The Autumn Statement was light on pension changes, with another reprieve for changes to tax relief, but there was a disappointing change to the money purchase annual allowance (MPAA).
The Statement saw the launch of a consultation proposing to reduce the MPAA from £10,000 to £4,000 by 6 April 2017, which is significant for anyone who is contributing to a pension having already triggered the MPAA or who may want to contribute again in the future.
The government believes an allowance of £4,000 is fair and reasonable, and should allow people who need to access their pension savings to rebuild them if they have the opportunity to do so. It believes this amount limits the extent to which pension savings can be recycled to take advantage of tax relief, which it states is not within the spirit of the pension tax system. The government rightly does not consider that earners aged 55 or over should be able to enjoy double pensions tax relief.
Triggering the MPAA
The MPAA only applies when income is taken once benefits are being accessed flexibly. It was introduced to stop pension members who are using the new flexible benefits from recycling pension income back into the scheme and gaining additional tax relief, consequently rebuilding their tax-free pension commencement lump sums.
The MPAA is only triggered by certain events, including:
• Taking income in the form of flexi-access drawdown
• Taking a flexible annuity that can go down as well as up.
• Taking an uncrystallised funds pension lump sum – a payment from a scheme that is 25 per cent tax free and 75 per cent taxed as income.
• Moving from capped to flexi-access drawdown and taking an income.
• A scheme pension with fewer than 12 members; this would usually be a small self-administered scheme (SSAS).
In some cases, benefits can be accessed without triggering the MPAA. These are:
• Buying a standard annuity – this will only be level, increasing or linked to inflation.
• Taking only the pension commencement lump sum (PCLS).
• Using the small pots rules, where three personal pensions of less than £10,000 each can be accessed.
• Continuing to take income from a capped drawdown plan (pre-6 April 2015 plan).
• Crystallising further funds into an existing capped drawdown plan.
• Taking a scheme pension (usually from a defined benefit scheme) where there are at least 12 members.
Once the MPAA is triggered, the member can no longer use carry forward for the MPAA, although they can use it for the additional annual allowance that can only be used against defined benefit accrual.
There are many reasons why someone may want to avoid triggering the MPAA, including just keeping their options open for future changes in circumstances.
There seems little point in triggering the MPAA where there is an option to avoid or delay it, because once it is triggered there is no option to revert back to a full annual allowance.
Overseas pension schemes
Separately, the Autumn Statement also contained various announcements with regards to overseas pension schemes and we have now had the draft regulation changes.
These regulations make amendments to the 2006 regulations that originally set out the requirement for a qualified recognised overseas pension scheme (Qrops).
The draft regulations remove what is known as the 70 per cent rule from the overseas pension scheme regulations, which required the rules of a scheme to designate a minimum of 70 per cent of the funds that have had UK tax relief to be used to provide the member with an income for life.
They introduce a new requirement that a provider of a non-occupational pension scheme be regulated in the country where the scheme is established, if the scheme itself is not regulated.
Changes have also been made to the pension age test. The test requires that benefits paid out of UK tax-relieved funds can be paid no earlier than they would be under pension rule 1 (generally, pension benefits are payable no earlier than age 55) that applies to a UK-registered pension scheme. The changes provide that as an alternative, payments can be made before age 55 in the event this would be an authorised payment if paid by a registered pension scheme.
These amendments bring a closer alignment of Qrops rules with UK-registered pension scheme rules, the gap between the two having been an issue ever since the pension freedoms were announced.
There were also some changes announced to bring to an end the use of Section 615 policies, which means no new schemes can be established and no new contributions can be made.
Pension scams
The Autumn Statement saw the launch of a consultation on three areas the government believes are associated with pension scams. To ensure that all areas are covered, the paper also discusses and asks for feedback on the definition of a pension scam.
Cold-calling is the most publicised area and the consultation discusses what does and does not constitute this, focusing on whether or not a consumer is already a client or has requested a call back directly.
The proposal is to ban all types of cold-calling in relation to pensions, so anyone receiving a call will know it isn’t a legitimate call, in the hope this will encourage consumers to put the phone down.
In 2013, 97 per cent of cases brought before Citizens Advice Bureau involving pensions liberation stemmed from cold-calling, so the ban is aimed at cutting off the main mechanism for initial contact in these cases.
The scope of the ban is wide-ranging, and includes aspects marketed as free services, such as pension reviews, initial financial advice/guidance, reviews of investment performance/fees as well as any type of inducement.
There is no scope to include electronic communications in the ban, but the consultation does ask for those in favour of inclusion to provide details of the costs and benefits of extending the ban.
The second part of the consultation looks at limiting the statutory right to transfer, in light of clarity given by the High Court recently.
The proposals seek to restrict the right, currently available to all those who are “earners”, in favour of a tighter definition that gives the right to transfer to those with a genuine employment link to the receiving occupation scheme, a personal pension or an occupational scheme with an authorised master trust.
This change is attempting to stop transfers to single member occupational schemes where there is no sponsoring employer. HM Revenue & Customs believes that the alteration should not be an issue for most legitimate transfers.
There are alternative approaches discussed within the document, which include the option for those who insist they want to transfer to use a declaration that they understand the scam warnings and have been explained the nature of the risks. However, there is concern from HMRC that this could result in a lack of due diligence on the receiving schemes.
The third and final section looks at limiting pension scams that are facilitated through SSASs, particularly where the scheme is established with a dormant company as the sponsoring employer. A dormant company is one that is registered with Companies House, but does not carry out any business activity.
It is likely that a dormant company would not need a pension scheme, so it seems that by removing the option to create one, it will close another option that is being exploited by scammers.
Although there wasn’t much substance in the Autumn Statement with regard to pensions, all the little things can add up. These issues need to be considered along with other recent changes we are already dealing with, such as the tapered annual allowance.
Claire Trott is head of pensions strategy at Technical Connection
