What lies ahead for UK pensions? What lies ahead for UK pensions?

What lies ahead for UK pensions?
30 Nov 2014

I suspect you are only reading this if the thought of the UK's auto-enrolment (AE) pensions are still keeping you awake at night, even if staging for your business (or more likely your clients if you are an agent) is still months or years away. But if you are one of the ‘big guys’ who are congratulating themselves that you have survived the twin peaks of real time information (RTI) and AE then I am sorry to disappoint you but it is not over yet.

This article looks at what the next two or three years holds for all shapes and sizes of employer.

Next April, just a few weeks before a general election, the biggest shake up in pensions takes effect. For the first time, the government will give individuals complete choice over what to do with their direct contribution (DC) pension fund and trust them to consider what they might need for a lengthy retirement.

This is a contrast to the current situation where the vast majority of us either turn our fund into an occupational pension or annuity with only the very wealthy having the choice to indulge in more flexible funding options.

At the moment the pensions industry is rushing around trying to decide what this new world of flexibility needs to look like, whether they can offer it from April and what information we will need about it to make critical choices ahead of retirement (the ‘guidance guarantee’ that the government wants the Pension Advisory Service and the Money Advice Service to deliver funded by a levy on pension schemes).

This levy will certainly not provide for ‘advice’- that will need the individual to cough up their own hard earned cash. But for those who do not want to do that - and I suspect many will not-the guidance needs to be comprehensive enough to allow people to make an informed decision even if it that decision is ‘I need to pay for some advice given this is the most important financial transaction of my life’.

April 2015

The key difference in April will be the ability to access all money purchase pension funds flexibly. Up to three funds that are a maximum of £10,000 each can be turned into cash with the employee’s marginal tax rate levied on 75 per cent of the fund. Funds in excess of £10,000 will continue to deliver a scheme pension or annuity.

For the first time all of us, not just the wealthy, can opt for flexible drawdown. This will allow us either to designate and take a tax-free lump sum as now and pay our marginal rate as we access the rest of the fund or (and this is the new bit) we can opt for the snappily titled ‘uncrystallised pension fund lump sum’.

This option means that each time we take money out of our fund 25 per cent will be tax free and 75 per cent taxed at whatever our marginal rate is for that tax year. The rest stays invested with returns accruing tax free. So it is up to us how much tax we pay based on how much we withdraw and what that represents as part of our total income for the year.

As it would be tempting for those who can afford it to ‘control’ their marginal rate by salary sacrificing all their salary into a pension and withdrawing it to keep within the 20 per cent band where possible, HMRC have introduced a new reduced annual allowance for anyone who starts to withdraw funds flexibly from their pension fund.

This will enable them only to put £10,000 per year into the fund without a 55 per cent tax charge. HMRC will monitor this through a new RTI field that is being introduced in April 2015 to be called ‘flexibly accessing pension funds’. This field will be optional for 2015/16 and mandatory for 2016/17.

We are also promised new auto-enrolment regulations from DWP in April that will allow us to exclude from auto enrolment those who sensibly should not be included in assessment:

• Senior employees who have taken pension protection with HMRC on the understanding they do not take up pension membership again
• Those who are about to retire
• Those who have resigned
• Those who have opted out after contractual enrolment

In short order it will be July and re-enrolment starts for the large employers beginning with The Royal Bank of Scotland, the first large employer to stage back on 1 July 2012. Reenrolment is not the same as staging first time around in two respects:

•There is no obligation to write to current scheme members to confirm membership
•You cannot postpone in the month of reenrolment which means that you need to consider carefully the operational impact that this will cause if your re-enrolment date coincides with any earnings spike for part of the workforce. Equally - can your software can cope with part-period deductions- a new starter jobholder or someone turning 22 cannot be postponed to the start of the next pay reference period. This may prompt you to look at which month of the three month available window you choose for re-enrolment and whether your software is geared up to the pro-rating challenge.

But what if you are a small or micro employer or an agent supporting such clients? What do we know about the current pension provision at such employers?

Recent research from NEST says paradoxically that 75 per cent have no pension provision and yet 69 per cent say that their employees should have access to a pension. So perhaps the resistance to policy objectives we worry about amongst this group will not be so problematic.

There are 45,000 such businesses due to stage in 2015 and they will need significant help from their agents and the payroll software industry in offering a pension they can be confident is good value; legally compliant and an easy way to assess and make deductions. What we need to make sure is that they don’t end up ‘oversold’ to.

For those with fewer than 50 employees their payroll software will be able to assess and they absolutely do not need expensive middleware from pension providers. A number of cheap out of the box compliance solutions to ensure compliance and provide statutory notices are currently in development and will be competitively priced to meet the needs of this group.

We may be two years into the auto-enrolment project but pensions will remain a high profile subject for businesses for several years to come.

By Kate Upcraft

I suspect you are only reading this if the thought of the UK's auto-enrolment (AE) pensions are still keeping you awake at night, even if staging for your business (or more likely your clients if you are an agent) is still months or years away. But if you are one of the ‘big guys’ who are congratulating themselves that you have survived the twin peaks of real time information (RTI) and AE then I am sorry to disappoint you but it is not over yet.

This article looks at what the next two or three years holds for all shapes and sizes of employer.

Next April, just a few weeks before a general election, the biggest shake up in pensions takes effect. For the first time, the government will give individuals complete choice over what to do with their direct contribution (DC) pension fund and trust them to consider what they might need for a lengthy retirement.

This is a contrast to the current situation where the vast majority of us either turn our fund into an occupational pension or annuity with only the very wealthy having the choice to indulge in more flexible funding options.

At the moment the pensions industry is rushing around trying to decide what this new world of flexibility needs to look like, whether they can offer it from April and what information we will need about it to make critical choices ahead of retirement (the ‘guidance guarantee’ that the government wants the Pension Advisory Service and the Money Advice Service to deliver funded by a levy on pension schemes).

This levy will certainly not provide for ‘advice’- that will need the individual to cough up their own hard earned cash. But for those who do not want to do that - and I suspect many will not-the guidance needs to be comprehensive enough to allow people to make an informed decision even if it that decision is ‘I need to pay for some advice given this is the most important financial transaction of my life’.

April 2015

The key difference in April will be the ability to access all money purchase pension funds flexibly. Up to three funds that are a maximum of £10,000 each can be turned into cash with the employee’s marginal tax rate levied on 75 per cent of the fund. Funds in excess of £10,000 will continue to deliver a scheme pension or annuity.

For the first time all of us, not just the wealthy, can opt for flexible drawdown. This will allow us either to designate and take a tax-free lump sum as now and pay our marginal rate as we access the rest of the fund or (and this is the new bit) we can opt for the snappily titled ‘uncrystallised pension fund lump sum’.

This option means that each time we take money out of our fund 25 per cent will be tax free and 75 per cent taxed at whatever our marginal rate is for that tax year. The rest stays invested with returns accruing tax free. So it is up to us how much tax we pay based on how much we withdraw and what that represents as part of our total income for the year.

As it would be tempting for those who can afford it to ‘control’ their marginal rate by salary sacrificing all their salary into a pension and withdrawing it to keep within the 20 per cent band where possible, HMRC have introduced a new reduced annual allowance for anyone who starts to withdraw funds flexibly from their pension fund.

This will enable them only to put £10,000 per year into the fund without a 55 per cent tax charge. HMRC will monitor this through a new RTI field that is being introduced in April 2015 to be called ‘flexibly accessing pension funds’. This field will be optional for 2015/16 and mandatory for 2016/17.

We are also promised new auto-enrolment regulations from DWP in April that will allow us to exclude from auto enrolment those who sensibly should not be included in assessment:

• Senior employees who have taken pension protection with HMRC on the understanding they do not take up pension membership again
• Those who are about to retire
• Those who have resigned
• Those who have opted out after contractual enrolment

In short order it will be July and re-enrolment starts for the large employers beginning with The Royal Bank of Scotland, the first large employer to stage back on 1 July 2012. Reenrolment is not the same as staging first time around in two respects:

•There is no obligation to write to current scheme members to confirm membership
•You cannot postpone in the month of reenrolment which means that you need to consider carefully the operational impact that this will cause if your re-enrolment date coincides with any earnings spike for part of the workforce. Equally - can your software can cope with part-period deductions- a new starter jobholder or someone turning 22 cannot be postponed to the start of the next pay reference period. This may prompt you to look at which month of the three month available window you choose for re-enrolment and whether your software is geared up to the pro-rating challenge.

But what if you are a small or micro employer or an agent supporting such clients? What do we know about the current pension provision at such employers?

Recent research from NEST says paradoxically that 75 per cent have no pension provision and yet 69 per cent say that their employees should have access to a pension. So perhaps the resistance to policy objectives we worry about amongst this group will not be so problematic.

There are 45,000 such businesses due to stage in 2015 and they will need significant help from their agents and the payroll software industry in offering a pension they can be confident is good value; legally compliant and an easy way to assess and make deductions. What we need to make sure is that they don’t end up ‘oversold’ to.

For those with fewer than 50 employees their payroll software will be able to assess and they absolutely do not need expensive middleware from pension providers. A number of cheap out of the box compliance solutions to ensure compliance and provide statutory notices are currently in development and will be competitively priced to meet the needs of this group.

We may be two years into the auto-enrolment project but pensions will remain a high profile subject for businesses for several years to come.

By Kate Upcraft

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