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Article | Pensions Briefing

UK pensions headlines: February 2024

February 26, 2024

This month's summary of recent news in UK pensions covers changes to SMPIs, the new pensions tax regime and an update on automatic enrolment.
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Significant updates to UK Statutory Money Purchase Illustrations

Spencer Bowman | February 22, 2024

Annuity rates used for Statutory Money Purchase Illustrations (SMPIs) are based on gilt yields at 15 February each year. The yield was significantly higher in 2024 than in 2023, leading to higher pension projections.

Separately, on 9 February the UK Financial Reporting Council (FRC) issued AS TM1: Statutory Money Purchase Illustrations; version 5.1, increasing the accumulation rates for funds in volatility groups, 1, 2 and 3 by 1% pa, which would now be 2%, 4% and 6% respectively. The accumulation rate for volatility group 4 remains unchanged at 7% pa.

The guidance states that version 5.1 “is effective for statutory illustrations based on calculations performed on or after 6 April 2024”. In its “Feedback Statement” on the consultation on the revised standard, the FRC acknowledged that there is ambiguity as to whether Version 5.1 applies to Illustration Dates before 6 April 2024 where calculations are actually performed after 5 April 2024 or only to cases where the Illustration Date is on or after 6 April 2024. The FRC recognises that different providers may have different interpretations and is comfortable with either interpretation. However, FRC “intends to conduct further stakeholder engagement in due course on this matter to consider if further amendments may be appropriate in any subsequent review”.

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Further clarification on the new UK pensions tax regime

Dave Roberts, Kirsty Cotton | February 15, 2024

His Majesty’s Revenue and Customs (HMRC) has issued a further Lifetime allowance guidance newsletter: February 2024, bringing much-needed clarity to certain aspects of how the pensions tax regime will operate from 6 April 2024, when the concept of the Lifetime Allowance (LTA) ceases to exist. The Newsletter takes the form of FAQs followed by more substantive sections and, while some of the FAQs do little more than confirm understanding, the Newsletter does reveal genuinely new information and/or changes. The main points worth drawing out include:

  • Removal of the cap on the pension commencement excess lump sum (PCELS) – the successor payment to the lifetime allowance excess lump sum (LAELS).
  • Confirmation that the one-off exercise requiring schemes to provide a LTA usage statement where annual statements are not being issued (eg in relation to uncrystallised funds lump sum payments (UFPLS)) will be narrower in scope than many feared. It will NOT apply to former members of the scheme, only to individuals who retain benefits under the scheme.
  • The current age 75 cut-off for provision of annual statements of allowance used will be removed (schemes will need to provide these irrespective of the member’s age)
  • Once a member has made an application for a transitional certificate of tax-free cash already taken, that application cannot be withdrawn and, if the certificate is granted, must use it (even if the certificated deduction is greater than would have been the case had the standard adjustment applied) as it represents the “correct” amount of tax-free lump sum drawn pre-6 April 2024.
  • Where a person has received a protected tax-free lump sum under the LTA regime, for the purpose of transitional certification, the amount paid is taken at face value eg where benefits were valued at £1,000,000 and a protected lump sum of £400,000 was paid, it is £400,000 that feeds through into the transitional amount (not 25% of £1,000,000)
  • Confirmation that pre-A day pensions in payment – where there has been a Benefit Crystallisation Event between 6 April 2006 and 5 April 2024 – will be taken into account for the purpose of transitional certification (the legislative provisions, as drafted, failed to capture these)
  • Where a person received a serious ill-health lump sum (or where a death benefit lump sum has been paid) under the LTA regime, that person’s individual lump sum and death benefit allowance (iLSDBA) will be reduced by 100% of the amount paid, even if a part of that usage relates to one or more benefit crystallisations where less than 100% was paid tax-free (eg where an earlier UFPLS payment had been made).

There are other useful clarifications across multiple areas and HMRC repeats its commitment to provide regular updates.

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Automatic enrolment: earnings thresholds and scheme quality tests unchanged

Kirsty Cotton, David Robbins | February 9, 2024

The DWP has completed its Automatic enrolment: review of the earnings trigger and qualifying earnings band for 2024-25. The lower earnings threshold, upper earnings threshold and earnings trigger have all been kept at the 2023-24 levels ((£6,240, £50,270 and £10,000 respectively). The review states that the DWP is looking to consult on the detailed implementation of the 2017 Review ambitions (ie removing the lower earnings threshold and reducing the minimum age from 22 to 18) “at the earliest opportunity”, but “the right implementation” will “include giving employers and savers the time to plan for future changes”.

Every three years, the DWP must review the alternative quality requirements for DC and DB schemes (the latter being essentially the cost of accruals test). The DWP has confirmed that there will be no changes to any of these tests for now. The relevant publication is somewhat misleadingly-titled Government response to Automatic enrolment: Alternative quality requirements for defined benefits and hybrid schemes being used as a workplace pension, as it not only contains a response to the DB/hybrid 2023 consultation but also CDC schemes and the DWP analysis of the position for DC.

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