PFS What's new bulletin - August II
UPDATE from 8 August to 22 August 2024
TAXATION AND TRUSTS
HMRC’s quarterly publication of tax-free childcare statistics
(AF1, RO3)
Tax-free childcare provides help with childcare costs for working parents. For every £8 a parent pays into their tax-free childcare account, the Government will add an extra £2, up to a maximum of £2,000 per child per year. For disabled children the maximum is £4,000 per year.
Tax-free childcare replaced the childcare voucher and directly contracted childcare schemes, which closed to new entrants in October 2018.
For more information about tax-free childcare, please see HMRC’s guidance.
The key points from HMRC’s latest release covering the period to 30 June 2024 are:
- approximately 545,000 families used tax-free childcare for 664,000 children in April 2024 (the peak in the quarter to 30 June 2024), compared to 523,000 families using tax-free childcare for 636,000 children in January 2024 (last quarter’s peak);
- both the number of families and children using tax-free childcare and the top-up value, increased in April 2024, before decreasing slightly in May 2024, and falling again in June 2024;
- more families used a tax-free childcare account in April 2024, compared to May 2024. This is thought to be due to the final day of March 2024 landing on the Easter weekend, causing an uplift in April’s figures, rather than a change in the underlying trend of a gradual increase in number of users of tax-free childcare. When the final day of the month lands on a weekend, there is frequently an uplift in the following month’s figures. June 2024 also ended on a weekend, meaning payments made on the final day of June 2024 will appear in July rather than June data;
- the Government said that it spent £164.8 million on top-up for families in the quarter to 30 June 2024, £0.4 million less than in the last quarter.
Many accounts that were previously tax-free childcare only have become joint tax-free childcare and 30 hours accounts. Looking at families, in December 2023, 46% of used accounts were joint. This has increased to 68% by June 2024. This can be attributed to the Department for Education (DFE) childcare expansion roll out. Please see Upcoming changes to childcare support.
In June 2024, there were 170,000 open accounts for 1-year-olds, an increase of 26,000 since March 2024. This can be attributed to anticipation of the DFE childcare expansion roll out affecting this age group in September 2024. This is similar to what was seen for two-year-olds last quarter, in anticipation of the DFE expansion affecting them in April 2024.
Tax-free childcare was launched in April 2017 with a phased roll out by age of the youngest child in a family, completed in February 2018. Children must be aged 11 or under, or 16 and under if they have a disability, to be eligible for tax-free childcare. Families with a disabled child up to the age of 16 were able to sign up for tax-free childcare in April 2017.
Families with a tax-free childcare account receive 20% top up on childcare costs up to a total of £2,000 per year per child (£4,000 for a disabled child).
Tax-free childcare is run by HMRC with their delivery partners National Savings & Investments (NS&I). Parents pay into and make payments to childcare providers out of the same account. Parents are able to withdraw money for other purposes, but lose the Government top-up on anything removed. An individual family may register for a tax-free childcare account for multiple children. Separated or divorced parents cannot register an account separately for the same child.
In order to qualify for tax-free childcare, families must have all adults earning the equivalent of at least the national minimum or living wage for 16 hours per week, and don’t have income over £100,000 a year. They must not be claiming tax credits or universal credit in any form or other disqualifying benefits such as Job Seeker’s Allowance.
Since September 2017, families in England have also been able to use the Government’s offer of 30 hours free weekly childcare for children aged three or four. Families can access this offer provided all parents are earning at least the equivalent of the national minimum or living wage for 16 hours a week, and don’t have a taxable income over £100,000 annually. Unlike tax-free childcare, families are eligible for 30 free hours if they receive tax credits or universal credit or childcare vouchers. Applications for the two offers are linked and accessed through the same online portal on GOV.UK.
When a family applies for 30 hours free childcare and also meets the additional eligibility criteria for tax-free childcare, a tax-free childcare account is automatically opened, and vice versa. This leads to a discrepancy between ‘open’ and ‘used’ tax-free childcare accounts which can be seen in the tables accompanying this publication.
From April 2024, this offer was expanded to also include 15 hours free weekly childcare entitlement for children aged two years of eligible working parents. This will be followed up by 15 hours free weekly childcare entitlement for children aged nine months of eligible working parents in September 2024, which will increase to 30 hours in September 2025.
Tax-free childcare is available to families where one or more parents are self-employed. This is different to the employer supported childcare schemes, which are only available from some employers.
With childcare vouchers, a basic rate taxpayer can salary sacrifice up to £55 per week, with a maximum benefit of £933 per year per parent, whilst a higher rate payer can get up to £28 a week in vouchers. Whether a family is better off under tax-free childcare or childcare vouchers (if available) will depend on their circumstances. Following the closure of childcare vouchers, parents who change employer and new parents are no longer be able to receive childcare vouchers but may be eligible for tax-free childcare. The Government believes this should lead to an increase in take up of tax-free childcare in the longer term, as these families look for childcare support.
Whether a family can access tax-free childcare may also depend on their preferred childcare provider. Childcare providers need to be signed up to tax-free childcare before a family can make payments to them.
You can see the full statistics here.
EWHC allow son to remain as trust beneficiary despite paternity dispute
(AF1, RO3)
The meaning of the term 'children' in a trust deed. The England and Wales High court have rejected a claimant’s attempt to have his brother removed as beneficiary of a family trust after a dispute over paternity.
In a recent case (Marcus v Marcus, 2024 EWHC 2086 Ch), the England and Wales High Court (EWHC) have rejected a claimant’s attempt to have his brother removed as beneficiary of a family trust settled by his deceased father after a dispute over paternity.
In November 2003, the trust in question was created as a so called ‘Son of Melville’ arrangement to postpone the payment of a capital gains tax liability. Discretionary beneficiaries of this trust included ‘the children and remoter issue’ of the settlor (the deceased) along with their spouses. At the time, the deceased’s wife also created a similar settlement.
When this arrangement was created, Jonathan Marcus (the claimant) and Edward Marcus (the defendant) were being brought up and under the belief that biologically, they were brothers. However, in 2010, their mother had told the defendant that the deceased was not in fact his biological father. The deceased never discovered this and passed in 2020. It was only in May 2023, long after his father’s death that the claimant discovered this. By that time, the claimant and defendant had already fallen out, with the defendant having launched legal action to have the claimant removed as a trustee of the settlement. In 2022, a court ordered both brothers to resign in favour of independent trustees, although that court order doesn’t appear to have been carried out.
After discovering that the defendant was not his biological brother, the claimant then issued his claim to have the defendant removed as a beneficiary of the trust settled by the deceased. This claim was put forward on the grounds that the defendant was not the deceased’s biological son and that the word ‘children’ in the settlement did not include him as a stepchild. In response to that, the defendant argued that the settlement refers to both brothers and that ‘children’ includes children and stepchildren of the family.
The EWHC concluded that the defendant was probably not the deceased’s biological son. However, on the issue of the proper construction of the settlement, and the natural meaning of the reference to ‘the children’ used in the trust deed, the court ruled that this was intended to include both the defendant, and the claimant.
The court said, “the surrounding circumstances point overwhelmingly in favour of a wider meaning than biological child being adopted. A reasonable person in knowledge of the relevant facts would readily conclude that when using "children" Stuart intended this word to be understood as meaning Edward and Jonathan; and not "Edward and Jonathan provided they are in fact my biological sons".
Besides this, there was no reason to consider that the deceased may have intended to treat the defendant and claimant unequally. The EWHC stated that “The inequality that would arise between the two settlements by applying the natural meaning of children is stark”.
INVESTMENT PLANNING
July inflation numbers
(AF4, FA7, LP2, RO2)
The CPI annual rate for July was 2.2%, up 0.2% from June, but 0.1% below the Reuters consensus forecast and 0.2% below the Bank of England’s expectations.
The monthly UK CPI reading was down 0.2% from June. The CPI/RPI gap widened 0.5% to 1.4%, with the RPI annual rate jumping by 0.7% to 3.6%. Over the month, the RPI index rose by 0.1%.
The Office for National Statistics (ONS)’s favoured CPIH index rose 0.3% to an annual 3.1%, widening its unusually high margin above the CPI. As we have said in recent months, a large part of that excess is due to the owner occupiers’ housing (OOH) category, which has a 16.5% weighting in the CPIH but is absent from the CPI. The OOH is up 7.0% over the past year. A year ago, OOH annual inflation was 4.5%.
The ONS attributed the increased CPIH inflation primarily to three elements:
Main upward driver
Housing and household services. Monthly prices in this division rose by 0.1% in July 2024, having fallen by 1.4% last year. The annual rate rose to 3.7% in the year to July 2024, up from 2.3% in the year to June. The rise in the divisional annual rate is mainly because of gas prices, although electricity prices also contributed to this rise. Despite monthly gas and electricity prices declining by 7.8% and 6.8% respectively in July 2024, these falls were less than their equivalent drops in July 2023 (25.2% and 8.6%), hence the overall increase.
October’s Ofgem cap adjustment is also likely to push up inflation as October 2023 saw a 7% fall in the cap, while October 2024 is currently expected to produce a 10% increase (new figures are out on 27 August).
Main downward drivers
Restaurants and hotels. Prices in this division fell by 0.4% between June and July this year, compared with a rise of 0.9% a year ago. The annual rate rose by 4.9% in the year to July 2024, down from 6.3% in the year to June. The slower annual rate was almost entirely because of the price of hotels, which saw a monthly fall of 6.4% compared with a rise of 8.2% a year ago.
Transport. Prices in the transport division rose by 0.1% in the year to July 2024, compared with a rise of 0.7% in the year to June. On a monthly basis, prices rose by 0.7% compared with a rise of 1.3% a year ago.
The decrease in the annual rate was the result of downward effects from categories including maintenance and repairs of personal transport equipment, passenger transport by air, and motor fuels.
The main counteracting upward effect came from second-hand cars, where prices rose by 0.1% on the month compared with a fall of 1.4% a year ago. On an annual basis, prices fell by 8.4% in the year to July 2024, compared with a fall of 9.8% in the year to June 2024. The annual rate has now been negative for twelve consecutive months.
Five of the twelve broad CPI divisions saw annual inflation decrease, while four rose and three were unchanged. The category with highest annual inflation rate remains alcoholic beverages and tobacco (3.9% of the Index) which recorded a 7.3% annual increase. Four divisions (Food and non-alcoholic beverages; Housing, Water, Electricity, Gas and Other Fuel; Furniture; Household Equipment and Maintenance; and Transport), accounting in total for 44% of the Index, posted an annual inflation rate below 2.0%.
Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) fell 0.2% to 3.3%. Goods inflation in the UK rose 0.8% to -0.6%, while services inflation saw a useful downtick, falling 0.5% to 5.2%, 0.3% below the Reuters consensus.
Producer Price Inflation input prices rose by 0.4% in the 12 months to July 2024, against a revised figure of 0.0% in the year to June 2024. The corresponding output (factory gate) figures saw a 0.8% annual rise against a previous revised 1.0% increase.
Comment
These inflation numbers are generally better than had been expected. In particular the fall in services inflation, coming after yesterday’s data showing a drop in earnings growth, will be welcomed by the Bank of England. In the forex markets, sterling weakened as traders saw the data implying a higher probability of two more interest rate cuts by the end of the year.
PENSIONS
FCA Consultation: The Value for Money Framework
(AF8, FA2, JO5, RO4)
The Financial Conduct Authority (FCA) has released a new consultation document CP24/16: The Value for Money Framework. The consultation invites opinions on a value for money (VfM) framework for workplace defined contribution (DC) schemes.
This is the consultation promised by the previous Government in its Autumn 2023 statement but delayed because of the General Election.
Although the FCA’s consultation is notionally covering contract-based arrangements, it is clear that the FCA has worked with the Department for Work and Pensions and The Pensions Regulator on this and that the joint intention is that equivalent requirements for trust-based DC schemes will be included in the forthcoming Pension Schemes Bill. Therefore, this consultation is of interest to anyone involved in running a DC workplace pension scheme, whether contract or trust based.
The core consultation is 129 pages long with a further 90 pages of appendices. It covers several areas including:
- The proposed scope of the requirements – the FCA intends that the VFM framework will apply to “in-scope arrangements” which are a scheme’s default arrangements or “Quasi-default” arrangements for pre-auto-enrolment “legacy” schemes.
- How the core metrics on cost, performance and quality of service are to be calculated and published.
- The process to be adopted by Independent Governance Committees (IGCs) in assessing arrangements, including how comparisons are to be made against other arrangements.
- The range of actions to be taken by providers in the event an arrangement is poor value for money.
- The annual publication cycle and the details of how metrics are to be published.
The VFM framework introduces four elements, with the FCA saying that it:
- Requires the consistent measurement and public disclosure of investment performance, costs, and service quality by providers for all such arrangements – against metrics we believe allow VFM to be assessed effectively.
- Enables those overseeing and challenging an arrangement’s value – IGCs and Governance Advisory Arrangements (GAAs) for contract-based schemes – to assess performance against other arrangements and requires them to do so on a consistent and objective basis.
- Requires public disclosure of assessment outcomes including a Red, Amber or Green (RAG) VFM rating for each arrangement. Amber indicates an arrangement that is offering poor VFM but can be improved over a reasonable period of time so that it offers VFM and a red rating indicates that the arrangement cannot be improved within a reasonable period of time.
- Requires firms to take specified actions where an arrangement has been assessed as not VFM (i.e. Red or Amber).
The VFM framework will require detailed and complex disclosures, the FCA proposing that for each default arrangement, several investment and charges metrics are disclosed over reporting periods of 1, 3 and 5 years, and for 10 and 15 years if practical. Such tabulations are needed for three cohorts – those with 30, 5 and 0 years until retirement – reflecting the growth, de-risking and at retirement stages of a typical pensions saving journey.
Regarding service quality, the FCA sets out five indicators and detailed commentary on how a scheme can be assessed on these. They are that savers:
- can be confident that transactions are secure, prompt, and accurate;
- are satisfied with the service they receive;
- are supported to make plans and decisions for their retirement;
- can amend their pension with ease; and
- are supported to engage with their pension.
IGCs (or third parties duly appointed) will carry out the actual assessment of VFM for in-scope arrangements. The FCA expects comparison to be made against at least three arrangements offered by other providers in order to assess the RAG rating, and several conditions about the choice of comparators are also set out.
Where an arrangement is rated Red or Amber, the provider will be required to communicate that rating each year to any employer currently paying contributions and will not be able to accept business from new employers into that arrangement.
For an Amber-rated arrangement, providers will need to quickly submit an action plan to the FCA indicating how the poor value will be rectified, whilst for Red-rated arrangements, the action plan must consider transferring savers to an alternative arrangement that does offer VFM. However, this seems to be far from straightforward and the Government may have to legislate to enable providers to transfer pension savers without their consent.
To enable these comparisons to take place, there will be extensive disclosure requirements for providers to publish data for each of their in-scope arrangements, as well as the IGC’s annual reports. The intention is that data will be collected on a calendar year basis, published the following 31 March, with the IGC producing its annual report by 31 October.
Consultation closes on 17 October 2024. In due course the FCA will publish a final policy statement including Handbook rules and guidance setting out the VFM framework to be implemented. The forthcoming Pension Schemes Bill will contain measures to apply the framework to trust-based schemes.
Sarah Pritchard, Executive Director of Markets and International at the FCA, was quoted in their Press Release as saying that: “We want to see a focus on long-term value, not just costs and charges. Given the impact these changes could have we are consulting now to ensure that the pension system can be ready to go when the legislative changes that need to happen are ready.” Minister for Pensions Emma Reynolds was also quoted in the same Press Release urging the industry to help shape the framework, by saying that: “Our Pension Bill and Pensions Review, will make pensions fit for the future, and having an effective [VfM] framework will lay the foundations for this. I would encourage responses from across the industry, including trust-based schemes, to this consultation.”
The industry has generally welcomed the FCA's consultation on a value for money (VfM) framework for defined contribution (DC) schemes as "a step in the right direction," but has also expressed concerns about the potential for unintended consequences and the risk of "oversimplifying" a complex issue.
PLSA: Pensions & Growth: Creating a Pipeline of Investable UK Opportunities
(AF8, FA2, JO5, RO4)
The Pensions and Lifetime Savings Association (PLSA) has released a report entitled: Pensions & Growth: Creating a Pipeline of Investable UK Opportunities. The has made recommendations to create the necessary investment conditions for pension schemes to allocate a greater portion of retirement savings to UK growth areas. Since early 2023 there has been considerable debate about whether and how pension funds can be supported to allocate more to emerging, but higher risk, sectors that could drive UK economic growth. The PLSA set out six ways to achieve this its report on Pensions & Growth last year. The report follows up on how the UK needs to ensure there is a pipeline of investible opportunities:
The report identifies a funding gap amounting to tens of billions of pounds across four key areas which most require investment:
- Climate change: In the UK, the Climate Change Committee’s sixth carbon budget estimated that reaching net zero will cost ~£50 billion a year.
- Infrastructure: Analysis of the National Infrastructure and Construction Pipeline identifies a need for private investment in infrastructure between now and 2032/33. For example, energy sector investment of £33 billion.
- Social and community growth funds: in social housing research shows the sector will require an average of £14.6 billion in capital grant from the Government each year between 2021-2031, to leverage enough private capital for a housebuilding programme worth a total of £46.2 billion per year on average.
- Life sciences and AI: in these areas improvements to the investment ecosystem are required. With AI predicted to generate an additional £32 billion of revenue by 2030, there is substantial scope for expansion if the UK can incentivise it.
PASA Guidance: Preparing for the change to NMPA
(AF8, FA2, JO5, RO4)
The Pensions Administration Standards Association (PASA) has issued guidance: Preparing for the change to Normal Minimum Pension Age (NMPA). The NMPA is set to increase to age 57 from 6 April 2028. The guidance is intended to assist trustees and administrators in their preparations for this transition:
- identify scheme members with a Pension Protected Age (PPA) who will be impacted by the change in NMPA.
- deal with transferred in PPAs.
- understand how these changes differ to the last NMPA increase in 2010.
- provide a checklist of actions which should be taken now to prepare for the new legislation.
Mark Ormston, Chair of the PASA Industry Policy Committee, stated that: “Although the increase on NMPA is three and a half years away, trustees and administrators should take action now to prepare for the change and ensure people with a PPA are treated fairly.” He then continued, saying that: “We do expect further ‘transitional regulations’ from the Government to address minor consistencies. PASA will keep a watching brief on this and update the Guidance as new information becomes available.”
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