) and 234(5BD)). In addition, articles 12 and 15
make provision for more situations where a deferred member's PIA
will be nil.
- Articles 13 and 16 make amendments about a "block transfer",
meaning a transfer between schemes or arrangements in respect of at
least two persons. Those amendments apply where a reduction in the
value of an individual's benefits in the transferring scheme is
equal to an increase in the value of the individual's benefits in
the receiving scheme. The reduction and increase must be in
consequence of the transfer. The Order specifies what is then to be
added in the transferring scheme, and subtracted in the receiving
scheme, for PIA purposes. Articles 13 and 16 also deal with
individual transfers by setting out definitions which ensure that
only amounts which are solely attributable to the value of
transferred sums or assets will count for PIA purposes (see new
sections 232(6D) and 236(5D)).
- Article 13(f) makes amendments in relation to a cash balance
arrangement. The amendments determine what is to be added to the
closing balance for PIA purposes. They apply where the individual
becomes entitled to a pension because of a relevant "benefit
crystallisation event" ("BCE") such as retirement. Articles 13(g)
and 16(f) make amendments relating to an adjustment to the
individual's pension rights where the individual has given notice
under section 237B of the Act so that the scheme and the individual
are jointly liable to pay that individual's annual allowance charge
("scheme pays notice"). The amendment applies to cash balance and
defined benefits arrangements. It ensures that, if the adjustment
occurs before the individual takes all their benefits (or if BCE 5,
5A or 5B occurs), an amount is to be added to the closing balance
for PIA purposes.
- Article 14 amends section 233 of the Act in relation to a
"refund of excess contributions lump sum" (see paragraph 6 of
Schedule 29 to the Act). That amendment ensures that the sum will
not be included in PIA. It applies to a money purchase arrangement
other than a cash balance arrangement. Article 17(a) makes
amendments which prevent an individual giving a scheme pays notice
after that individual has taken all their pension benefits (or BCE
5, 5A or 5B occurs). Article 17(b) ensures that an individual can
give a scheme pays notice even where there is a transfer of all the
individual's sums or assets into that scheme during a PIP.
NEST's annual contribution limit and transfer
The National Employment Savings Trust (Amendment)
Order 2015 (2015/178) has been published removing the annual
contribution limit and the transfer restrictions on NEST with
effect from 1st April 2017.
The National Employment Savings Trust (NEST) was set up
alongside the introduction of automatic enrolment to be a pension
provider which any employer would be able to use for any worker. To
prevent NEST from having an unfair advantage over commercial
pension providers that do not have government backing, various
constraints were placed upon it including an annual contribution
limit and transfer restrictions.
However, following a consultation that ran from October to
December 2014, legislation has now been published removing the
annual contributions limit and NEST will be able to accept cash
transfers-in from1st April 2017.
First EU occupational pension 'stress tests' results
due in 2015
(AF3, CF4, RO4, JO5, FA2)
The European Insurance and Occupational Pensions Authority's
(EIOPA) first 'stress tests' of EU occupational pension schemes
will measure the anticipated resilience of both defined benefit
(DB) and defined contribution (DC) schemes against financial market
shocks, according to the regulator.
The EIOPA will assess whether selected occupational schemes
would survive two asset price shock scenarios, two low return
scenarios and a 'longevity' scenario, based on a 20% fall in
mortality rates. Affected schemes have until 10 August to complete
the exercise, and the regulator will publish a final report by the
end of 2015, according to the announcement.
EIOPA will also undertake a 'quantitative assessment' of the
potential uses of a holistic balance sheet approach to DB and
hybrid scheme solvency over the same period, it said. This work
will feed into advice that the regulator intends to submit to the
European Commission on the potential for EU-wide pension solvency
According to Gabriel Bernardino, chair of EIOPA; "Pension
funds are already experiencing a challenging environment with low
interest rates and rising life expectancy. A key vulnerability for
the occupational pensions sector is a prolonged period of low
interest rates combined with a fall in asset prices due to a
re-appraisal of risk on financial markets. The stress test will
retrieve valuable information on the sensitivity of IORPS
[institutions for occupational retirement provision], sponsoring
undertakings and members and beneficiaries to such a
However, pensions expert Robin Ellison of Pinsent Masons, said
that the new stress tests would materially increase the
administrative costs of running schemes while adding only marginal
benefits for members.
"The next stress for schemes will come from unexpected
quarters," he said. "For example, 25 years ago nobody expected
negative interest rates on sovereign bonds, and so the then test
would not have tested for the effects of them if the test had been
required then. . . The new requirements seem particularly
disproportionate given the work of the High Level Group on
Administrative Burdens, another EU agency; whose Stoiber Report on
cutting red tape in Europe produced in July last year called on
agencies like EIOPA to reduce regulatory burdens on employers and
The stress tests will cover 17 EU countries with "material"
occupational pension scheme provision covering at least 50% of the
national market. Participating DB and DC schemes will be selected
by national regulators. DB schemes will be required to calculate
the impact of the specified scenarios on a common, holistic balance
sheet and their national balance sheet, while a dedicated satellite
module for DC schemes will consider the effects of the shocks on
the future income of three representative scheme members, due to
receive benefits in five, 20 and 35 years respectively.
The quantitative assessment will be used to gather data from DB
schemes on potential uses of the holistic balance sheet within an
EU-wide supervisory framework, following last year's consultation
paper on potential solvency standards. EIOPA's proposed holistic
balance sheet approach to scheme solvency would require pension
funds across Europe to meet similar solvency requirements
regardless of the strength of the employer's covenant, or of
whether national security mechanisms such as the UK's
industry-funded Pension Production Fund (PPF) are in place.
EIOPA has been undertaking further work on scheme solvency on
its own initiative after the Commission dropped plans to include
more stringent solvency requirements in a revised IORP Directive.
It intends to submit this work to the Commission in March 2016,
although the Commission is under no obligation to implement its
More detail is set out below.
Objective of the Pensions Stress Tests
Stress tests are an important supervisory tool to examine the
sensitivity of the occupational pensions sector to adverse market
developments and to reach robust conclusions for the stability of
the financial system as a whole and to enhance consumer
The aim of the exercise in 2015 is to test the resilience of
defined benefit (DB) and hybrid pension schemes against adverse
market scenarios and increase in life expectancy as well as to
identify potential vulnerabilities of defined contribution (DC)
In parallel with the stress test EIOPA carries out a
Quantitative Assessment (QA) - see below - on its work on solvency
for IORPs to further educate its advice to the European Commission.
The timing of the stress test and the Quantitative Assessment has
been aligned to minimise the administrative burden for
participating IORPs and NSAs (common technical specifications,
templates and processes, including launching and submission dates,
Q&A and quality assurance processes).
|11 May 2015
||Launch of the occupational pensions stress test and the
|19 May 2015
||Workshop with participating IORPs
|May - August 2015
||Q&A procedure for participating IORPs
|10 August 2015
||Deadline for submission of data to the national supervisory
|End August - September 2015
||Centralised quality assurance of all the submissions by
||Disclosure of the results of the stress test analysis
||Advice to the European Commission on EU solvency rules for
The stress test has been designed for the countries where the
IORP sector exceeds 500 million euros in assets. The following
Member States fall within this scope: Austria, Belgium, Cyprus,
Germany, Denmark, Spain, Finland, Ireland, Italy, Luxembourg, the
Netherlands, Norway, Portugal, Sweden, Slovenia, Slovakia and the
The exercise is conducted in close cooperation with the national
supervisory authorities (NSAs): the NSAs will identify and contact
prospective participants in the test.
EIOPA is providing industry participants with the regular
updates on the status and all the upcoming steps of the stress
Quantitative Assessment Objectives
This Quantitative Assessment (QA) is an important input to
EIOPA's work on solvency for IORPs and will shape the own
initiative advice to the European Commission.
The aim of the quantitative assessment is to collect evidence
and to assess the appropriateness of EIOPA's proposals that were
publicly consulted during 2014. Those proposals elaborate on
concepts for the use of the holistic balance sheet and possible
supervisory responses, with a focus on the valuation of technical
provisions and sponsor support.
The exercise is conducted simultaneously with the occupational
pensions stress test and in close cooperation with the national
supervisory authorities (NSAs).
Individuals with money purchase pension plans who are aged 55 or
over (or approaching that age) will be particularly interested in
the ability to draw down on their pension plans under the new
flexi-access income drawdown rules.
Unfortunately, not all pension plans offer these flexi-access
facilities and, in order to access them, it may mean that
individuals will need to transfer their plan to another provider or
pension scheme that does.
Transfers of this nature will mean that the individual will need
to take advice on a number of factors - not least what the costs of
transfer will be (particularly in terms of charges imposed by the
existing provider) and whether the transfer will mean the
individual will lose any existing valuable guarantees (on
investment funds or annuities) offered by the existing plan.
One very important point to consider for those people who have
large taxable estates and/or large pension funds is inheritance
tax. In such circumstances, if a person who is in serious ill
health transfers their pension plan and doesn't survive the
transfer by 2 years, HMRC are likely to treat that individual as
having made a transfer of value for IHT purposes and therefore the
whole transfer value could potentially be liable to IHT.
This information will be picked up by HMRC on form IHT 419 - the
Pension Supplement to the IHT 400 which is the Estate Return on
Careful consideration needs to be given to this aspect by those
people who are contemplating a transfer and have a potential IHT
liability on their death and are not in the best of health at the