Pensions; HMRC issues new guidance and more.

Contents:

• Pensions Policy Institute - what is an adequate retirement income?
• HMRC issues new guidance: Tax avoidance using unfunded pension arrangements
• Settlement reached with global healthcare group to better protect thousands of DB savers
• ACA warns of "inadvertent damage" to pension advice market
• Investigation indicates that women’s pension age changes were not communicated correctly by Government

 

Pensions Policy Institute - what is an adequate retirement income?

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The Pensions Policy Institute (PPI) has published a report, sponsored by The Centre for Ageing Better, entitled: “What is an adequate retirement income?” The report looks at debates around adequacy and the questions of what adequacy is, how it should be defined and who is responsible for providing it. This is essential reading for anyone dealing with the accumulation or at retirement areas of the pensions market.

Head of Policy Research at the PPI Daniela Silcock commented: “Changes in the way people work, save and retire mean that traditional measures of adequacy are not as relevant as they used to be. A new consensus is required to generate retirement income adequacy targets which people can use, and which allow for both income and liquid capital in retirement... Under current adequacy measures, a quarter of people approaching retirement are unlikely to achieve a minimum acceptable standard of living in retirement and fewer than one in 10 can expect to achieve a comfortable standard of living. These stark figures underscore the urgency to develop relevant, accessible and achievable adequacy targets for those saving today, and for future generations.”

Some of the findings include:

1)	People are experiencing increasing additional demands on retirement income. A number of social and policy changes are increasing the demands made on assets originally saved to provide a retirement income. These include: •        A widening gap for some between leaving work and receiving the State Pension, •        Paying for rent in retirement as fewer expect to retire as owner-occupiers, •        Paying off debts carried into retirement, and Supporting other family members with regular financial payments, housing deposits and loans.
2)	Older people who lose their jobs as a result of COVID-19 may struggle to return to the labour market. The age group with the highest redundancy rate as a result of COVID-19 is those aged 50 years and over, with 12.8 thousand people being made redundant, up from 4.4 thousand at the same time in the previous year (November 2020 to January 2021).
3)	Assessing Adequacy There are two traditional approaches to assessing adequacy which stem from very different perspectives: i)      The fixed income target, which has its origins in the state underpin and avoidance of deprivation, but has developed into objective ‘basket of goods’ approaches, which price a basket of goods and services required for a particular living standard and translate these into an annual required income. ii)    The proportional income target; which focusses on assessing subjective individual comfort and has its origins in the view of the engaged employer. Replacement rates, the ratio of incomes after and before retirement, are a widely used method. These focus on the proportion of working-life income required to replicate working-life income in retirement.

Daniela Silcock, Head of Policy Research at the PPI said “Changes in the way people work, save and retire mean that traditional measures of adequacy are not as relevant as they used to be. A new consensus is required to generate retirement income adequacy targets which people can use, and which allow for both income and liquid capital in retirement. Achieving a consensus will not be straightforward as it requires agreement from industry, employers and unions and the overall support of Government in orderto ensure all key stakeholders play their parts. Therefore, action from the Government to pursue this agenda will be necessary soon, to help prevent future generations of older people experiencing poor retirement living standards.

Under current adequacy measures, a quarter of people approaching retirement are unlikely to achieve a minimum acceptable standard of living in retirement and fewer than one in 10 can expect to achieve a comfortable standard of living. These stark figures underscore the urgency to develop relevant, accessible and achievable adequacy targets for those saving today, and for future generations.”

 

 

HMRC issues new guidance: Tax avoidance using unfunded pension arrangements

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HMRC has issued new guidance in the form of Spotlight 58 setting out why disguised remuneration using unfunded pension arrangements are considered as tax avoidance with tough penalties for promoters.

The arrangements are used to reward a director for the services they provide to a company. This is done in a way that seeks to avoid paying income tax and National Insurance contributions, while obtaining corporation tax relief at the same time.

HMRC strongly believes these arrangements do not work and said that it would ‘seek to challenge anyone promoting or using these arrangements and we’ll make sure the correct tax is paid’.

The company enters into an agreement with its director to give that director the rights to receive a pension from the company in the future. However, due to the structure of the arrangements, HMRC believes that the pension is never likely to be paid to the director. The company then claims a Corporation Tax deduction. This deduction is equal to, what is claimed to be, the current value of the total future pension to be paid to the director.

The arrangements involve a company creating an unfunded pension obligation to pay one or more of their directors a pension. This is to create an expense in the company accounts to reduce the company’s profit. The intended result of this step is to reduce the amount of corporation tax payable.

With many of these arrangements, the company then transfers the pension obligation to a closely associated third party. The third party is usually a relative or colleague of the director due to receive the pension. The intended result of this step is a payment to the director or a closely associated third party, with no immediate liability to income tax and national insurance contributions.

Many arrangements include further steps where the company transfers its obligation to pay the director a pension in the future to a third party. In exchange for this, the company agrees to pay the third party. This payment may be made directly to the third party or the third party can ask for the payment to be made to the director instead. The third party is often a relative of the director or another director of the same company.

HMRC claims that the arrangements result in the director, or a third party closely associated with the director, avoiding their tax obligations.

These arrangements often result in unusual outcomes. For example, a spouse agreeing to pay their partner a pension without receiving anything in return.

Users of these arrangements may be charged a penalty for submitting an inaccurate tax return to HMRC.

The tax authority is also reviewing whether this avoidance measure falls under the General Anti-Abuse Rule (GAAR) if arrangements were entered into after 16 July 2013. Where the GAAR applies and the arrangements were entered into after 14 September 2016, taxpayers could be subject to a 60% GAAR penalty, representing a proportion of the avoidance. Users will also be charged interest on any tax paid after the statutory due date.

Promoters will also be targeted by HMRC with threats of penalties amounting to the level of fees charged for joining a scheme.

 

 

Settlement reached with global healthcare group to better protect thousands of DB savers

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The Pensions Regulator’s (TPR) latest Regulatory Intervention Report sets out how it worked with a DB scheme’s trustees and corporate sponsor in order to reach a settlement that addressed TPR’s concerns of a weakening in direct employer support over recent years.

The report explains, in the case of the Sanofi Pension Scheme, that a number of mergers and acquisitions, which required several restructures within the existing group companies and businesses, had led to multiple changes to the statutory employers supporting the scheme, some significant intra-company dividends being paid, and the introduction of a significant degree of reliance by the remaining statutory employers on inter-company balances.  This caused TPR to become worried that there was little direct corporate support, i.e. from the ‘statutory employers’, to back the recovery plan.

Financial support from the wider group had been in place for some while and it did increase following initial engagement, but due to its informality and limited extent TPR felt the need to open an investigation in August 2019 to explore whether it should seek a Financial Support Direction against a number of targets across the corporate group.  It concluded that it had a strong case for so doing and notified the targets of its intention to issue a Warning Notice.

Negotiations then ensued leading to a settlement which included the following:

• A new guarantee from the French parent company in relation to the deficit repair contributions and additional protection of up to £730m in the event of insolvency for roughly 20 years (by which time the scheme should be fully funded on a buy-out basis).
• A legally binding agreement which means that any dividends paid to the wider group are matched by payments into the scheme for the same amount.
• An upfront payment into the scheme of £37m.

Erica Carroll, TPR's Director of Enforcement, said: “This case demonstrates how productive negotiations can be carried out alongside our investigations so that the best possible outcome is achieved for savers. We signalled our intention to use our anti-avoidance powers which prompted Sanofi to engage in meaningful discussions with us and the scheme’s trustee.”

 

 

ACA warns of "inadvertent damage" to pension advice market

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The Association of Consulting Actuaries (ACA) has warned of “inadvertent damage” to the pension advice market in its response to HMRC's consultation Raising Standards in the Tax Advice Market. The ACA welcomed HMRC's initiative to improve standards in the tax advice market, but said that this should not be at the expense of damaging the pension advice market or the provision of high-quality information to scheme members.

ACA Chair Patrick Bloomfield commented in their Press Release: “HMRC is looking to find an extremely wide definition of 'tax advice'. This is understandable as it means promoters of tax avoidance schemes cannot hide behind a label of offering 'guidance' rather than 'tax advice'. However, given the complexity of pensions tax rules, such a definition could inadvertently capture a wide element of the industry helping the day-to-day delivery of pension schemes. This could significantly inconvenience scheme members and bring pensions professionals into regulations primarily designed with traditional tax advisers and their clients in mind.”

ACA Pensions Tax Committee Vice-Chair Tim Sexton added: “ACA is also concerned it could become difficult to communicate with trustees, employers or members effectively without encroaching on a wide view of tax advice. Any policy regulating tax advice should not interrupt the high-quality advice given by pension professionals, interfere with the good running of pension schemes, or interfere with TPR's aim that pension schemes give members as full as possible information to understand their rights and options.”

 

 

Investigation indicates that women’s pension age changes were not communicated correctly by Government

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An investigation carried out by the Parliamentary and Health Service Ombudsman (PHSO) suggests that women who were born in the 1950s were not notified of the increase to their state pension age in a timely fashion.

Initial findings state that these women suffered delays in communication of more than two years, which could mean that compensation will be payable to thousands of those impacted, as they were not given sufficient time to make changes to their retirement plans.

The Women Against State Pension Inequality (WASPI) and BackTo60 campaign groups argued that when plans were made to increase women’s state pension age to 65 – in alignment with men’s – these changes were not implemented in a fair manner and not enough notice was provided. Additionally, they state that the changes were actioned more quickly than stated within the Pensions Act 2011.

The PHSO announced that a sample of complaints on the matter would be investigated back in 2018. This investigation was suspended in December 2018 because a judicial review was being carried out into the matter. As the High Court rejected the claims that women born in the 1950s who saw their state pension age increase were discriminated against and the claims that the Government did not appropriately notify those affected by the changes, the PHSO resumed its investigation in January 2021.

A final report from the PHSO is expected in July 2021, but the Financial Adviser (ftadviser.com of 9 June 2021) reports that initial findings of the investigation highlight the fact that the Department for Work and Pensions (DWP) did send sufficient communication regarding the planned pension age rises between the period of 1995 and 2004. The changes were first legislated for in 1995.

However, analysis in 2004 unearthed the fact that the Government campaign on the topic did not reach the relevant people, and those who needed the information the most. The DWP failed to act on this research, and it was only in 2006 that it proposed to write to all of those impacted individually to advise them of the increase to their state pension age. It was not until December 2007 that these proposals were actually actioned.

 

 

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