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Pensions and retirement planning


What would pensions look like in an independent Scotland?

Ian Naismith

A ‘Yes’ result in the Scottish independence referendum on 18 September 2014 could have a profound effect on pension provision in Scotland. The Scotland Act 2012 requires the Scottish Government to set an income tax rate from April 2016. Any difference from the rest of the UK will complicate pensions tax relief at source, especially because there are some people who might change their residence for tax purposes retrospectively part-way through the year. But independence would introduce many new complexities.

The Institute of Chartered Accountants of Scotland (ICAS) has published ‘Scotland’s pensions future: what pensions arrangements would Scotland need?’ highlighting key issues.

Scotland’s state pensions system might look quite different from the rest of the UK’s. Scotland might not, for example, adopt the planned single state pension, and any variations would require transition arrangements. In addition, state pensions and most public sector pensions are unfunded, so the independence agreement would need to cover how they would be paid for.

An independent Scottish government could redraft private pensions law (including automatic enrolment) immediately – although it is more likely that existing law would be carried over, but diverge over time. Regulation and member protection would be more important issues to address − should there be Scottish equivalents to the Pensions Regulator and Financial Conduct Authority?

The Pension Protection Fund could, in theory, continue in the short term, and may need to for companies operating across the UK, but its continued existence would become more difficult as the pensions systems separated. Given the disproportionate number of banks and
financial institutions based in Scotland, consideration would also need to be given to the Financial Services Compensation Scheme.

Greater complexity still could be introduced where pension schemes with members in both Scotland and the rest of the UK could technically become cross-border. They would then be subject to tighter EU solvency requirements, with even more complications if Scotland was not immediately a member of the EU.

While pensions issues are not a core campaign topic for the Scottish referendum, a positive result for independence would certainly herald significant change to state, company and individual pensions.


Pensions Bill moves ahead

Ian Naismith

The Department for Work and Pensions (DWP), under Pensions Minister Steve Webb, is forging ahead with changes to state and private pensions.

The Pensions Bill 2013/14 includes the legislation needed:

• To implement the single-tier state pension from April 2016 (with transitional provisions for those who have already built up higher amounts); and
• To increase the state pension age (SPA) from 66 to 67 between 2026 and 2028.

A review of SPA by the Government Actuary will be required at least every six years, with the first one due by 7 May 2017. The aim of these reviews is to keep the average proportion of adult life spent in retirement constant. For the foreseeable future, therefore, the SPA can be expected to increase every few years.

The Bill also further develops the framework for private pensions in the automatic enrolment regime. It lays the groundwork for regulations to be issued on ‘pot follows member’ transfers of small pots under £10,000, and gives the Government power to disallow incentivised transfers from defined benefit (DB) schemes. It also strips the ability of occupational pension schemes to make short service refunds to employees who leave service within two years, and changes automatic enrolment to allow for the Government’s simplifications to reduce the administrative burden on employers.

The Bill also introduces a new statutory objective for the Pensions Regulator to take account of employers’ sustainable growth. The objective is that any funding requirements it imposes on a DB scheme should minimise possible adverse effects on the employer. Finally, it introduces a new Bereavement Support Payment.


Public sector to benefit from ’individual’ pension protection

Tom Selby

Highly-paid public sector workers are most likely to be the main beneficiaries of new ‘individual’ pension protection rules, according to industry experts.

HMRC published details in June of protections it wants to put in place for people affected by the Government’s decision to cut the lifetime allowance for tax-free pension saving from £1.5 million to £1.25 million from April 2014. HMRC has plans to introduce two new protection regimes − fixed protection and individual protection − to ease the transition to the new savings limit.

The proposed fixed protection rules will enable individuals to lock-in to a lifetime allowance of £1.5 million, so long as they do not make any further pension contributions. Investors will need to apply for the new protection before 6 April 2014. Under the individual protection regime, savers will be able to apply for a personalised lifetime allowance, up to a maximum of £1.5 million, based on the value of their pension pot at 5 April 2014. Investors will have three years to apply for individual protection from 6 April 2014.

Anyone who opts for individual protection will still be able to contribute to their pension. However, if their pension fund is worth more than the amount they locked into at 5 April 2014 when it crystallises, the excess will be subject to lifetime allowance charges of up to 55%.

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