April CPD Newsbrief – Pensions and retirement planning
Auto-enrolment – let’s get technical
The Department for Work and Pensions (DWP) plans a number of improvements to auto-enrolment in an attempt to offer more flexibility to employers. This is the result of a consultation on a series of technical amendments to auto-enrolment. The consultation closed in May of last year, and the DWP issued its response in late February 2014.
The DWP will make improvements before the majority of SME employers reach their staging dates. The end result should be that – in a limited number of specific situations affecting a small number of workers – some employers will not be obliged to go through with auto-enrolment.
The changes recognise that auto-enrolment is not suitable for all workers in all circumstances, even if they meet the eligibility requirements for a qualifying workplace pension scheme. This includes workers who have either enhanced or fixed protection for existing pensions, and who will lose this protection if they are auto-enrolled and do not opt out within the 30-day window.
The DWP stated that there is a “strong case” not to auto-enrol workers who have:
• enhanced or fixed protection; or
• given notice of imminent retirement/resignation; or
• recently cancelled their membership after being contract-joined.
The DWP will bring forward its final proposals with a draft statutory instrument for consultation in due course. The Government’s proposals could be seen as less than exciting, given that we are already well down the road to auto-enrolment and any changes made now could result in major problems for payroll providers.
Nonetheless, the DWP is displaying a willingness to learn from the lessons of the early stages of the auto-enrolment roll-out.
Transaction charge measures still unclear
There will be amendments to the Pensions Bill requiring transparency for transaction charges in workplace defined contribution (DC) schemes, the Government announced on 24 February. The Bill is currently entering report stage in the House of Lords.
The move follows last year’s report by the Office of Fair Trading into workplace DC pension schemes. This found that employers with the responsibility for choosing a pension scheme for their employees may lack the capability to assess value for money. The result may be that tens of thousands of pension members have been detrimentally affected by the hidden costs often attached to DC pension schemes.
Once enacted, these amendments will place a duty on the Secretary of State to make regulations requiring greater transparency about the transaction costs incurred by workplace DC schemes. This should help employers to get the best value for their scheme members, who should in turn also benefit from greater transparency and so (it is hoped) have greater confidence when planning for their futures.
The Government announced that it would shortly outline further details of its proposals. It has delayed introducing a charge cap until at least April 2015, although many employers are already struggling to comply with implementing the auto-enrolment rules.
The requirement for greater transparency about charges is in the interests of scheme members. But it needs to go hand-in-hand with the implementation of the delayed charges cap on workplace DC schemes in order to have a significant impact.
Under auto-enrolment, the reality is that employees will often simply remain in their employer’s scheme, which will soon have transparent but possibly still high charges.
Halfway there: IFS pension tax ideas
The Institute for Fiscal Studies’ (IFS) latest Green Budget reviews the current system of UK pensions taxation and considers ways in which it could be improved.
The IFS challenges the view that higher rate taxpayers benefit most under the current system. It points out that HMRC’s figures showing the cost of relief do not take into account the amount of tax that higher earners will pay on their pension incomes in retirement, and make no allowance for the fact that their earnings may vary over time. The figures also do not consider the impact of corporation tax and stamp duty.
Taking everything into account, the IFS argues that the true cost of pensions tax relief is more likely to be £19.15 billion – half of the current HMRC estimate of £38.3 billion. It suggests several ways to enhance the pensions tax relief system:
Compensate for corporation tax and stamp duty In the interests of a fair and balanced system, the IFS argues that individuals should be compensated for the impact of corporation tax and stamp duty on the investment returns within their pensions. Although it is difficult to quantify the cost of such relief, the IFS estimates it to be in the region of a few billion pounds.
Cap the pension commencement lump sum (PCLS) The IFS accepts that the PCLS is an incentive to pension saving and compensates for the illiquidity of pensions, but thinks there is a strong argument for adopting a cash limit on the amount of PCLS.
Levy NICs on employer pension contributions Employer pension contributions are the only form of employee remuneration that avoids NICs entirely. This creates a significant bias towards employer-funded pensions, confirmed by HMRC figures that almost 75% of all pension contributions are paid by employers. Alternatively, providing relief from NICs on all contributions and charging NICs on pension income instead could be easier to administer and more cost-effective to implement.
The IFS analysis suggests that the current incentives do not target the right individuals, and fail to encourage all taxpayers to save enough for their retirement.
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