Technical News Update 06/02/2020

Taxation and trusts

• The Budget date is to remain 11 March.
• ISA manager bulletin 79 is now available
• HMRC has recently updated the Lifetime ISA guidance notes
• Quarterly Stamp Duty Land Tax Statistics – Q4 2019
• Employment Allowance eligibility reforms – an update
• April 2020’s IR35 changes – an alteration to the new rules
• The Office of Tax Simplification (OTS) has outlined the scope of a new review about people's experience of making tax-related claims and elections
• Inheritance Tax planning ahead of the Budget
• FTT finds double IHT charge applies to ‘home loan’ trust arrangement

Investment planning

• December 2019 Investment Association (IA) statistics
• NA&I takes the axe to rates
• January Inflation numbers

Pensions

• Latest HMRC statistics on Flexible Payments from Pensions
• PASA launch DB transfer Code of Good Practise Consultation.
• FOS has published data for Q3 2019/20
• FCA goes ahead with costs and charges disclosure requirements for contract-based workplace DC schemes
• State Pension: Valuation on divorce or dissolution
• PPF publishes updated PPF 7800 index - February 2020
• The Pension Regulator News - New plan to protect pension savers – 10 February

TAXATION AND TRUSTS

The Budget date is to remain 11 March.

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8)

The Government has confirmed that the Budget date is to remain as Wednesday 11 March.

This could mean either that there will be little change from what was being planned by Sajid Javid or that we will see a March Budget that kicks the hard decisions out to Autumn. By then the Spending Review will be due and this could give some cover for tax increases.

Source: The Treasury 18/2/20

ISA manager bulletin 79 is now available

(AF4, FA7, LP2, RO2)

HMRC has recently published the latest ISA manager bulletin 79.

The bulletin broadly focuses on transfers from maturing Child Trust Fund accounts in relation to when an ISA can be opened with funds transferred from a matured Child Trust Fund account, including the position where no instructions have been given, who can open a Lifetime ISA, subscriptions and details about returns of information for ISA managers.

Transfers from maturing Child Trust Fund account were covered in some detail in the last edition of What’s New.

Source: https://www.gov.uk/government/publications/isa-manager-bulletin-79/isa-manager-bulletin-79

HMRC has recently updated the Lifetime ISA guidance notes

(FA5)

HMRC has recently updated its guidance notes on Lifetime ISAs (LISAs).

The guidance is split into the following areas:

• Overview 
• Applying to be a LISA manager
• Who can open a LISA
• Opening a LISA
• How people pay into their LISA
• Transferring LISAs between LISA managers
• Claiming the Government bonus for LISAs
• Qualifying investments
• Withdrawal charges and charge-free withdrawals
• Withdrawals for first-time residential purchase
• Closing a LISA

Overall, aside from the new ‘overview’ section, the guidance has been updated with new information about who can open a LISA (broadly anyone over 18 but under 40), primarily focused on those making payments from a matured Child Trust Fund account.

Source: https://www.gov.uk/guidance/lifetime-isas-for-isa-managers#history

Quarterly Stamp Duty Land Tax Statistics – Q4 2019

(ER1, LP2, RO7)

The Quarterly Stamp Duty Land Tax Statistics bulletin provides statistics on residential and non-residential stamp duty land tax (SDLT) transactions valued at £40,000 or above. The statistics include the whole of the UK up to April 2015; England, Wales and Northern Ireland from April 2015 up to April 2018; and England and Northern Ireland from April 2018 onwards.

The data is split by property type, liability threshold and price band, including transactions paying higher rates of SDLT for additional dwellings and those claiming the first-time buyers’ relief.

Overall, as shown below, transactions and receipts continue to mirror the profile from previous years.

The key highlights are as follows:

• Transactions in Q4 2019 were 314,700 which is similar (less than 1% fall) to the 315,300 transactions shown for Q4 2018.

• Non-residential receipts increased by 2% from £959 million in Q4 2018 to £975 million in Q4 2019.

• 62,800 transactions claimed first-time buyers’ relief in Q4 2019, making a total of 464,700 claims since the relief’s introduction. The estimated total amount relieved over that period is £1,109 million.

• Higher rates for additional dwellings receipts decreased by 4% from £1,055 million in Q4 2018 to £1,009 million in Q4 2019.

A 14 day filing window for SDLT returns was introduced for all transactions effective as of 1 March 2019. The majority of transactions already file within the 14 day window.

Source: https://www.gov.uk/government/statistics/quarterly-stamp-duty-statistics

Employment Allowance eligibility reforms – an update

(AF2, JO3)

Employment Allowance is an entitlement of £3,000 a year for businesses, charities and amateur sports clubs towards their employer Class 1 National Insurance contributions (NICs) liability. It can be an important factor in planning around profit extraction for shareholding director clients using salary, dividend and pension combinations. Also, note that the Conservative Manifesto (and associated costings) said this allowance would rise to £4,000 in 2020/21.

One of the existing restrictions is that the Employment Allowance cannot be claimed if the director is the only employee paid above the £8,632 NICs threshold (£9,500 for 2020/21). However, if a company employs, for example, husband and wife directors where both earn above the £8,632 threshold, the Employment Allowance remains available. See HMRC’s guide ‘Single-director companies and Employment Allowance: further guidance’. This means that they could, for example, both take a salary of £12,500, to potentially use their respective personal allowances and reduce their NICs bill to £Nil by benefiting from the Employment Allowance.

From 6 April 2020 Employment Allowance will, however, be restricted to employers with NICs liabilities of under £100,000 in the previous tax year:

• Employment Allowance can only be claimed if total qualifying employers’ (secondary) Class 1 NICs liability in the previous tax year was less than £100,000. If an employer has multiple PAYE schemes or is part of a connected group of companies, the Employers’ (secondary) Class 1 NICs liabilities of all companies, and/or PAYE schemes, need to be added together to assess eligibility for Employment Allowance;

• The Allowance can only be claimed once across all of the employer’s PAYE schemes and connected companies. The employer will need to decide which PAYE scheme to set the claim against;

• Employment Allowance claims will need to be submitted each tax year. Claims will not automatically roll over from the previous tax year

In order to receive Employment Allowance, employers will need to confirm annually that they have space in their relevant de minimis State Aid ceiling(s) to include the full annual amount of the Employment Allowance, regardless of whether or not they will use the full amount of the Employment Allowance against their employer Class 1 NIC liabilities over the tax year.

In HMRC’s consultation last Summer it was also proposed that employers would have to inform HMRC which State Aid sector(s) they operate in (agriculture fisheries and aquaculture, road transport and individual, or transport) and of any other State Aid received or allocated for the tax year and the two previous years.

State Aid is defined as support in any form (financial or in kind) from any level of Government – central, regional or local – which gives a business or another entity a benefit in the single market that could not be obtained during the normal course of business. The rules are in place to ensure open and fair competition and to prevent subsidies causing unfair distortions within the single market.

However, based on the responses received to its consultation, the Government has now confirmed that employers will no longer have to provide information about other de minimis State Aid they have received or been allocated.

More information can be found here and here.

Source: HMRC Consultation outcome: Draft legislation - Employment Allowance eligibility reforms – dated 29 January 2020.

April 2020’s IR35 changes – an alteration to the new rules

(AF1, AF2, JO3, RO3)

As part of a review into changes to the operation of the off-payroll working rules (IR35), due to come into effect from 6 April 2020, HMRC has made an announcement about what payments the new rules will apply to and from when.

From 6 April 2020 all medium and large-sized private sector clients will be responsible for deciding if the IR35 rules apply to their contractors. This moves the onus for IR35 decisions away from the worker to the (medium and large) private sector engager.

This responsibility already applies to public sector organisations. However, from 6 April 2020, there are also extra responsibilities that will affect public sector organisations.

Note that if a worker provides services to a small client in the private sector, the worker will continue to be responsible for deciding their employment status and if the IR35 rules apply.

The qualification criteria for being a “small” client are, for clients that are companies, set out in sections 382 and 383 of the Companies Act 2006, i.e. the client must meet two of the following three tests: turnover of not more than £1.2 million; a balance sheet total of not more than £5.1 million; or the average number of employees is not more than 50. Clients that are not companies, such as entities that are partnerships (but not limited liability partnerships), will only need to consider the turnover test in the Companies Act 2006.

HMRC has been seeking views on the implementation of the new IR35 rules. This review has just concluded on 19 February. However, as a result of a number of concerns raised by businesses already over what payments the new rules will apply to and from when, the Government has confirmed that the new rules will only apply to payments made for services provided on or after 6 April 2020. Please see here.

This means that the new IR35 rules will now apply only to payments made for services provided on or after 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out. Affected organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 5 April 2020.

This is set out in updated guidance in HMRC’s Employment Status Manual.

HMRC says that it will be writing to everyone that has already attended one of their webinars or one-to-one engagements to explain this change.

(Public sector organisations already applying the off-payroll working rules will not be affected by this change to the new rules.)

Source: HMRC Press release: HMRC announces change to the off-payroll working rules – dated 7 February 2020

The Office of Tax Simplification (OTS) has outlined the scope of a new review about people's experience of making tax-related claims and elections

The OTS has published a document setting out the scope of a new review about simplifying claims and elections and the processes involved.

Claims and elections are a long-standing feature of many UK taxes. In some cases it is unclear why there is a need to make a specific or separate claim or election in order to benefit from a relief or exemption, and this can lead to some of those who are entitled to benefit missing out.

The Office of Tax Simplification (OTS) says that its review will seek to establish the broad numbers and types of claims and elections across the main UK taxes, and then focus on a range of the claims and elections that are more significant or more frequently used by individuals, partnerships and companies.

Claims and elections that may be considered are likely to include:

• Claims for relief for certain expenses incurred by employees and not reimbursed, in particular flat rate allowances such as for cleaning uniforms or for tools;

• Capital allowances, including issues arising when these are subject to specific claims rather than handled within tax returns;

• Section 198 elections (for allocating property sale proceeds between buildings and fixtures), taking forward a recommendation in the OTS’s 2017 report on simplifying the corporation tax computation.

The work will be primarily concerned with how the administration of these claims and elections may be simplified, but where relevant may also consider related policy issues.

The OTS has also published a separate call for evidence seeking views from those with experience of making claims and elections to inform its current review. This consultation closes at midday on 8 May 2020. The OTS intends to publish a report on this work in autumn 2020.

You can read the OTS scoping document here and the call for evidence here.

Sources:

• OTS Policy paper: OTS to review claims and elections – dated 4 February 2020;
• OTS consultation: Claims and elections call for evidence – dated 11 February 2020.

 Inheritance Tax planning ahead of the Budget

(AF1, RO3)

There is a real concern that the inheritance tax rules may be due for a change. A couple of recent reports give an outline of the areas that may receive attention. One of these is the exemption for “normal expenditure out of income” and clients who can use this exemption may like to take early action.

Despite a recent little dip because of the impact of the residence nil rate band, inheritance tax (IHT) receipts are on the rise again and are comfortably over £5 billion per tax year. The tax was payable on 4.6% of estates of those who died in 2016/17 – up from 2.6% in 2009.

One of the most effective ways of combating IHT is to make lifetime gifts. There are potentially four drawbacks to this:

• To be fully effective for IHT purposes the donor needs to survive seven years.

• If the donor wants access to the property gifted, the gift with reservation of benefit rules will neutralise any potential IHT savings.

• Will any capital gains tax arise on the gift?

• The donor may be concerned over the loss of control over the asset gifted.

All four of these drawbacks can be overcome if proper planning is undertaken. For example, if gifts are made regularly out of the donor’s surplus income, and those gifts do not affect the donor’s standard of living, they will be exempt when made – no need to live for a further seven years for IHT effectiveness.

Because those gifts are of cash, no CGT issues arise. Further, because they are made out of surplus income, there is probably no requirement for the donor to have future access to the gifts and control can be exercised over the gifts by making the gifts into a trust.

And remember, all income can be taken into account for these purposes – earned income, investment income and tax-free income, such as that from ISAs and flexi-access drawdown income from an income drawdown account where the pension scheme member died under age 75.

Example

George is aged 57 and enjoys income of £150,000 per annum (£110,000 net) from his job as an architect. He and his wife, Samantha, have combined taxable estates of £3m and so face a hefty IHT charge of about £800,000 on the second death. His sons, Robert (14) and Richard (12), are showing academic promise and are likely to go to university. He would like to put in place some funding to help them.

George has surplus income of about £20,000 per annum. He thinks it would be good to use £10,000 of this to make a regular annual gift to a trust fund for the benefit of Robert and Richard. As each gift would be exempt under the normal expenditure exemption, there are no tax consequences on the gift and no requirement to live seven years for it to be IHT effective. The trustees invest in funds which are appropriate to the need to be drawn down over the next four to eight years.

So, this all works very well for George. But he needs to bear in mind two important facts about the normal expenditure exemption:

1. Because the donor’s personal representatives (PRs) will probably need to claim the exemption on those gifts made within seven years of the donor’s death, it is best if the donor can leave full details of the circumstances of each gift when made, in particular, that it is made out of income and does not affect his standard of living. In this respect it is worth the donor completing the form IHT 403 (Return of gifts and other transfers of value) to give his PRs guidance.

2. The Office of Tax Simplification recently produced a report on the simplification of IHT in which they proposed that the annual exemption, the marriage exemption(s) and the normal expenditure out of income exemption should be bundled together as one exemption of about £25,000 per annum. More recently a cross party committee of MPs have suggested the Government make more radical changes to IHT. One of these would be to remove the normal expenditure out of income exemption.

So, what should clients do? Well, it is impossible to predict whether changes to IHT will be made by the Government in the forthcoming Budget or over the next year or two. But, given the healthy majority the current Government enjoys, there must be a chance that the system will, at the very least, be simplified. It also means that clients that can afford to make substantial gifts out of income may like to get that planning up and running before any rule change occurs – in the hope that if a rule change does occur, existing arrangements will be protected.

If clients implement this planning now, it would make sense:

• to evidence, in writing, the intention to make regular gifts to show they form a pattern of gifting;

• to keep records of expenditure so that it can be shown that any payments out of income do not affect their standard of living; and

• ideally complete form IHT403, which records gifts and expenditure, and may help the client’s PRs to deal with any queries that arise from HMRC after the client’s death.

FTT finds double IHT charge applies to ‘home loan’ trust arrangement

(AF1, JO2, RO3)

The First-tier Tax Tribunal (FTT) have ruled that a 'home loan' scheme entered into in 2002 has not achieved the desired objective of removing the main residence from the estate of the homeowner – instead, the scheme could cause the property to be subject to two separate IHT charges – once in the homeowner’s estate; and again by virtue of their interest in possession in the settlement to which it was ‘sold’ (Shelford v HMRC, 2020 UKFTT 0053 TC).

So-called ‘home loan schemes’ were popular prior to Finance Act 2004 (before the pre-owned assets tax (POAT) was introduced) among property owners whose estates derived their value principally from a valuable main residence.

The objective of the scheme was to take the value of the home outside of the homeowner’s estate while facilitating continued rent-free and undisturbed occupation without infringing the gift with reservation rules.

The steps in a typical scheme were:

• the homeowner (the settlor) creates an interest in possession trust under which they have a life interest (and so have a right to receive income from or occupy any property owned by the trustees);

• the homeowner/settlor then sells their house to the trust, usually at the open market value; but because the trustees have no funds, they agree to leave the purchase price outstanding in the form of an IOU;

• the IOU owed to the settlor by the trustees is then transferred to a second trust - usually for the prime benefit of children/grandchildren - under which the settlor is excluded from benefit (although, in the case in point, the IOU was transferred to the settlor’s children outright).

The intended inheritance tax (IHT) effect of the transactions was that:

• the value of the property would remain in the homeowner’s estate by virtue of his or her (pre-March 2006) interest in possession in the trust to which it was sold;

• the taxable value would be largely reduced by virtue of the debt owed by the trustees; while the gift of the IOU/right to repayment of the outstanding loan would be a potentially exempt transfer and it would fall out of account after seven years; and

• the overall effect would be that the value of the house would be removed from the homeowner/settlor’s estate for IHT purposes after seven years without any detriment to his security of tenure or loss of the CGT main residence exemption.

The Government have implemented various legislative provisions to neutralise the tax advantages of home loan schemes over the years the most notable of which is the income tax POAT charge introduced by Finance Act 2004. As a result, very few schemes have been established since then, but many pre-existing schemes remain in existence and such schemes, even if effected before 2004/05, would be subject to the POAT.

One of these was the scheme entered into by John Herbert (deceased) in 2002, which was (typically) structured in such a way as to avoid a stamp duty charge. With effect from 2004/05, a POAT charge had been paid by Mr Herbert in respect of the scheme. Following Mr Herbert’s death in 2013, a dispute arose in relation to the IHT due on his estate as a result of the scheme. Mr Herbert’s executors disagreed with HMRC’s IHT determinations and appealed to the FTT. Following a detailed analysis of the steps and documentation that formed the arrangement, the FTT found that the sale agreement between Mr Herbert and the trustees of the life interest trust was void and so the house formed part of Mr Herbert’s estate on his death.

Additionally, if Mr Herbert did not dispose of the house, he would not have had any liability to POAT and the judge left it to the parties to agree on the terms of the variations to HMRC’s IHT determinations (including any entitlement that Mr Herbert's estate may have to a refund of prior payments of POAT).

Because the FTT judge expected the case to be appealed, he also considered what the IHT analysis would be in the event that it was decided on appeal that there was in fact a valid sale of the house to the trustees. In this alternative analysis, the judge concluded that:

• the house would form part of Mr Herbert’s death estate as his ability to dispose of it freely was restricted by the agreement to sell it to the trustees; but,

• it also formed part of the settled property which was also treated as forming part of his taxable estate due to the life interest. The trust had a liability of £1.4m (i.e. the sale price of the house at the time the arrangement was implemented) which the executors were entitled to deduct in calculating the total value of the settled property within Mr Herbert’s estate.

While this would mean that the property value at death would be double-counted, the judge commented: “this serves as a warning that the implementation of tax avoidance schemes can sometimes have the consequence of the participants paying more tax than if they had done nothing: if you play with fire, do not be surprised if your fingers are burnt.”

You can read the full details of the case Shelford v HMRC, 2020 UKFTT 0053 TC here.

HMRC has already set out the options for the ways in which trustees/executors can deal with tax liabilities following the winding up of double trust/home loan schemes. (See IHTM44120 onwards). It therefore remains to be seen what action HMRC will take following the decision in this case, particularly for anyone who may be in the middle of settlement negotiations. While the executors may well appeal to the Upper Tribunal, it is likely that HMRC will see the scheme as having failed and those who have paid the POAT charge in order to avoid IHT may find themselves with an IHT charge anyway.

Source: STEP UK news digest 10/2/2020

http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j11505/TC07549.pdf

INVESTMENT PLANNING

December 2019 Investment Association (IA) statistics

(AF4, FA7, LP2, RO2)

The Investment Association has just published its monthly statistics for December 2019 and thus provided data for the calendar year.

December marked the end of a somewhat mixed year that had seen positive net retail inflows in nine months (with December being the highest) and outflows in the other three. The data’s highlights include:

• Net retail sales for the year were £14,954m, up 94% on 2018. However, they were still lower than in seven of the last ten years.

• Net institutional outflow for 2019 was £6,395m, about half the 2018 outflow.

• The net overall inflow combined with positive market movements across the year saw total funds under management rise 12.1% to £1,294.3bn, a new record.

• Fixed Income was the best-selling asset class in 2019, with net retail sales of £11,589m. Mixed Asset came second, at £6,541m. Property saw a net outflow of £1,185m, while Equity funds lost £2,373m, despite a strong December inflow of £1,807m.

• £ Strategic Bond was the most popular sector in terms of net retail sales. The least popular was Targeted Absolute Return, which was the best seller in both 2015 and 2016.

• ISA net outflows were £2,069m. Only two months of 2019 saw inflows – April and May. Even so, strong markets helped total ISA funds rise by 10.7% over the year to £74,934m.

• The total value of tracker funds increased by 26.3% over the year to £230.1bn. They now account for 17.8% of the industry total, 2% higher than in December 2018. At the end of 2010 the proportion was just 6.6%. Net retail sales for tracker funds were £18,117m in 2019 – £3,163m more than the overall total of net retail sales.

These figures confirm the long-running stories of a continued move towards tracker funds and a lack of impetus in the ISA market. The latter might give the Chancellor food for thought as he contemplates ways to raise revenue that do not involve increases to income tax, VAT or NIC rates.

Source:  IA 6/2/20

NA&I takes the axe to rates

(AF4, FA7, LP2, RO2)

As we have said many times, the low interest rate environment leaves the Government in a bind when it comes to NS&I. The simple fact is that in current market conditions, raising money via NS&I is hard to justify. With 2-year gilts yielding 0.56% and 10-year gilts offering just 0.08% more, there is no need for the Treasury to compete for retail funds. As if to underline the point, last week the Debt Management Office sold £2.5bn of Treasury 1⁵/₈% 2071 at a yield of 0.93% - 51-year borrowing at under 1%.

On Monday, NS&I bowed to the inevitable and followed the path followed by many other deposit-taking institutions in recent months by cutting rates on all its products, other than ISAs and JISAs (for now).

The new rates, which take effect from 1 May 2020, are:

Product	Current rate	New rate from 1/5/2020
Direct Saver	1.00% gross/AER	0.70% gross/AER
Income Bonds	1.15% gross/1.16% AER	0.70% gross/AER
Investment A/C	0.80% gross/AER	0.60% gross/AER
Premium Bonds	1.40% 24,500:1 monthly odds	1.30% 26,000:1 monthly odds

The Premium Bond changes will reduce the number of prizes by 5% and nudge up the proportion of £25 prizes to 98.95% of the total prize number.

The axe is also falling on fixed rate products (Guaranteed Growth Bonds, Guaranteed Income Bonds and Fixed Interest Savings Certificates), although these are only available to existing investors with maturing plans. Automatic reinvestments made before 2 June will receive current rates, but renewals with a different term from 1 May 2020 will be subject to the new rates, as detailed below:

Product	Current rate	New rate
Guaranteed Growth Bonds (1-year)	1.25% gross/AER	1.10% gross/AER
Guaranteed Growth Bonds (2-year)	1.45% gross/AER	1.20% gross/AER
Guaranteed Growth Bonds (3-year)	1.70% gross/AER	1.30% gross/AER
Guaranteed Growth Bonds (5-year)	2.00% gross/AER	1.65% gross/AER
Guaranteed Income Bonds (1-year)	1.20% gross / 1.21% AER	1.05% gross / 1.06% AER
Guaranteed Income Bonds (2-year)	1.40% gross / 1.41% AER	1.15% gross / 1.16% AER
Guaranteed Income Bonds (3-year)	1.65% gross / 1.66% AER	1.25% gross / 1.26% AER
Guaranteed Income Bonds (5-year)	1.95% gross / 1.97% AER	1.60% gross / 1.61% AER
Fixed Interest Savings Certificates (2-year)	1.30% tax-free/AER	1.15% tax-free/AER
Fixed Interest Savings Certificates (5-year)	1.90% tax-free/AER	1.60% tax-free/AER

On average, the new NS&I rates are about 0.5% off the current market leaders, which is a significant amount when the numbers are so low. However, by May the picture could be different, as the NS&I move (and the fallout from COVID-19) may prompt further cuts in the retail market.

In the coming year, on the most recent (pre-Rishi Sunak) estimates the Treasury will need to borrow £173bn. That figure is much larger than the projected Budget deficit because nearly £100bn of existing stock will mature in 2020/21 and need to be refinanced (almost certainly at a lower interest cost).

January Inflation numbers

(AF4, FA7, LP2, RO2)

The CPI for January showed an annual rate of 1.8%, up 0.5% from December. The market had expected a 0.3% increase, according to Reuters. Across December to January prices fell by 0.3%, whereas they dropped by 0.8% a year ago.

The CPI/RPI gap was unchanged at 0.9%, with the RPI annual rate rising to 2.7%. Over the month, the RPI was down 0.4%.

The Office for National Statistics’ (ONS’s) favoured CPIH index rose 0.4% for the month to 1.8%. The ONS notes the following significant factors across the month:

Upward

Housing and household services: The largest increase came from this category. In January 2019, a fall in gas and electricity prices partially reflected energy providers beginning to operate Ofgem’s initial energy price cap. There was no such Ofgem adjustment this January because of a change in the timing of new pricing caps. These now take effect on 1 April and 1 October. The 0.2% inflation increase in gas and electricity bills created this month by the January 2019-January 2020 comparison will disappear in February, and in April energy prices will bring downward pressure on inflation because the cap rose by 9.3% in April 2019 but will drop by 1% in April 2020.

Transport: The main upward contributions came from fuels and lubricants, and airfares. Prices at the pump rose between December 2019 and January 2020 but fell between December 2018 and January 2019. There was also a large upward contribution from airfares where prices fell between December 2019 and January 2020 by 17.9%, compared with a fall of 25.5% a year earlier. There were further small upward contributions from vehicle maintenance and repairs, and other services. These upward contributions were partially offset by small downward contributions from rail and sea fares and the purchase of vehicles.

Clothing and footwear: This category also made a large upward contribution to the change in the inflation rate, with the main impact coming from women’s clothing.

There was no evidence to suggest a reduction in the proportion of items being recorded on sale compared with January 2019, despite evidence of increased discounting reported in December 2019.

Restaurants and hotels: Overall prices for overnight hotel accommodation fell by 3.9% between December 2019 and January 2020, compared with a fall of 9.1% between December 2018 and January 2019.

Downward

Furniture, household equipment and maintenance: Overall prices fell by 3.1% between December 2019 and January 2020, compared with a fall of 2.1% between December 2018 and January 2019. The main downward movement came from furniture and furnishings, in particular from settees and double beds.

Food and non-alcoholic beverages: Overall prices fell by 0.1% between December 2019 and January 2020, compared with a rise of 0.1% a year earlier. There were downward contributions from margarine or low-fat spread; fish; fruit; and fruit squash. These were partially offset by upward contributions from bread and cereals; and sugar, jam, syrups, chocolate and confectionery. CPI inflation in this category is now 1.5%.

In six of the twelve broad CPI groups, annual inflation increased, while three categories posted a decrease and the remaining three were unchanged. The category with the highest inflation rate remains in the Communications category, which fell 0.1% to 4.2%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) rose 0.2% to 1.6%. Goods inflation rose 0.7% to 1.3%, while services inflation was up 0.2% at 1.6%.

Producer Price Inflation was +1.1% on an annual basis, up 0.2% on the output (factory gate) measure. Input price inflation increased to 2.1% year-on-year, a 1.2% rise from December. The main driver here – for a change – was imported metal prices, not oil prices (which were the main driver for the output inflation rise). 

These inflation figures were higher than expected, but the quirks of energy price capping mean this could be a temporary blip rather than an omen of the end of sub-2% inflation. With earnings growth of 2.9% a year (total pay – 3.2% regular pay only) according to the latest statistics, real earnings growth continues to be positive.

These inflation numbers to some extent vindicate the Monetary Policy Committee’s no change decision on 30 January. The MPC next meets on 25/26 March, by which time it will have another set of inflation statistics and the impact of the Budget to consider.

Source: ONS 19/02/2020

PENSIONS

Latest HMRC statistics on Flexible Payments from Pensions
(AF3, FA2, JO5, RO4, RO8)

The latest Official Statistics on flexible pension payments show a 18% increase in the amount withdrawn from pensions flexibly, increasing from £1.8 billion in Q4 2018 to £2.2 billion in Q4 2019.

The number of individuals making withdrawals saw an increase of 24% over the year up to 327,000 compared to 264,000 in the same quarter of 2018.

The average withdrawal in Q4 2019 fell slightly to £6,800, down from £7,200 in Q4 2018. The statistics have shown average withdrawal amounts consistently decreasing since reporting became mandatory in Q2 2016 with peaks in Q2 of every year, again in line with the start of the tax year.

The decrease in average withdrawals suggests fewer people are paying unnecessary income tax on large withdrawals, however, advice is still essential to ensure money is taken in the most tax efficient way. 

Even where careful planning is sought, due to the way withdrawals are made under the PAYE system too much tax is often deducted at source. Where this occurs clients can make a reclaim during the tax year.

To reclaim tax within the same tax year the following forms should be used:

• P55 to reclaim an overpayment of tax when funds have been flexibly accessed but the fund has not been extinguished.
• P50Z to reclaim an overpayment of tax when funds have been flexibly accessed and the fund extinguished and the client has also ceased to work or claim benefits.
• P53Z to reclaim an overpayment of tax when funds have been flexibly accessed and the fund extinguished.
• P53 to reclaim an overpayment of tax on a trivial commutation lump sum or small pension pot taken as a lump sum.

PASA launch DB transfer Code of Good Practise Consultation.
(AF3, FA2, JO5, RO4, RO8)

The Pensions Administration Standards Association (PASA) have launched a consultation on a “Code of Good Practice” on defined benefit (DB) transfers.

PASA originally intended to publish the second of a two-part series on DB transfer guidance but have instead produced one comprehensive guide. The part one guidance was issued in July 2019 and intended to cover what PASA regarded as “standard” or straightforward transfers. The new guide incorporates the initial guidance and also covers more complex cases including those requiring significant manual intervention and partial transfers.

The draft Code is based around three objectives: improve the overall member experience through faster, safer transfers; improve communications and transparency in the processing of transfers; and improve efficiency for administrators. 

Depending on the complexity of the case, the draft Code suggests that the time required from receiving the member request to issuing a guaranteed quote should take between seven to ten working days, with an extra five working days if referral to the actuary is needed. Administrators are encouraged to take all reasonable steps to maximise automation in the calculation routine. Once the member confirms that they wish to transfer, and returns relevant forms, the settlement process should take around nine to eleven days. For members above the minimum retirement age, the draft Code suggests that transfer quotes should be accompanied by an early retirement quote.

Consultation ends on 30 April 2020, and PASA expects to release the finalised Code on 1 September 2020. Schemes and administrators will then have 12 months to comply with what is a voluntary Code, but also one on which the Pensions Ombudsman may have cause to refer to if dealing with complaints from scheme members.

Comment

As with the earlier guidance, the amount of detail set out in this Code will not only provide a framework for administrators to process transfer requests, it will hopefully also give some comfort to members on the timescale and process involved; and the example documents, if widely adopted by the industry as standards, should help to speed up the transfer process. But the biggest prize is retaining member confidence, so that they are less likely to take decisions that are not in their best interest, including falling into the hands of pension scammers.

The document is available here.

 FOS has published data for Q3 2019/20

(AF3, FA2, JO5, RO4, RO8)

The Financial Ombudsman Service (FOS) has published details of its complaints data for Q3 2019/20.  Between 1 October and 31 December 2019 FOS received 195,851 new enquiries and 83,754 new complaints; with 9,160 complaints passed to an ombudsman for final decision. On average, FOS upheld 34% of the complaints resolved. Pension-related enquiries received were:

• SIPPs 697
• PPs 314
• OPS transfers and optouts 135

Details of complaints concerning claims management companies over the same period have also been published.

FCA goes ahead with costs and charges disclosure requirements for contract-based workplace DC schemes

(AF3, FA2, JO5, RO4, RO8)

As confirmed in PS20/2, the Financial Conduct Authority is going ahead with its February 2019 proposals for contract-based workplace DC schemes to disclose costs and charges information to members.  As originally proposed, this duty will be imposed on these schemes’ governance bodies, such as Independent Governance Committees.  However, there are three important adjustments to the original proposals that have been accepted by the FCA on grounds of practicality:

1. “One-worker” schemes, such as self-invested personal pension schemes, will be excluded for now. The FCA will consider if there is a better way in which such individuals can have this information provided to them

1. For the first scheme governance year (from 1 January to 31 December 2020), scheme governance bodies will only have to report costs and charges information in respect of default options and funds. For subsequent governance years costs and charges information will need to be reported for all the funds and options that are available to members

1. The Chair’s report will only need to provide the information in respect of the default options and funds – so long as the report contains a link to a website that sets out the costs and charges information for all the funds and options that are available to members

The above reporting has to be completed within seven months of the end of each governance year.  There is also a new requirement that the information is communicated to members in a way that considers how members might reasonably use it.

The FCA has also clarified that the illustrations of the compounding effect of the aggregated costs and charges that it proposed will be required for a representative range of funds and options.  The FCA refrains from giving guidance on the specific funds and options that should be included in this representative range.

The FCA also says that it is doing further work with the Pensions Regulator on the framework for assessing value for money, as set out in their joint strategy.  This may include benchmarking costs and charges, together with performance and service metrics – further detail is promised for later in 2020.

The new rules come into force on 1 April 2020.  They also contain some adjustments to the rules that asset managers must follow when calculating transaction costs.

Comment

Contract-based DC schemes, especially SIPPs, can have a far wider investment choice than their occupational counterparts and so it is understandable that the FCA has made these adjustments, not only to assist providers transition to these new rules, but also to ensure that members are not swamped with information, much of which would be irrelevant to them.

Setting governance years is of note – at or around 31 July starting in 2021 there will be a wealth of information on administration and transaction charges available online relating to the previous calendar year.

State Pension: Valuation on divorce or dissolution

(AF3, FA2, JO5, RO4, RO8)

DWP have issued an updated form to request valuations of state pension benefits as part of divorce proceedings.

As part of a divorce or dissolution the court can treat State Pension entitlement as a financial asset. It is possible to share part of the State Pension with a pension sharing order.

A pension sharing order can be applied to any Additional State Pension for those who reached State Pension age before 6 April 2016. For those who reach State Pension age on or after 6 April 2016 and their divorce or dissolution proceedings also started on or after this date, then their Protected Payment could be shared, i.e. the amount on top of the standard new State Pension.

Temporary rules cover those who have reached State Pension age on or after 6 April 2016 where divorce proceedings started before this date which allow the Additional State Pension to be shared.

Both parties involved in the divorce or dissolution need to complete a separate version of the form to get a valuation which will help the court decide.

Once the DWP have received the completed forms they use any additional State Pension or Protected Payment amount to work out a Cash Equivalent Value.

The form is available here.

PPF publishes updated PPF 7800 index - February 2020

(AF3, FA2, JO5, RO4, RO8)

Since July 2007 the Pension Protection Fund has published the latest estimated funding position, on a s179 basis, for the defined benefit schemes in its eligible universe. 

February 2020 Update Highlights

• The aggregate deficit of the 5,422 schemes in the PPF 7800 Index is estimated to have increased over the month to £74.7 billion at the end of January 2020, from a deficit of £10.9 billion at the end of December 2019.
• The funding ratio decreased from 99.4 per cent at the end of December 2019 to 95.9 per cent.
• Total assets were £1,733.9 billion and total liabilities were £1,808.6 billion.
• There were 3,257 schemes in deficit and 2,165 schemes in surplus.
• The deficit of the schemes in deficit at the end of January 2020 was £209.9 billion, up from £165.6 billion at the end of December 2019.

The PPF 7800 index is published on the second Tuesday of every month, and the PPF publishes The Purple Book each year.

The Pension Regulator News - New plan to protect pension savers – 10 February

(AF3, FA2, JO5, RO4, RO8)

TPR has published its responses to its consultation on the future of trusteeship and governance.

TPR state that the 114 written responses highlighted broad support for their view that all savers should benefit from efficient and well run pensions with the right people in pace to make good investment decisions.

TPR believe that this requires trustees to constantly review and develop their knowledge and skills and to improve diversity and inclusion on trustee boards.

As a result TPR will review and update its Trustee Knowledge and Understanding code of practice and the Trustee toolkit to make its expectations clearer and drive up standards of trusteeship. It will run a regulatory initiative to tax levels of trustee knowledge and understanding.

On diversity TPR will establish an industry working group to find ways to supporting schemes to take steps to improve trustee diversity.

The consultation also asked if it should be mandatory for pension scheme boards to engage a professional trustee and for governance standards for sole trustees to be strengthened. Following the responses from the industry TPR state that they are not planning to introduce any new measures in these areas at this stage. 

Read more on the TPR website