Finance (No.2) Bill is Published

Introduction

Following a consultation on draft provisions at the end of 2012,1 the Government has formally published the Finance (No.2) Bill) (the “Bill”) together with a set ofExplanatory Notes.

In this Alert:

• Key points
• Pensions tax relief
• Changes to enhanced/primary protection
• Death benefits
• Bridging pensions
• Other pensions measures

Key points

The Bill includes:

• measures to reduce the AA to £40,000 and the LTA to £1.25 million with effect from 6 April 2014;
• a new transitional protection against the LTA charge from 6 April 2014, “fixed protection 2014”;
• provisions to align the tax rules for bridging pensions with forthcoming changes in SPA; and
• a number of other measures originally announced in the 2012 Budget.2

Pensions tax relief

The Bill introduces measures to reduce the AA to £40,000 (from £50,000) and the LTA to £1.25 million (from £1.5 million) with effect from the tax year 2014/15. To help those who already have or think they will have pension savings in excess of the revised LTA, a new transitional protection will be available, “fixed protection 2014”.

Individuals with fixed protection 2014 will be entitled to a personal LTA of the greater of £1.5 million and the standard LTA. To maintain the protection:

• individuals in a DC scheme must ensure that no further pension contributions are received by the scheme on or after 6 April 2014; and
• individuals in a DB scheme must not accrue further benefits above a “relevant percentage” from this date. The “relevant percentage” for this purpose will normally be either the annual rate specified in the scheme rules as of 11 December 2012 for the revaluation of accrued rights, or CPI (if no rate is specified), although certain statutory increases will be excluded from the test.

Certain members of non-UK pension schemes will also be able to apply for fixed protection 2014, provided they do not make any further pension savings on and from the tax year 2014/15.

In addition, the Government intends to introduce an “individual protection regime”. This will entitle individuals to an LTA of the greater of the value of their pension rights on 5 April 2014 (up to an overall maximum of £1.5 million) or the standard LTA. But, unlike fixed protection 2014, individuals with “personalised protection” would not be subject to any restrictions on future contributions or accruing further benefits. A consultation on the detail of this proposal is expected shortly and legislation will be included in the Finance Bill 2014.

Changes to enhanced/primary protection

Individuals could apply for enhanced and/or primary protection to safeguard pension savings accrued prior to A-Day (6 April 2006).

In brief, primary protection provided individuals with pension savings in excess of the LTA as at 5 April 2006 with their own personal LTA (based on the proportion by which their pension savings exceeded the LTA at A-Day). In contrast, an individual could obtain enhanced protection no matter their level of benefits at A-day but, in doing so, had to cease further accrual of benefits on 5 April 2006. It was possible to obtain both primary and enhanced protection.

In addition, individuals were able to protect a right to a lump sum in excess of 25% of their uncrystallised pension rights (“lump sum protection”).

The Bill includes amendments which will ensure that:

• “individuals with existing A-day primary or enhanced protection but who do not have lump sum protection will retain a right to a lump sum of up to 25 per cent of £1.5 million; and
• individuals with primary protection will not have an increased lifetime allowance available when the lifetime allowance is reduced. Where they have taken benefits before 6 April 2014 these will be revalued when further benefits are taken on or after 6 April 2014 as if references to the standard lifetime allowance were to £1.5 million.”

Death benefits

The Bill includes provision to ensure that, where an individual dies before 6 April 2014 but a relevant lump sum death benefit is paid on or after that date, the relevant lump sum death benefit will be tested against the standard LTA at the time of the individual’s death.

Bridging pensions

Some DB schemes pay members who retire before SPA a higher pension at the outset, which is then reduced at SPA to take account of their State pension coming into payment. The aim is to allow the member to receive a similar overall level of income in retirement, regardless of when their State pension actually starts.

Although often referred to as bridging pensions, these arrangements are also known by a variety of other names including “level pensions”, “step-up pensions” and “State pension offsets”. Bridging pensions may form an integral part of a scheme’s design (and therefore be payable automatically to anyone retiring before SPA) or, alternatively, they may be offered as an option.

In order to count as an authorised payment, the Finance Act 2004 generally prevents pensions being reduced once in payment. Reductions made to bridging pensions are an exception to this rule, provided that:

• the pension is reduced between the ages of 60 and 65; and
• the amount of the reduction does not exceed a specified limit (which is designed to ensure that the reduction is based on expected State pension).

The Bill includes provisions that are designed to align the tax rules governing bridging pensions with the forthcoming changes in SPA (namely, the equalisation of SPA between men and women by 2018 and the rise in SPA to 66 for both sexes by October 2020). The changes will have effect in relation to bridging pension payments made on or after 6 April 2013.

The Government consulted on a limited power for trustees to amend their schemes’ bridging pension provisions by resolution. In the recently published response, it announced that it would not be taking forward the proposal, but that it intends to conduct a further, informal, consultation at a (as yet unspecified) later date.3

Other pensions measures

The Bill also covers:

• Abolition of DC contracting-out – following its abolition in April 2012, consequential amendments are proposed to remove or amend obsolete provisions that refer to contracting-out through a DC pension scheme. Some provisions will be repealed from 6 April 2013, others from 6 April 2015 and 2016, to allow time for late payment of amounts due before abolition, and adjustments to payments already made in respect of contributions due before abolition, to continue to be made to schemes with the same tax consequences as previously. The Bill has been revised to clarify the types of payment that would be considered a “member’s contribution” for the purposes of a short service refund lump sum.
• Drawdown policy – as announced in the 2012 Autumn Statement, the capped drawdown limit (namely, the maximum amount that an individual is entitled to withdraw from their funds each year) will increase from 100% to 120% of a comparable annuity4 for all drawdown pension years starting on or after 26 March 2013.
• QROPS – building on changes introduced in April 2012, the Bill provides for additional circumstances that may lead to a pension scheme being excluded from being a QROPS, including a failure to notify HMRC that a scheme continues to meet the conditions to be a QROPS every five years. It will also include a power to make regulations to ensure that reporting requirements extend to all transfers of pension savings to a QROPS made free of UK tax.
• Family pension plans – from 6 April 2013, contributions to a registered pension scheme for an employee’s spouse or family member as part of the employee’s flexible remuneration package will give rise to tax and National Insurance contribution (NIC) liabilities on both the employee and the employer.
• Changes to fixed protection 2012 – this was introduced when the LTA was reduced from £1.8 million to £1.5 million on 6 April 2012 and allows individuals to retain an LTA of the greater of £1.8 million and the standard LTA. The Bill includes a power to amend the Finance Act 2011 which will be used to help ensure that individuals do not lose fixed protection 2012 in circumstances outside of their control.

1 Please see our Alert: “Finance Bill 2013” dated 13 December 2012
2 Please see our Alert: “Budget 2012: the pensions story” dated 22 March 2012
3 Please see our Alert: “Miscellaneous Amendment Regulations – The Government Responds” dated 15 March 2013
4 A level single-life annuity without a guaranteed term