June 2018

Setting up a business is an exciting time, and while looking ahead at the opportunities that are opening up, perhaps the last thing on most entrepreneurs’ mind is the death or severely diminished health of either themselves or one of their business partners.

If you were to lose the contributions of a key business partner to ill health or worse, the impact on the workings of your business could be enormous. Not only would you lose the companionship of a business partner and possibly a friend, you would also lose their valuable expertise. Moreover, you could lose a share of your company to the spouses or beneficiaries of their estate, who may only be interested in the fiscal release-value of their inherited shares, and have little or no concern about the business’ future.

Steps to take

The answer is to think seriously about setting up some level of shareholder or partnership protection. This could help to safeguard you by enabling existing partners or company directors to purchase business shares from a deceased’s family if they should die or suffer a critical illness which prevents them from working. It is available to individuals in either a limited company, LLP or a partnership, and combined with good shareholder and ‘cross option’ agreements, can help to ensure continuity by providing insurance funds that you and surviving business partners could use to retain control of your firm should the worst happen.

Options

There are a number of ways to go about taking out these insurances. Each principal could take out a policy on each of the others; this is a popular approach when there are just two partners involved in a business. However, matters can become complicated when there are three or more partners involved.

There can also be inequitable situations if the age difference between the business partners is significant, because the cost of insurance for older persons will be much higher. For three or more partners therefore, it is a common approach for each business partner to establish a policy on their life and place it in trust for the benefit of either the company itself or in appropriate shares to the other business partners/directors. If the worst should happen, the remaining shareholders can then use the funds received from the insurance to fund the purchase of the deceased’s shares from their family or estate and redistribute them amongst the surviving business partners according to the Trust and ‘Cross Option’ Agreements.

Is it worth it?

The costs of protection can be relatively low for life cover only, and for business people, is as important as arranging their own personal Will and Lasting Power of Attorney. These issues are equally important for long established businesses where frequently we find that no regular reviews have been undertaken on the business protection arrangements and circumstances, particularly the value of the business, have changed.

How we can help

We can help you find the best option for you and your business and assist with all the arrangements, setup and management. In the first instance, contact Graham Smithson, Senior Consultant at Hanover Financial Management Limited.

Robert Young's article was published by Pay & Benefits in March 2016.

Family friendly benefits

Employers face many challenges and one is recruiting and retaining good quality staff to enable their business to thrive. Work-Life balance is perhaps an overused phrase but what can employers do to try and improve this and why should they?

The pressures of being a working parent are significant, so a key benefit for them is flexible working. There are many ways this can be achieved. Options include flexible start and finish times around core hours.  The ability to work from home and time off to attend appointments during the day (provided that the time is made up).

A major event for any parent is the birth or adoption of a child. Children grow up incredibly quickly these days so spending time together particularly over the first few weeks are very important.  Offering enhanced terms for maternity, paternity and adoption leave and the relatively new ability to share parental leave are all viewed as significant family friendly benefits by employees.

Childcare vouchers are a simple family friendly benefit to provided, generally by salary sacrifice. The cost of providing these will be mitigated by the savings in employer National Insurance contributions on the sacrificed salary. It should be noted that a new government scheme is being introduced in 2017 and there are winner and losers as a result of the changes so these need to be communicated.

One benefit that is popular and of benefit to all employees is the offer of retail and leisure discount vouchers or pre-paid cashback cards as they put money back into their pockets. They can help make treats such as meals out, trips to the cinema or theme parks more affordable and enable families to have some fun together. Many of these schemes give discounts at the high street chains we all use so that is money back on everyday spending. Employees that have a happy home life, come to work happy. This helps motivation and productivity while costing little to arrange.

On the issue of quality family time, the ability to buy additional holiday is another benefit many find attractive.

The ability to extend healthcare benefits such as private medical insurance and health cash plans is also attractive, even if the employer recovers the cost for the family members as this would be significantly cheaper than if employees sourced this themselves.

The overall message is that flexibility is key and so is good clear communication of all the benefits available. We are all time poor to some extent (working parents particularly so). Fortunately modern technology makes this achievable. Management must also buy into the benefits on offer and allow the flexible working to be achieved in practice. The provision of some of these benefits has a cost attached but employers should not underestimate the value that a happy, strongly motivated workforce has in terms of productivity, staff retention and staff recruitment.

Robert Young’s article in Pay & Benefits Magazine, published November 2016.

Should you Outsource Payroll and Employee Benefits Support?

Every employer needs payroll and many also decide to provide employee benefits. This means deciding whether to undertake this work internally, or utilising outside specialists.

Payroll

For any business ensuring that employees are paid on time, and correctly, is vital. Staff morale will soon suffer it this does not happen.   If the business is to avoid fines it is important that information passed to HMRC is on time and accurate.   With the introduction of Real Time Information (RTI) a few years ago, this can only be achieved electronically.  HMRC has provided some basic tools but as the HMRC tool does not produce payslips this is of limited use in practice.  There are many payroll systems on the market, some of which can be obtained at no cost, or low cost for very small businesses.   Unfortunately payroll has its own language and whilst some aspects are straightforward, others can cause problems.

Why do it yourself?

For a small business owner who is prepared to invest some time and energy in investigating the market, choosing some appropriate software, learning how to use it, and who operates a simple pay structure, they may well decide that they can undertake this role themselves or add this to the role of their bookkeeper.

As the business and the size of the payroll grows, a payroll specialist may be employed, initially as part of the accounting team and eventually as a separate unit itself.   The accuracy of payroll processing relies on the provision of accurate data, and as the business will need to produce this data, it may seem simpler to keep everything in house.  The data can be reviewed, checked and processed without the need to consider how it can be exported safely and securely.   Keeping everything in house may appear to provide greater flexibility to make adjustments more easily, respond to changes more quickly and keep everything within a small trusted team.    You may prefer this feeling of having greater control of a task that is vital to keep staff happy and motivated.

Why outsource?

For some businesses, however, there is an issue in where this private data can be held securely and confidentially.   They may operate from a small office or indeed no office at all.   It may therefore be better for this data to be held securely at another place.

The amount of time involved should not be underestimated, particularly if payroll is run weekly with staff working variable hours.

As we move closer to the deadline for smaller businesses to deal with pensions Automatic Enrolment, this will add further complications and processes to the payroll function.

For a large business the outsourcing issue is different. Although they have the ability to hire the appropriate resources, there are times when they are under pressure to reduce headcount or fixed costs so may not wish to directly employ the resources necessary or fund the additional IT infrastructure that may be required, particularly when making payments to thousands of employees weekly.

A specialist outsourcer can bring a number of benefits and the real cost may be less than it first appears.   As a business owner, you will have started your business because you have a passion for it, not due to a great desire to understand the world of payroll. If you devote the time you would spend dealing with payroll matters on your own business instead, then not only are you likely to enjoy this more but you will be concentrating on growing your own business with the rewards this will bring, leaving the specialist payroll bureau to deal with this essential administration, as this is their passion. If you employ staff to undertake the payroll function, they are likely to be salaried and therefore a further fixed cost overhead on the business.

An outsourcer will bring to you greater resources to deal with issues. If you only have one person who deals with payroll what happens if they are off sick at a key point in the pay cycle?  A specialist outsourcer will provide in depth technical knowledge and have the experience and flexibility of a large team, yet you will only pay for the support you need.

In the world of payroll, like everything else, nothing stays still for long so there will be legislative changes to keep up with.   A good software provider, if they have a good support function, should ensure that you are kept up to date on these issues but an outsourcer will alert to you to, and guide you through any changes, identifying the key issues that may impact your business.  There are issues such as sick pay and maternity pay to deal with and the levels of these and the rules surrounding them do change from time to time.

It will not have escaped your notice that the UK has recently voted to leave the European Economic Community (EEC). No one is currently sure of the actual implications of Brexit, but this could lead to more changes.  As each European country retained their own tax systems, it is to be hoped that there will not be too many implications for payroll processing.  However an outsourcer will keep a keen eye on developments and be ready to react to any changes.

Employee Benefits

Many smaller businesses provide few employee benefits in order to keep the payroll processing as simple as possible.   Others take the view that they pay their staff and it is up to them decide how to spend this money and whether to purchase benefits such as life cover or not.  However, in a competitive world, it is often necessary for an employer to offer some benefits in order to attract and retain key employees needed to develop and grow your business.   Some benefits are straightforward to provide but others are complex and again subject to their own language and legislative requirements.

If you are spending money on employee benefits, it is important that the benefits are obtained at the best possible price, constructed in the most appropriate way, and appropriate to the needs of your workforce.

While many very large companies employ benefit and reward managers, smaller businesses typically rely on either the Finance Director, Human Resources Director or business owner to deal with this.

Why do it yourself?

You would need to pay an outsourcer whereas an internet search and a few telephone calls will obtain at least a few providers of any benefit you may wish to offer.   A little time in reviewing their offerings and a decision can be made and implemented.   Indeed at the simplest level the provision of tea and coffee or in this healthy era, fresh fruit, may simply require for a small business the occasional trip to the supermarket.    There are a number of other benefits that are relatively simple for a business to find directly such as childcare vouchers, or bike to work schemes.    A good provider should also provide marketing materials and explain how the benefit impacts on payroll.

Other typical employee benefits such as pension, life cover, income protection, and private medical cover or health cash plans are not as straightforward.

Why outsource?

The time that it takes to undertake the required research should not be underestimated and may not result in finding the best provider.

If you have a small HR team, then their focus should be on the people issues, ensuring that you maintain a happy and motivated workforce rather than being involved in the detail of seeking the best providers for different benefits, particularly where they may have no experience in doing so.

An outsourced employee benefit specialist will give a smaller business access to the same skills that a large company may employ directly, with the ability to work with the appropriate in house personnel to formulate the appropriate benefit strategy for your business and then seek the best providers for each aspect.

At one level money purchase pensions are straightforward, but pensions has a language all of its own with much associated legislation and regulation.   In addition the State provision of pension has changed recently and is likely to change again.   It is not always easy to ascertain the full costs of an arrangement.  Although the difference between an annual management charge of 0.4% and 0.6% does not sound much, your younger members of staff will be investing for 30 to 40 years and over this amount of time the impact of this can be significant.   There is also the issue of where the funds should be invested which can have a significant impact on the final outcome.

Most large employers provide life cover but smaller employers have tended not to. However this is a popular benefit with staff and even for small groups can be purchased on terms that are far less than it would cost the employees direct.   The key is knowing which insurers are competitive for smaller groups, which your outsourcer will know.   Smaller business may decide not to offer benefits because they are too costly whereas a specialist could demonstrate that this is not the case and therefore enable a wider employee benefit package to be offered, perhaps helping attract staff to the business and retain them.

As we move into the post Brexit world, businesses will be faced with a number of changes particularly if they are trading internationally and new trading agreements are negotiated.   The provision of State and private benefits has never been unified across the various countries within the EEC.   As a result there are unlikely to be many changes directly as a result of Brexit.  Of greater issue in the UK is the Treasury’s  focus on salary sacrifice arrangement and the potential for this to be withdrawn.   The provision of childcare is already changing in 2017 with the introduction of a new Government Scheme, but other benefits such as bike to work, provision of mobile phones, tablets and computers and optional employee pension contributions are tax efficient at least partially due to being provided on a salary sacrifice basis.  This was considered in the last budget and no action was taken but a further review may take place.

In summary although there is a direct cost if a specialist outsourcer is used, and to some extent at least a perceived relinquishment of control,  this can be offset by internal resources being more profitably directed to your own business, and savings being made due to the experience and knowledge of the specialist and the alternative proposals they can provide.

Summer Budget 2015

Earlier this month the Chancellor delivered the first conservative Budget for 18 years. Various announcements were made which affect UK registered pension schemes. A summary of the main changes is as follows:-

Tax relief on pension contributions for ‘high earners’

At present, the Annual Allowance for tax relievable pension contributions is £40,000 p.a.. Individuals also have the ability to carry forward unused allowances from the previous three tax years in certain circumstances.

The Chancellor announced that from 6 April 2016, anyone with an ‘income’ in excess of £150,000 will have their Annual Allowance reduced. This reduction will be tapered from £40,000 down to £10,000, with every £2 of income over £150,000 leading to a reduction in Annual Allowance of £1. Therefore, anyone with an income of £210,000 or above will have an Annual Allowance of £10,000. Furthermore, individuals will only be able to carry forward the tapered Annual Allowance to future tax years if this is unused.

The definition of income to be used is quite wide ranging and is expected to include salary, bonuses, rental income, salary sacrifice pension contributions, employer pension contributions etc. We will have to wait and see the makeup of the final legislation, but anyone with expected income within the above range will find it quite difficult to pinpoint the exact limit on their tax relievable contributions during the tax year in question.

Changes to Pension Input Periods (PIPs)

In light of the above proposals, the Chancellor has announced immediate changes to the Pension Input Period rules affecting all individuals. A PIP is the period over which a member’s contributions are valued in order to test them against the Annual Allowance. In most cases, a member’s PIP is aligned to the tax year, but this is not always the case. The changes that have been announced to the PIP rules are as follows:-

· Any PIPs active on 8 July 2015 will cease on that date.

· A new PIP commences on 9 July 2015 and will cease on 5 April 2016.

· Transitional rules will apply for contributions made on or prior to 8 July 2015, giving individuals an Annual Allowance of £80,000 (plus the usual carry forward rules).

· The Annual Allowance from 9 July 2015 to 5 April 2016 will be £0, but up to £40,000 of the unused Annual Allowance from the period up to 8 July 2015 can be added to this (plus the usual carry forward rules).

· Future PIP’s will be aligned to the tax years and individuals will no longer be able to alter their PIP.

All in all, these changes are quite complicated for the 2015/2016 tax year, but are simplified thereafter. Please contact your usual consultant if you or your scheme members need any assistance in working out the maximum allowable tax relievable contributions for the 2015/2016 tax year in light of the above changes.

Reduction in the Lifetime Allowance from 6 April 2016

As announced previously, the Lifetime Allowance will reduce from £1.25m to £1m from 6 April 2016. Protection will be offered for individuals who feel they will be affected by this reduction and we will be writing to clients separately on this issue as and when the protection regime is announced.

The Lifetime Allowance should increase in line with CPI from April 2018.

Changes to the taxation of lump sum death benefits

The benefits that can be paid on the death of a member altered from 6 April 2015. These changes were covered in previous newsletters. Any lump sums payable in respect of a member who passed away after the age of 75 are currently taxed at 45% for the 2015/2016 tax year. The Government previously indicated that from 6 April 2016 the tax rate would change to the recipient’s marginal rate and this change has now been confirmed. Any payments made to non-individuals (such as a company or a trust) will continue to be taxed at 45%. Lump sums payable in respect of members who pass away prior to age 75 continue to be paid tax-free, provided the payment is made within two years of the date of death and subject to the usual Lifetime Allowance rules.

Delay in changes to annuities in payment

The Chancellor previously announced that from April 2016 members who have already purchase an annuity will be able to sell these contracts on a secondary annuity market. This would presumably then allow the member to flexibly access the current capital value of the annuity. However, these plans have been put back to April 2017.
It should be noted that any decision to cash in an annuity contract (if the rules go ahead) should not be made lightly. It is likely that this secondary annuity market will be relatively small and it is doubtful that this will offer value for money to individuals.

Consultation on pension tax relief

Probably the most significant announcement in the Chancellors Budget was that of a Green Paper on the future of the pensions industry. The Government are asking if the current ‘exempt-exempt-taxed’ operation of the pension system is the best mode of operation. They are seeking opinion whether an alternative ‘taxed-exempt-exempt’ system would be clearer to understand and would be a greater incentive for savers.

The current system operates by tax relief being given on contributions paid into a registered pension scheme (exempt). The majority of the growth within the fund is tax-free (exempt). The benefits payable on retirement are taxed (taxed) except for the tax-free retirement lump sum.

The Government are asking if an alternative system might be better. Paying contributions from taxed income with no tax relief granted (taxed), growth within the fund tax-free (exempt), then benefits payable on retirement would also be paid tax-free (exempt). This is essentially the way the ISA regime operates.

The consultation ends on 30th September and anyone is free to respond to the consultation. It remains to be seen what changes (if any) will be made as a result of this consultation. We expect the Government are hoping that a move over to a similar system to ISA’s will attract more pension savings. However, overall it is likely that pension savers would lose out on a change of this nature, as the current tax relief granted on contributions would generally out-weigh the taxable benefits paid from pension funds under the current system. Furthermore, as the current system allows a tax-free lump sum to be paid, a certain portion of the current system operates on an exempt-exempt-exempt basis, and this would be lost altogether.

Please do not hesitate to contact your usual consultant at Hanover if you wish to discuss any of the above points in more depth.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Changes to Legislation effective 6 April 2015

During the course of 2014 and early 2015 we sent you Updates outlining proposed changes to legislation. These changes have now been enacted with effect 6 April 2015 and we felt we should write to you again to remind you of the changes which have taken place.

The main changes are:

1. For members who have not yet taken their Retirement Benefits.

From a certain minimum age (usually age 55) you can elect to apply your individual fund to pay 25% (this may be more for certain members with protected lump sums greater than this as at 5 April 2006) as a tax free lump sum with the balance forming a drawdown fund from which you can elect to draw income from time to time to time-subject to income tax which may take you into a higher income tax bracket. No maximum rate under this so-called “flexi access drawdown” applies-subject of course to the amount held in your individual fund.

Legislation also permits you to elect to take your individual fund as a so-called Uncrystallised Funds Pension Lump Sum. 25% of the value of your individual fund (subject to a maximum of 25% of the Lifetime Allowance-please note that this is inclusive of all pension arrangements you have) will be tax free and the balance will be taxed as income.

When an amount is paid from your flexi-access drawdown fund or an Uncrystallised Funds Pension Lump Sum is paid your annual allowance for tax relievable contributions to defined contribution funds reduces from £40,000 per annum to £10,000 per annum.

You can elect to “phase” the taking of your retirement benefits.

If you elect, a scheme pension and/or the purchase of a lifetime annuity can be paid instead of flexi-access drawdown or an Uncrystallised Fund Lump Sum.

2. For members who have already taken/“crystallised” their benefits before 06/04/2015 and are in a so-called “Capped Drawdown” arrangement.

You can continue in the capped drawdown arrangement and will be subject to a maximum permitted drawdown each pension year as in the past. Triennial (or annual from the age of 75) reviews of the maximum permitted drawdown will continue. As long as any drawdown pension payment does not exceed the maximum permitted for a pension year you will retain an annual allowance of £40,000 per annum. The “annual allowance” is the maximum amount, across all your pension arrangements that can be contributed (or accrued in the case of defined benefit funds) and receive tax relief.

If you do not want to remain in your existing capped drawdown arrangement you can elect to enter a flexi access drawdown arrangement and be entitled to draw as much income as you wish subject to a maximum of your individual fund, and income tax. As soon as an amount is paid from your flexi access drawdown arrangement the annual allowance for defined contribution pension schemes of which you are a member reduces to £10,000 per annum.

You retain the right to elect a scheme pension or the purchase of a lifetime annuity instead of capped drawdown or flexi-access drawdown pension.

3. Changes to the Taxation of Death Benefits

The Trustees will be guided by the member’s Expression of Wish/Nomination of Beneficiary Form but retain the discretion to pay the balance of the member’s individual fund at date of death as they decide to beneficiaries. Benefits can be paid in lump sum form, drawdown pension form, scheme pension form or by the purchase of an annuity, or by any combination of these forms of benefits.

The categories of person who can now potentially “inherit” a member’s individual fund

through payment of pension benefits have been extended. Before 6 April 2015 only a dependant/s’ pension on death could be paid (normally to a spouse or financially dependent child under 23). Following the changes, in addition to a dependant, a “nominee” or “successor” can now also “inherit” a member’s fund (but this is not currently applicable for members in receipt of a Scheme Pension at date of death).

A nominee can be anyone who has been nominated by you as a member, other than a dependant. If no nomination has been made, and there are no dependants the Trustees/Scheme Administrator can nominate an individual to become entitled.

A successor can be anyone nominated by the previous beneficiary, or if no nomination has been made by the beneficiary, by the Trustees/Scheme Administrator.

3.1 Benefits On death before age 75:

On death before attaining age 75, the death benefit/s (both lump sum payments to beneficiaries, and/or dependants’, nominees’ and successors’ drawdown pensions) are now tax free (including Inheritance Tax) up to the value of your Lifetime Allowance-but see the note below re members in a Scheme Pension arrangement. If you do not have Enhanced Protection, Primary Protection, Fixed Protection 2012 and Fixed Protection 2014 your Lifetime Allowance is the Standard Lifetime Allowance which is currently £1.25 million.

3.2 On death after age 75:

On death after age 75 lump sum death benefits will be taxed at 45% for payments made in the 2015/16 tax year. After 5 April 2016 it is proposed that the tax will be at the recipient/s’ income tax rate. If the Trustees direct that drawdown pensions are to be payable to beneficiaries (dependants, nominees and successors) these will be taxed at the recipients’ income tax rate.

3.3 Comment

It can be seen from the above that there may now be far greater advantages in retaining funds within the pension fund as these can be “passed on” in a tax efficient manner to nominated beneficiaries by creating flexi access drawdown funds for them with the amount of your individual fund held in the fund when you die. The funds left in the pension fund will also continue to receive a largely tax free build up. You should seek advice if you are unsure of your options. The legislation may of course change in future.

3.4 Members receiving a Scheme Pension

Only a dependant’s flexi access drawdown pension can be paid on death both before and after age 75-no flexi drawdown arrangements can be set up for a nominee or successor. Lump sums can be paid, at the Trustees’ discretion to beneficiaries.

4. Expression of Wish/Nomination of Beneficiary in the Event of Death

You should give thought to updating your Expression of Wish form, now known as a Nomination of Beneficiary form, which will guide the Trustees on how you wish funds held in the scheme at your date of death to be utilised. Please note that the Trustees cannot establish a nominee flexi access drawdown fund on your death for an individual who is not a dependant if a dependant (usually your spouse or children financially dependent on you aged 23 years or under) is still alive, unless you have nominated that individual.

5. Revised Rules

We believe that the new legislation may override the provisions of the scheme’s Rules. However, as in the past, you should give consideration to updating the Rules governing your scheme so that they mirror as close as possible the existing legislation. We can provide an updated set of Rules at a cost of £400 plus VAT.

6. Proposed Changes from 6 April 2016

6.1 Reduction in Lifetime Allowance to £1million.

The Lifetime Allowance is likely to be reduced to £1 million from 6 April 2016, and from 6 April 2018 it is proposed that it will increase annually in line with Consumer Price Index (CPI).

6.2 Members with Annuities.

It is proposed that if you have purchased a lifetime annuity that you will be able to
trade/assign this on the open market subject to the agreement of the annuity provider. The proceeds would be taxed as income.

Please do not hesitate in contacting your usual consultant if you have any queries, or wish to discuss the changes in more depth.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

In his last Budget before the election, Chancellor George Osborne has reduced the Lifetime Allowance (LTA) again and published a call for evidence on creating a secondary market for annuities.

With effect from 6 April 2016, the LTA is reduced from £1.25 million to £1 million. It will then increase annually in line with CPI from 6 April 2018. HMRC analysis shows that less than 4% of individuals currently approaching retirement have a pension pot worth more than £1 million, so the change will affect only the wealthiest pension savers. The Annual Allowance (AA) is unchanged.

A few days earlier, Ed Miliband pledged to reduce both the LTA and AA to fund lower tuition fees for university students. He said that Labour would also restrict tax relief on pension contributions for those earning more than £150,000 a year from 45% to 20%. This led to the Association of Consulting Actuaries (ACA) sending an open letter to all of the political parties calling for no “knee jerk” changes to an already complex system.

The government’s consultation on creating a secondary market for annuities aims to give people who have already bought an annuity the same flexibility in how they access the value of their savings as those taking their pension after April 2015.

From April 2016, people will be able to sell their annuity income to a third party, subject to the agreement of their annuity provider. The proceeds of the sale could then be taken directly or drawn down over a number of years, and would be taxed at their marginal rate. It is thought that purchasing the right to annuity payments could be attractive for a range of institutional investors.

Guide to retirement communications

The Pensions Regulator has published a draft guide for trustees, administrators and advisers of occupational pension schemes that provide flexible benefits (DC including AVCs and cash balance benefits) on changes to the disclosure regulations in relation to retirement communications.

From 6 April 2015, where the disclosure regulations apply, trustees must automatically tell affected members how to access the new government service Pension Wise. This must be at least four months before the member reaches their normal retirement date or, if the member is over or within four months of minimum pension age (currently 55), when there is contact with them about taking their flexible benefits. In addition to signposting Pension Wise, the member must also be given information about the options available to them within the scheme, and potentially from other pension providers if they were to transfer.

The guidance includes generic risk warnings on the four main retirement options (annuity, flexi-access drawdown, lump sums at different stages and cashing in the whole pot) which the regulator suggests should be sent at the point the member is required to make a final decision about how to take their retirement benefits (i.e. later than the initial information). The member should also be asked to confirm whether they have received Pension Wise guidance or regulated advice and that they have read the generic risk warnings.

Company news

The chairman of the consortium that has bought BHS for £1 has said that the retailer’s pension fund is the biggest challenge facing the company. The fund is reported to have a deficit “significantly higher than £100m” with the company currently paying contributions of £10m per year.

Unions at Tata Steel are to ballot workers on industrial action over plans to close the company’s final salary scheme and replace it with a defined contribution scheme. The move would affect around 17,000 workers.

The Pensions Regulator has banned two individuals and a trustee company, Avalon Pension Trustees Limited, from acting as pension trustees, following a pension scams investigation.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Government unveils Pension wise

The government has unveiled the name and logo to be used for the new guidance service that Chancellor of the Exchequer George Osborne promised would accompany the pension freedoms coming into effect for defined contribution schemes in April 2015.

Pension wise (www.gov.uk/pensionwise) will provide free and impartial guidance for savers approaching retirement, either online, face to face or by telephone. The service will be delivered by the Citizens Advice organisations and The Pensions Advisory Service.

Economic Secretary to the Treasury Andrea Leadsom said “We want people to be empowered to make informed and confident choices. Pension wise is a distinctive brand, making it easy for consumers to know where to go for help and guidance.”

In order to protect consumers from imitators of the service and to ensure the guidance brand is trusted, the government will make the imitation of Pension wise illegal.

Consumers can now register to get early access to the service and give feedback about how the service could be improved.

Pensions Minister proposes further changes

Pensions Minister Steve Webb has floated the idea that existing pensioners should be able to cash in their annuities, in order to have the same flexibilities as will be available to new retirees after April 2015. The government has already announced that beneficiaries under a joint life annuity will be able to receive future payments tax free where the annuity holder dies before age 75, consistent with the treatment for post 2015 drawdown arrangements. Neither of these changes are likely to apply to defined benefit schemes.

ACA survey of smaller firms

The Association of Consulting Actuaries (ACA) has published a survey report into pension savings at smaller employers (those employing 1-249 employees). The report found that most employers were auto-enrolling employees that were not previously in pensions into a multi-employer scheme such as NEST with contributions at or close to the minimum rate of 1%. Most employers with pre-existing schemes have kept those arrangements for existing employees, although 15% have closed them in favour of new arrangements.

The report also calls on the government to review auto-enrolment policy after the election to avoid potential financial difficulties for smaller employers caused by the increases to minimum contributions scheduled for 2017 and 2018. A copy of the report is available at <ahref="http://www.aca.org.uk">www.aca.org.uk.

Company news

The trustees of the Nortel Networks UK Pension Plan, supported by the Pension Protection Fund, have secured £340m of funding from failed Canadian parent company Nortel Networks Limited (NNL) but have failed in their attempts to secure further funding based on the Financial Support Direction served by the Pensions Regulator on NNL (and other Nortel group companies) in 2010.

Tesco has announced plans to close its defined benefit scheme to new and existing members as part of a raft of measures aimed at savings the company £250m per year. The scheme has around 350,000 members, of which around 200,000 are current employees.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

FCA retirement income report published

The Financial Conduct Authority (FCA) has published an interim report on its retirement income market study which seeks to assess whether competition in the annuity market is working well for consumers. The market study follows a thematic review of annuities which the FCA completed earlier this year.

The provisional findings of the report are that the market is not working well and that many consumers are missing out on a higher income by not shopping around or by not purchasing the best annuity for their circumstances. The report proposes the following remedies:

• Requiring firms to make it clear to consumers how their quote compares to other providers on the open market;

• Recommending that firms take into account the effect of how options are presented on consumers’ decision-making;

• Working with Government to develop an alternative to the current “wake-up” pack and other at-retirement communications;

• In the longer term, recommending the development of a “Pensions Dashboard” which would enable consumers to view all their pension savings (including their state pension) in one place;

• Continuing to monitor the market using a combination of consumer research, market data and on-going sector supervision.

Critics accused the FCA of “sweeping past mis-selling under the carpet”. Although the annuity market is likely to be significantly affected by the Government’s reforms due to come into effect in April 2015, the FCA’s analysis shows that for people with average-sized pension pots, the right annuity purchased in the open market offers good value for money relative to alternative drawdown strategies.

40th NAPF Annual Survey

The National Association of Pension Funds (NAPF) has published its 40th Annual Survey, illustrating the huge changes that have taken place in the pensions landscape since its first survey in 1975.

For the first time, active membership of DC schemes now exceeds the active membership of private sector DB schemes. With the continued roll out of automatic enrolment, this trend is set to continue. However, once deferred and pensioner members are included, DB schemes remain the dominant force.

The average contribution rate for DC schemes is 11.7% (down from 12.5% in 2013). This consists of 7.6% from the employer and 4.1% from the employee. Many new automatic enrolment schemes have contributions at the minimum rate.

Automatic transfers to begin in 2016

Pensions Minister, Steve Webb, has announced that automatic transfers, or “pot follows member”, will begin in Autumn 2016. The policy aims to make it easier for people to keep their pension savings in one place when they change employers. The government will publish further information about the implementation model and timetable in early 2015, ahead of consulting on draft regulations.

Company news

Pilots at Monarch Airlines face losing £10m in benefits because of the effect of the Pension Protection Fund (PPF) compensation cap. Monarch’s pension fund transferred to the PPF as part of the sale of the airline to Greybull Capital. However, many of the pilots’ pensions are above the cap of £26,572 pa for retirement at age 55.

Legal & General have secured the buyout of 22,000 pensioners of the TRW Pension Scheme covering £2.5 billion of liabilities. The buyout is the largest such transaction in the UK to date.

Hanover Pensions would like to wish all of its clients and contacts a merry Christmas and a prosperous New Year.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

DC governance and charge cap confirmed

The Department for Work and Pensions (DWP) has published a Command Paper “Better Workplace Pensions: putting savers’ interests first” which builds on its consultation in March 2014 and confirms that a charge cap of 0.75% of funds under management will be introduced on the default funds of qualifying workplace pension schemes from April 2015.

Member-borne payments for advice to employers – consultancy charges – will be banned from workplace personal pensions from April 2015 and from all schemes, along with commission payments and active member discounts, from April 2016. The level and scope of the charge cap will be reviewed in 2017.

The paper also confirms that the trustees of money purchase occupational schemes will have new duties to ensure that default arrangements are designed in members’ interests and kept under regular review, that core financial transactions are processed promptly and accurately and that they assess the value of transaction costs and charges borne by scheme members.

Providers of workplace personal pensions will need to establish Independent Governance Committees (IGCs) with similar duties and there will be new independence requirements for the trustees of multi-employer master trusts.

Separately, the government has announced that, for joiners from October 2015, short service refunds from money purchase occupational schemes will only be permitted for leavers within the first 30 days of membership rather than the current 2 years.

Regulator issues first AE fines

The Pensions Regulator’s latest automatic enrolment compliance and enforcement bulletin (www.thepensionsregulator.gov.uk/docs/automatic-enrolment-use-of-powers-september-2014.pdf) has shown that enforcement activity is increasing, with the first employers being fined for not meeting their duties. Three fixed penalty notices were issued and 163 compliance notices.

The period coincided with a significant rise in the number of employers reaching their deadline to complete their declaration of compliance, with thousands of medium sized employers (150-250 employees) reaching their staging date in April 2014.

New appointments

Lesley Titcomb has been announced as the new Chief Executive of the Pensions Regulator with effect from 2 March 2015. Ms Titcomb is currently Chief Operating Officer and Board member of the Financial Conduct Authority (FCA). She originally qualified as a Chartered Accountant with Ernst and Young.

Otto Thoresen has been appointed as the next Chair of the National Employment Savings Trust (NEST) Corporation commencing on 1 February 2015. Mr Thoresen is currently Director General at the Association of British Insurers (ABI).

Company news

Following the recent settlement in the case of the Lehman Brothers UK pension scheme, a similar deal has been reached for the MG Rover Group senior pension scheme which is now expected to avoid entry into the Pension Protection Fund (PPF).

Airline group, Monarch, has been sold to turnaround specialist Greybull Capital for a nominal sum, with the PPF taking over the pension liabilities in return for a 10% stake in the business. The estimated pension shortfall is £660m.

The Pensions Regulator has published “section 89” reports on the Kodak Pension Plan which has so far (mainly) avoided entry to the PPF and the UK Coal pension schemes (which haven’t).

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Chancellor abolishes 55% ‘death tax’

In his speech to the Conservative party conference, Chancellor George Osborne announced that the current 55% tax on defined contribution pension funds passed on at death will be abolished.

From April 2015, individuals with a drawdown arrangement or with uncrystallised funds will be able to nominate a beneficiary to pass their pension to when they die. If the individual dies before they reach the age of 75, the beneficiary will pay no tax, whether it is taken as a lump sum or as drawdown. If the individual dies after age 75, tax will be at the beneficiary’s marginal rate, or at 45% if it is taken as a lump sum. From 2016-17, the Government also intends to replace the 45% with the beneficiary’s marginal rate.

Currently, if the individual is under 75 and has uncrystallised funds, there is no tax payable (subject to the lifetime allowance). After age 75 or once benefits have started to be taken, an individual’s spouse or dependant can receive a pension or drawdown, taxed at their marginal rate, but any other beneficiary (apart from a charity) is taxed at 55%.

The policy is expected to cost around £150 million per annum. Mr Osborne said: “People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down.”

PPF levy proposals to go ahead

The Pension Protection Fund (PPF) has announced that its proposals for the 2015/16 levy (see the June 2014 issue of Update) are to go ahead largely as planned. The PPF has also set the levy estimate for 2015/16 at £635m, nearly 10% lower than the 2014/15 estimate (although this reduction is not due to the new rules – it is the same amount the PPF would have expected to collect if it had made no changes).

Changes that have been made since the consultation include:

• Reducing ‘scorecard arbitrage’ by limiting the ‘consolidated’ scorecard to genuinely large or complex companies. However, companies filing abbreviated accounts at Companies House will be able to voluntarily share full accounts with Experian;

• Mortgages that are not relevant to insolvency risk will be excluded;

• Asset backed contributions involving assets other than UK property will be recognised, although only to the extent they are worth in the event of insolvency.

Trustees and employers are urged to check their data and scores at www.ppfscore.co.uk before they start to be used from 31 October 2014.

Auto-enrolment research published

Research published by the Pensions Regulator shows that 20% of small and almost half of micro employers do not know their staging date for automatic enrolment. This is despite other data released by NEST suggesting that the majority of these employers support the idea of workers having access to a workplace pension. www.thepensionsregulator.gov.uk/docs/employer-automatic-enrolment-research-spring-2014.pdf

Company news

The Wedgwood Collection of art, ceramics and paintings has been saved by public donations. The collection faced being broken up to meet the deficit in the Waterford Wedgwood pension scheme, which arose when the rest of the employers in the scheme went into administration in 2009. The museum remained solvent and became the “last man standing”.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.