May CPD Newsbrief — Pensions and retirement planning
Pensions charge cap might be a tight fit
Pensions minister Steve Webb ended years of speculation on 27 March 2014 by announcing that a charge cap of 0.75% will apply to the default funds of all workplace qualifying pension schemes from April 2015 − meaning that the charge will apply to all schemes used for automatic enrolment.
The Department for Work and Pensions (DWP) has taken the intriguing step of setting out a high-level principle, where the cap will apply to member-borne charges (paid to the pension provider or another third party). The cap will not take into account transaction costs, though it will apply to funds under management.
The DWP believes adopting a high-level principle − rather than attempting to detail an exhaustive list of charges − will prevent the industry from creating new structures to evade the cap by hiding charges under new or false definitions. To allay any concerns this may raise, the DWP is working with the FCA to introduce new rules to boost the transparency of transaction costs.
The Government will look at lowering the cap from 0.75%, this time including transaction costs, when it reviews the cap again in 2017. The DWP has developed ‘equivalency tables’ to show how the charge cap will apply to schemes with dual charging structures, such as NEST. For example, a scheme with a 0.3% funds under management charge, plus a 1.5% contribution charge, is deemed to be levying an overall charge of 0.46%.
New minimum quality standards for defined contribution workplace pension schemes are also on the Government’s wish-list. ‘Independent governance committees’ (IGCs) will be created to protect members’ interests. The committees must collect all data on charges and ensure value for money for scheme members, finding schemes with charges below 0.75% if possible. This, and stronger requirements on trust-based schemes, will improve accountability and make sure schemes comply with the quality standards.
With only a year to go until the cap takes effect, providers will be scrambling to introduce the new rules.
HMRC loses an NIC case … in the end
After an epic battle, HMRC has finally been defeated in what once would have been an important NICs case about FURBS (Funded Unapproved Pension Schemes).
You may well remember the emergence of FURBS from the primordial soup of the 1989 pensions tax regime. When pensions ‘simplification’ arrived, FURBS survived by evolving into Employer Financed Retirement Benefit Schemes (EFRBS), but before long they were killed off by the disguised remuneration rules.
Employer contributions to FURBS were taxable on the employee, but there was uncertainty as to whether they were also subject to NICs. HMRC argued that contributions were NIC-able earnings, and this was widely, though resentfully, accepted in preference to wrangling with the tax office. However, in the case of one FURBS to which total contributions of £163,000 were made in 2002 by Forde Machinery Ltd, the employer did choose to dispute the NIC liability.
After suffering inevitable defeats at Upper Tribunal and Court of Appeal hearings, Forde Machinery’s case reached the Supreme Court early this year. The Bench mused over the meaning of ‘earnings’ in NIC legislation (as distinct from ‘emoluments’ in income tax law), and whether payment into a FURBS could be ‘earnings to or for the benefit of’ the employee.
The five judges all agreed that the contributions were not earnings, primarily because any benefit for the employee was contingent upon them reaching retirement age and the investment performance of the fund until that date.
While Forde Machinery Ltd has been spared the NICs bill, the time that it has taken to reach a decision will mean few others can benefit. The maximum period for making a reclaim of overpaid NICs is six years from the end of the relevant tax year, which does not take us back beyond the era of EFRBS.
This case has taken well over a decade for this case to limp over the finish line. It’s therefore little wonder that HMRC would prefer that tax avoiders hand over their money and then attempt to wrest it back.
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