Technical Bulletin - September 2015
In a world where change is the only constant, we help you keep on top of the developments in financial services regulation, legislation and environment.
Here’s what happened in September:
FCA launches annuity mis-selling review
The Financial Conduct Authority (FCA) has launched a review into annuity mis-selling, which could see providers pay out compensation to consumers amid fears many should have been sold enhanced annuities but were not.
The FCA has begun looking at a large sample of annuity sales from the UK's major life companies since 2008. It is believed more than 600,000 pensioners have been wrongly sold a standard annuity, which meant the provider failed to take into account their health.
Many customers were not made aware that common ailments including diabetes and high blood pressure could have boosted their payouts by more than 20%. The FCA will look at hundreds of annuity contracts from each provider to establish whether customers were given a fair deal.
The FCA will also analyse telephone conversations between providers and their customers and all paperwork sent to customers before they retired. If the FCA finds the provider failed to treat its customers fairly, it will order it to issue compensation.
New crystallisation event
The Finance Act 2015 added a 13th Benefit Crystallisation Event (BCE) - number 5D.
BCE 5D is where a member dies before their 75th birthday and unused uncrystallised funds remaining at death are used to secure, on or after 6 April 2015 but before the end of a two-year period, a dependants' annuity or nominees' annuity in respect of the individual.
This closes the loophole which previously allowed a dependant to avoid a lifetime allowance charge by using funds in excess of the lifetime allowance to buy a dependant’s pension which did not count for lifetime allowance purposes. The option remains to wait until the end of the two-year period, when the LTA charge does not apply, but the income becomes taxable.
Response to Treasury’s pension tax relief consultation
The Treasury’s consultation on pensions tax relief closed on the 30 September. Although, the consultation had stated that all options were still on the table, including retaining the status quo, it appears from media reports the Treasury is already investigating how to manage a move to a ‘taxed exempt exempt’ (TEE environment) – ISA-style pensions. One way could be to run dual systems for pensions. But it appears the ‘nuclear’ option of changing every pension plan to the new basis is also being considered.
Intelligent Pensions submitted a response to the consultation. Our key views are:
- There should be no change to the current pension tax relief system for several years, particularly while auto-enrolment is still being implemented and so much work is still required to help retirees maximise their options under the new pension freedoms.
- We believe the public sector defined benefit system is a bigger priority for change and cost cutting. The private sector has moved to far greater personal responsibility of pension funding and the public sector should do the same.
- If there are to be changes to the current pension system, we believe reductions in the annual allowance and/or a move to an ETT basis would be the least disruptive measures. The tax exempt nature of pension investment is the least understood and valued benefit of pensions.
A PDF of our full response is available on request.
We expect to learn more about the Treasury’s preferred direction in the Autumn Statement (a date for which has yet to be set).
Individual protection and fixed protection 2016
The HMRC has recently published its latest pension schemes newsletter – number 72.
In it, it confirms the legislation for both the reduction in the lifetime allowance and the new protection regimes (fixed protection 2016 and individual protection 2016) will be delivered in the Finance Bill 2016. As a result it won’t be possible for scheme members to apply for protection until after April 2016.
This means individuals who want to rely on fixed protection 2016 can’t notify HMRC of their intention in advance. But they still need to start thinking about what arrangements they need to make to stop accruing benefits or paying contributions after 5 April 2016.
Qualifying Recognised Overseas Pension Schemes (QROPS)
The HMRC newsletter also covered the area of QROPS. HMRC has received numerous requests to confirm whether an overseas pension scheme is a Qualifying Recognised Overseas Pension Scheme (QROPS). But HMRC is unable to confirm this for any overseas pension scheme.
As a reminder, to be a QROPS:
i) the scheme must meet the requirements to be a Recognised Overseas Pension Scheme (ROPS)
ii) the scheme manager must notify HMRC that the scheme meets the ROPS requirements and undertake to provide information (to HMRC, other pension schemes and individuals) and to notify HMRC if the scheme ever ceases to be a ROPS
The published list shows that the scheme manager has notified HMRC, wishes to appear on the list and has undertaken to provide information (point ii), but this is all it shows. It does not show that the scheme meets the ROPS requirements (point i).
A scheme’s presence on the list does not guarantee it is in fact a ROPS. It is the responsibility of the individual and scheme administrator making the overseas transfer to check that the receiving scheme meets the requirements to be a QROPS. UK tax charges will arise if it does not – usually at 55% on the individual and 15% on the scheme administrator.
Checking the published list the day before the transfer will confirm whether the scheme has notified HMRC. But it will not confirm that the scheme meets the ROPS requirements. So HMRC is stating loud and clear to schemes and members that they have to do their own due diligence on QROPS, to check if a pension scheme meets the ROPS requirements, to make sure they avoid any UK tax charges.
Ilot vs Mitson – new ruling may increase attractiveness of trusts
A new UK court ruling may increase the attractiveness of using trusts to distribute benefits on death.
In English law, a testator generally has the ability to leave their estate to whomever they choose through their will, known as testamentary freedom. This means the money is their own to distribute as they wish after they have paid outstanding taxes and debts, and provided for those toward whom they have a legal obligation, such as dependent minors. This is in contrast to many European states, for example, where forced heirship rules apply.
But the recent judgement in Ilot V Mitson makes it legitimate in the UK to challenge provisions, or lack of provision, for adult children.
Here, Heather Ilott’s mother Melita Jackson left her entire estate of almost £500,000 to various animal charities upon her death in 2004. Ilott subsequently challenged the will under the Inheritance Act (Provision for Family and Dependents) 1975. Ilott, now 54, had left home with a boyfriend when 17. Jackson had apparently never forgiven her daughter and excluded her in the will, making it clear, through letters, she did not want her daughter to benefit upon her death.
In July the Court of Appeal ruled that Ilott, who has five children, did not receive appropriate provision from her late mother’s estate for her future maintenance. It also ruled that Jackson had “no connection” with the charities she had chosen to benefit though her will during her lifetime. Ilott was awarded £143,000 to buy her housing association property and a further £20,000 in cash as “additional income”.
The ruling creates a significant new incentive for clients to consider the use of trusts. Alongside the tax benefits a trust structure can enable from an estate planning perspective, they offer the opportunity to gain greater control over the distribution of wealth on death. As well as the Inheritance Act not applying to trusts, another useful feature is trusts are confidential - unlike wills that become public knowledge once probate has been obtained, and available for anyone to scrutinise through the Probate Registry.
With no such registry or provision existing for trusts in locations such as England & Wales, Jersey, Guernsey and the Isle of Man, a settlor choosing appropriate trustees can go to their grave with significant confidence.
Please contact us if you have any questions.
0141 226 1710