As years go 2017 hasn’t been the worst year for pensions even with three Finance Bills being published but there have been some significant and some less significant changes to comment on. I can’t comment on all of the changes but here is a selection of some of those of more importance.
Overseas transfer charge
The overseas transfer charge that was announced in the Budget in March was not really a surprise because we were aware that there were issues with the loss of tax revenue from pension schemes transferring overseas. What was surprising was the level of detail and the fullness of the legislation that was provided on Budget day, including comprehensive guidance notes. It was also surprising that this made it into legislation where other simpler changers were dropped and won’t be legislated for until later in the year. It clearly shows how important this change is to HM Treasury.
The overseas transfer charge is designed to stop transfers overseas to jurisdictions that have favourable tax treatment of pensions where the member isn’t actually living there at the time or plan to move there in the next five tax years, unless both the pension and the member remain in the EEA plus Gibraltar. The tax charge is 25% of the fund transferred and applies after any lifetime allowance charge that is applicable under benefit crystallisation event 8. This can lead to more than a 25% tax charge making the whole purpose of the transfer, to save tax, pointless for most people.
In addition to the implementation of the charges additional reporting requirements were added which meant that the list of Recognised Overseas Pensions Schemes needed a complete overhaul. What actually happened was that the list was suspended and those schemes that wanted to remain on the list had to reapply. This saw over 400 schemes drop off the list but we have seen a steady stream of schemes added throughout the rest of the year which now stands at 1163 schemes, about 170 shy of the changes.
Money Purchase Annual Allowance
Another change that took a while to get sorted was the drop from £10,000 to £4,000 of the money purchase annual allowance. Initially announced in the Autumn Statement in 2016 alongside a consultation on the change. The legislation was published with the Budget in 2017 shortly followed by the response to the consultation paper. It was dropped because of the snap election to ensure the Finance Act went through in time, then reintroduced in the second Finance Bill of the year which finally got Royal Assent in November. The change, as promised, was back dated to the beginning of the tax year.
Defined Benefit Transfer Consultation
The defined benefit consultation was generally welcomed and many of the proposals make great sense because the environment in which defined benefit transfers are now advised on is significantly different to when the rules were last reviewed. The consultation closed on 21st September but we don’t expect to see any changes won’t be in place this side of the tax year end because they are likely to cause significant work for those providing reports and giving advice.
The consultation touched on many areas of advice but of particular note was the proposal to remove the starting assumption that the transfer is unsuitable and addition of a requirement that all advice should contain a personal recommendation.
Further changes are proposed with regards to the analysis reports that accompany the advice, moving to an appropriate pension transfer analysis, which must include, amongst other things, a prescribed comparator to help clients understand what they are giving up.
Pension Scams Consultation
The pension scams consultation response was delayed because of the snap election, as with many other things but was published in August and it is generally good news. The next step is to get it implemented as soon as possible to ensure that those most at risk start to be protected. There were three main areas to the consultation:
- a ban on cold calling in relation to pensions, to help stop fraudsters contacting individuals,
- limiting the statutory right to transfer to some occupational pension schemes; and
- making it harder for fraudsters to open pension schemes.
Some of the above have been address to some degree with additional legislation in the Finance Bill 2017-18 with regards to dormant employers and pension schemes, but we haven’t yet seen anything on the cold calling ban.
Legislation and guidance were published that require trustees and scheme managers to:
- send tailored communications (‘personalised risk warnings’) to members with safeguarded-flexible benefits, such as guaranteed annuity rates;
- use the ‘transfer value’ of members’ safeguarded benefits, when assessing whether the value of their pension pots is above the threshold at which they are required to take financial advice; and
- make transitional arrangements to inform members who are affected by the change in valuation methodology.
For some scheme members there would currently be a requirement for them to take regulated financial advice because under current valuation methods their funds would be deemed to be in excess £30,000 before they were able to transfer. From 6 April 2018 this may not be needed because of the change in valuation of these benefits. The benefits will be valued simply by their transfer value and not the value of the guarantee.
The guidance sets out the changes and how it should be communicated with members who are impacted and by when.
In addition for all of those with guarantees who make certain requests for valuations or requests to transfer the guidance sets out how and when the personalised risk warnings should be provided.
Action to be taken and by when, if a member applies for a statement of entitlement; referred to here as a ‘transfer quotation’. Periods of time refer to time elapsed since the application was made.
Tapered Annual Allowance
A review of 2017 wouldn’t be quite right without a mention of the tapered annual allowance. April saw the first time that advisers and clients were having to really deal with the full fall out of these legislative changes. The introduction of the tapered annual allowance may well have been April 2016 but given the complexities it won’t really have impacted many until the end of the tax year when trying to establish what their annual allowance was and if there they had triggered a tax charge. Many have only in the last couple of months received their pension savings statements so only now are realising the impact this change may have to their plans.
One issue that many will have faced will be the lack of willingness for schemes to operate the scheme pays option, it isn’t compulsory for a scheme to offer this if the pension input amount into the scheme was less than £40,000. The rules take no account for those now over their tapered annual allowance and it will mean that they will have to fund the tax charge out of their own pocket even if the contributions to the scheme were entirely employer contributions in the first place.
One other change that wasn’t directly related to the tapered annual allowance is the change in which tax relief is given on financial expenses on buy to let properties. Interest payments used to be taken off the profit made by the individual so reduced the taxable income of the individual. Interest payments will now give rise to a tax relief so more profit is actually deemed taxable income for the purposes of the tapered annual allowance.
Although this has been a relatively quiet year for pensions with no major changes there is still plenty to think about and even small changes can have an impact to many clients so need to be understood.