Contents
- HMRC newsletter confirms U-turn on death benefits
- TPR's corporate plan for 2023-24
- IFS launches pensions review
- HMRC revises lump sum death benefit tax process again
HMRC newsletter confirms U-turn on death benefits
HMRC has published newsletter no.149 confirming publicly that it has revised the lump sum death benefits tax process as first featured in our Headline, of 6 April 2023 – so that schemes continue to use their current processes rather than the one that was announced in the Lifetime allowance (LTA) guidance newsletter and is now officially revoked. HMRC will develop a long-term position by April 2024 and will continue to publicise changes through LTA guidance newsletters.
The newsletter also confirms developments on the move to the online Managing Pension Schemes service including an update on the process for submitting Pension Scheme Returns.
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TPR’s corporate plan for 2023-24
The Pensions Regulator (TPR) has published its corporate plan, setting out its strategic priorities for the year ahead (as well as outlining its plans beyond 2024). Most notable is the reference to its preparations for bringing the new DB Funding Code into effect from April 2024, previously expected in October 2023. TPR reinforces its commitment to improving value for money (VFM) for defined contribution schemes, working alongside the Government and the Financial Conduct Authority to develop and implement a new framework once the formal response to the Government's recent consultation is published in the summer. Further work on VFM is expected ‘over the coming years’ to extend the new framework to include measurements for decumulation. TPR also plans to develop its automatic enrolment strategy to provide a more “targeted, efficient and effective” approach to enforcement and compliance.
Following the publication of its recent practical guidance on Equality, Diversity and Inclusion, TPR will start to engage with schemes to develop its understanding of how schemes are implementing EDI, to inform further work in this area and to develop and share best practice examples. As announced in a recent blog, TPR has also started to investigate whether schemes (with 100 or more members) have published their statement of investment principles and implementation statements onto a public website and will be assessing the quality of these disclosures, the results of which will feed into the DWP’s planned review of regulations underpinning climate-related and stewardship disclosures, later in 2023.
As part of its drive to improve standards on trusteeship and governance, TPR will be considering whether legislation should require each Trustee Board to appoint a professional trustee and also whether professional trustees should be regulated either by an accreditation or authorisation process.
Finally, TPR confirms that the General Code will be published in Q1 of the regulatory year, which runs from 1 April 2023 to 31 March 2024.
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IFS launches pensions review
The Institute for Fiscal Studies (IFS) has published: Challenges for the UK pension system: the case for a pensions review. This publication outlines the challenges regarding financial security in retirement for future generations and makes the case for a more detailed assessment.
The publication highlights concern about pensions adequacy noting that a fifth of private sector workers do not make any pensions saving in any given year and that most of those making contributions are saving less than the 15% that Lord Turner's Pensions Commission thought appropriate almost 20 years' ago. Worryingly, the publication provides evidence that the assumed rates of investment return on which the Commission based its recommendations are now too high, thereby making those earlier assumptions look optimistic. The IFS also expresses concern at the low – down to less than a fifth of such savers and falling – number of self-employed saving in a pension arrangement.
The IFS flags that individuals are likely to face substantial financial difficulties in older age and notes that the increased numbers approaching retirement who live in insecure private rented accommodation could lead to lower living standards and greater reliance on housing benefit in later life. It also notes the significance of reaching the State Pension Age (SPA) on household incomes with a significant number delaying their retirement until that age. The IFS finds that SPA rises in the past decade have led to increasing levels of relative poverty (particularly among women) approaching SPA, which prompts the IFS to question whether there should be greater State support for older people to remain in employment in the run up to SPA, or more flexibility in the timing of when people can draw their State pensions, something that the recent SPA review has also considered.
The IFS will pull together evidence of how well current pension policy is preparing people for retirement. It aims to publish a series of reports culminating in Summer 2025 with specific policy recommendations to improve retirement outcomes for future generations.
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HMRC revises lump sum death benefit tax process again
HMRC has announced that the recent change to the process for dealing with lump sum death in service payments, notified in its Lifetime Allowance guidance newsletter, will no longer take place. Instead, there will be a continuation of, broadly, the existing process. Under this, the scheme administrator will continue to provide information to the legal personal representatives (LPRs), who, if necessary, will inform HMRC that an amount in excess of available lifetime allowance (LTA) has been paid. HMRC will then ask the administrators for the identities of the recipients and the amounts paid to each, with the recipients assessed to income tax (rather than a 55% LTA charge) on their share of the excess.
For reference, on 27 March, the Lifetime Allowance guidance newsletter outlined that responsibility for deducting any tax due (on amounts in excess of the available LTA) was due to switch from the member's LPRs administering the estate, to the pension scheme. This would have necessitated the scheme administrator contacting the LPRs to ascertain the deceased member's available LTA. Tax would then have been deducted on amounts in excess of available LTA, based on the recipient's tax status.
HMRC responded to industry concerns with that approach, circulating (5 April 2023) an email to the industry group it established to consider Budget 2023 pensions tax issues) HMRC will publish a Newsletter (or similar) formally announcing the latest change, as soon as practicable, but in the meantime, the full text of its email follows:
"Good afternoon,
As you will be aware, on 15 March the Chancellor announced that he would introduce legislation to ensure that nobody faces a lifetime allowance (LTA) charge from 6 April 2023. As a result, where currently subject to a 55% tax charge above the LTA, the following payments will now be taxed at the recipient's marginal rate of income tax:
- LTA excess lump sum,
- Serious ill-health lump sum (SIHLS),
- Defined benefits lump sum death benefit (DBLSDB), and
- Uncrystallised funds lump sum death benefit (UFLSDB).
The LTA guidance newsletter, published on 27 March, provided further guidance. It set out that where schemes identify one of the above lump sums, normal PAYE rules would apply to these payments and that they would be treated as pension income.
It also highlighted that the process for dealing with DBLSDBs and UFLSDBs would change. Schemes were advised that they would need to first contact the Legal Personal Representative (LPR) of the deceased member to find out how much available LTA the member has, telling them the type and amount of the benefit to be paid. This would enable schemes to determine whether the deceased member's LTA had been used up and whether any of the benefit should be subject to tax at the beneficiaries' marginal rate.
Many representatives from across the industry have since raised concerns around this new process for the taxation of death benefits. These concerns were discussed in depth at the first LTA Working Group yesterday.
A strong preference had been expressed for maintenance of the current system. Under this process, if the member's LPR identifies a chargeable amount after payment of a DBLSDB or UFLSDB, they must report this to HMRC. It is HMRC that then assesses the tax due.
In light of concerns raised, we agreed to consider alternative options.
We are writing to confirm, therefore, that schemes may continue to use the current process for taxation of the DBLSDB and UFLSDB. Based on information provided by LPRs, HMRC will then raise marginal rate taxation (as opposed to an LTA charge) on the applicable portion of these payments. We would appreciate stakeholders help in communicating that HMRC will approach affected beneficiaries following the end of the tax year in line with the existing process but with marginal rate charge instead of lifetime allowance charge.
This process will continue until we develop a longer-term position for the full abolition of the LTA from 6 April 2024.
Further information will continue to be provided in LTA specific Pension Scheme Newsletters".
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