Pensions snapshot - November 2014

This edition of snapshot summarises some of the key legal and regulatory developments that occurred during November 2014 in relation to occupational pension schemes. The items covered in this edition are as follows:

• Pension Schemes Bill amendments in respect of the Guidance Guarantee
• Taxation of Pensions Bill receives first reading in House of Commons
• Changes announced to the taxation of lump sum death benefits
• McNee (PO-2780/PO-4183) discretionary distribution of lump sums and relevant factors
• Short service refunds from money purchase schemes to be restricted from October 2015

Pension Schemes Bill – amendments in respect of the Guidance Guarantee

A number of amendments to the draft Pension Schemes Bill have recently been laid before Parliament. These include amendments to create the framework for the provision of pensions guidance to money purchase scheme members who want to access their pension savings flexibly.  These amendments are currently being considered as part of the Bill's committee stage which ends on 6 November 2014.

Some of the key points to note from the proposed framework are:

• "Pensions guidance" is defined as "guidance given for the purpose of helping a member of a pension scheme to make decisions about what to do with the cash balance benefits or other money purchase benefits that may be provided to the member";
• HM Treasury will be responsible for ensuring members have access to the guidance, the "designated guidance providers" will initially be the Pensions Advisory Service and the Citizens Advice Bureau, and the Financial Conduct Authority will set the guidance standards and monitor compliance; and
• imitation of the guidance service by someone who is not a "designated guidance provider" will be a criminal offence punishable by imprisonment and/or a fine.

Crucially, however, we are still waiting to see exactly what the guidance will need to cover.

Taxation of Pensions Bill receives first reading in House of Commons

The draft Taxation of Pensions Bill has received its first and second readings in the House of Commons. The Bill contains the legislation which will enable people with money purchase pensions to access their pension savings flexibly (as outlined in the 2014 Budget) and if trustees allow members to do so.

Some significant changes have been made to the draft Bill since it was originally published in August. In particular, the Bill imposes new requirements on scheme members and administrators to provide each other with information where members flexibly access their money purchase pensions for the first time. This is intended to ensure that, in particular, the reduced Annual Allowance of £10,000 for money purchase savings is properly applied, but the requirements may be viewed as excessive by some.

The Bill also applies the flexible access options to non-UK pension schemes provided they consist of or contain UK tax-relieved funds. Broadly speaking, this ensures that non-UK scheme funds will be treated as if they were in a UK registered pension schemes for tax purposes.

Changes announced to the taxation of lump sum death benefits

At the recent Conservative Party Conference the Chancellor announced changes to the 55% special lump sum death benefit charge applying to certain lump sum death benefits paid from pension schemes.

The proposed changes, which apply to payments made on or after 6 April 2015 (even if the death occurred before that date) include a reduction in the special lump sum death benefit charge to 45% where the member was aged 75 or over at the date of death (although a further change is expected to apply marginal rate tax from 2016/17).

Also, the following lump sum death benefits will be tax-free if the member was under age 75 at the date of death:

• a pension protection lump sum death benefit;
• an annuity protection lump sum death benefit;
• a drawdown pension fund lump sum death benefit;
• a flexi-drawdown fund lump sum death benefit;
• a defined benefit lump sum death benefit; and
• an uncrystallised funds lump sum death benefit.

The Taxation of Pensions Bill already contains some of the legislation required to implement the proposals and further legislation is expected shortly.

It is worth noting that, despite these favourable changes to the taxation of lump sum death benefits, drawdown may nevertheless provide beneficiaries with more tax-efficient death benefits (assuming it is an option under the scheme).

McNee (PO-2780/PO-4183) – discretionary distribution of lump sums and relevant factors

A recent Pensions Ombudsman determination has highlighted the importance of thoroughly investigating the circumstances of deceased members and their potential beneficiaries before distributing a lump sum death benefit payable under discretionary trust.

Ms McNee was a deferred member of the Local Government Pension Scheme (LGPS) when she died in 2011. Her former employer exercised its discretion under the LGPS rules to pay a lump sum death grant from the LGPS to Ms McNee's estate for the benefit of her young son. Ms McNee's parents subsequently complained to the Ombudsman that the employer failed to pay the lump sum to them despite Ms McNee having completed a nomination form in 2005 in their favour.

The Ombudsman determined that, whilst the nomination form was not binding on the employer, the employer had failed to take account of all relevant matters in coming to its decision. In particular, it failed to give proper consideration to Ms McNee's parents as potential eligible recipients of the lump sum; something which could have been remedied by contacting the parents and asking them to provide details of their position.

The Ombudsman directed the employer to obtain information from Ms McNee's parents regarding their position and to then reconsider its decision in light of that information.

Short service refunds from money purchase schemes to be restricted from October 2015

The Government has announced that it intends to end the practice of providing short service refunds of contributions from money purchase schemes in respect of members who leave with less than two years' qualifying service.

However, this is not quite the "abolition" that it has been reported to be. The intention is that, from 1 October next year, money purchase schemes will only be permitted to pay refunds of contributions if a member leaves within 30 days of joining (although the change will not apply to members who join the scheme before 1 October 2015).

This represents another component in the Government's drive to help people save more for retirement through workplace pension schemes and will help pave the way for the new automatic transfer regime for money purchase schemes.

Defined benefit schemes and personal pension schemes will not be affected by the change.