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My PFS - Technical news - 26/05/2015

Personal Finance Society news update from 6 May 2015 - 19 May 2015 on taxation, retirement planning, and investments.


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Taxation and Trusts

Investment planning

Retirement planning

Taxation and trusts

HMRC provides updated guidance on income from property rentals

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 let. 
  • 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 [2015] EWHC 170 (Comm) highlights the potential problems that may arise when a grantee company ceases to exist.

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 proceedings.

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 exists.

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 terms.

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 Act.

The Manifesto

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 their fund.

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 that:

  • 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 Spending Review.

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 husband's father

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 settlement.

In the case of P v P [2015] 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 wife".

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 that:

  • 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 mental capacity
  • 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'.


Investment planning

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 outflow.

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 ago.
  • Institutional net sales were negative for the third consecutive month.

These numbers underline the continued march of tracker funds which, on the IA's favoured yardstick, accounted for 82% of net retail sales.

Rising yields

Suddenly bond yields are rising around the world. It is not clear why.



10 Year 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 fees

(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 trough".
  • 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 weak.
  • 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 surprising".

It now looks like it could be a lucky seven (years) for 0.5% base rates.



Amendments to provisions about the annual allowance charge

(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 years.

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 restrictions

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 rules.

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 scenario."

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 others."

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 recommendations.

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 protection.

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) schemes.

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 QA
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 authorities (NSAs)
End August - September 2015 Centralised quality assurance of all the submissions by EIOPA
December 2015 Disclosure of the results of the stress test analysis
March ​2016 Advice to the European Commission on EU solvency rules for IORPs

Working process​

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 United Kingdom.​

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 test.

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 st​ress test​​ and in close cooperation with the national supervisory authorities (NSAs).

Pension flexibility

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 death.

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 moment.


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