7 days

7 Days is a weekly round up of developments in pensions, normally published on Monday afternoons. We collate this information from key industry sources, such as the DWP, HMRC and TPR.

In this 7 Days:

• Chancellor abolishes 55% tax on pension funds at death
• Access to Pension Schemes Guidance is moving to GOV.UK
• Public service pensions: actuarial valuations and the employer cost cap mechanism
• TPR urges small businesses to check automatic enrolment duties

Chancellor abolishes 55% tax on pension funds at death

On 29 September 2014, the Chancellor announced that, from April 2015, individuals will have the freedom to pass on their unused DC pension to any nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies to pensions passed on at death.

Current system

Under the current system, a 55% tax charge on inherited pensions applies when an individual wants to pay their DC pension out to somebody else as a lump sum after they die, and where the pension money is:

• already in a drawdown account (regardless of the individual’s age), or
• “uncrystallised” (i.e. hasn’t been touched) and the individual dies at or over the age of 75.

The individual can also pass their DC pension to a dependant (which includes their spouse/civil partner or child under the age of 23), who can then draw down on it at their marginal rate of tax.

Where the individual dies under the age of 75 and the DC pension has not been touched, it can be paid out as a lump sum completely tax free up to the LTA (the total amount of tax relieved pension savings that an individual can build up over their lifetime without incurring an additional tax charge). The LTA is currently £1.25 million.

New system

Under the new system, anyone who dies below age 75 will be able to give their remaining DC pension to anyone completely tax free, whether it is in a drawdown account or untouched as long as it is paid out as a lump sum or is taken through a flexi access drawdown account (see our Alert for details). This does not apply to annuities or scheme pensions.

Those aged 75 or over when they die will be able to pass their DC pension to any beneficiary who will then be able to draw down on it at their marginal rate of income tax.

This tax cut will apply to all payments made after April 2015.

Beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45% (if the deceased was over 75). The Government intends to also make lump-sum payments subject to tax at the marginal rate (not a flat rate charge of 45%). It will engage with pension industry in order to put this regime in place for 2016-17.

The LTA will still apply.

Access to Pension Schemes Guidance is moving to GOV.UK

Pension schemes guidance currently located on the HM Revenue & Customs (HMRC) website is moving to the GOV.UK website. From the end of September 2014 all current pension schemes guidance will only be available using GOV.UK.

Public service pensions: actuarial valuations and the employer cost cap mechanism

In his 2011 report on public sector pension schemes, Lord Hutton recommended that the Government set a “clear cost ceiling” for public service schemes with “automatic stablilisers” to keep future costs under more effective control (see our Alert for details).

The Public Service Pensions Act provides the legal framework for regular actuarial valuations of the public service pension schemes to measure the costs of the benefits being provided. These valuations will inform the future contribution rates to be paid into the schemes by employers. The Act also provides for the establishment of an employer cost cap mechanism to ensure that the costs of the pension schemes remain sustainable in the future.

Directions and regulations made under the Public Service Pensions Act implement this policy.

TPR urges small businesses to check automatic enrolment duties

Research published on 24 September 2014 indicates that around 20% of small employers and almost half of micro employers (those with fewer than 50 employees ) do not know the exact date they need to comply with the automatic enrolment laws. In response, TPR urged small businesses to check their staging date (a date set in law when their duties start) using its online tool.

TPR recommends that employers should start preparing for automatic enrolment 12 months ahead of their staging date. Failure to prepare in good time puts employers at risk of non-compliance and this can ultimately lead to financial penalties.

Key findings from the survey include:

• Nine in ten employers staging between October 2014 and April 2015 had commenced preparation to meet their new duties
• Eight in ten employers staging between October 2014 and April 2015 had consulted an adviser, with IFAs and pension providers the main types used.
• Consistent with previous waves of the survey, most employers had consulted or planned to consult with an external adviser, ranging from 89% of smaller medium employers to 64% of micro employers.