"So that was pensions.....April 2003"
Hi! Here we are again with our summary of the month gone by and my attempt to put together a running diary of the pensions changes throughout 2003. Last month we got off to a good start by launching this new downloadable ‘magazine’ and we have great plans to eventually bring it to you every month in full colour with pictures, cartoons and cute logos and everything else you’d find in a regular publication. But for now, as I said in March, we’re not going to wait until we’ve got the thing looking good before we start publishing it, there’s too much going on in pensions right now for that. So, for the first few issues anyway, we’re putting it out as an extended BeeLine. Not as good, I know, but you can always print it out and staple the corner, even put some drawings on it yourself if you have the time, and before you know it you’ll have a half decent little mag to put on your coffee table and admire. It’s the content that’s important to me, as you know, and we’ve got a really good read lined up for you this month.
As well as the regular ‘Pensions in Parliament’ column by Annabel Berdy of the Jackson Consultancy, a number of articles for this issue have been penned by Maureen Ripley and Jamie Clark two of our resident pensions experts in Edinburgh. Thanks too to Liz Fleming and Caroline Kellas, without whose eagle-eyed technical skills I’d have found myself a long way up a certain creek by now and wondering where I’d put the paddle. A real team effort! I hope you find it all useful.
Them and Us
by Steve Bee
I just had to kick this issue off with the breaking news that there appears to be some disquiet in Government circles about the fact the £1.4 million Lifetime Limit will also affect the pensions of MPs and Civil Servants. If the things being reported in the press are right, then there is a possibility that the £1.4 million limit may not apply to the unfunded schemes of Civil Servants and MPs.
Looking through the Inland Revenue proposals it is not clear whether Government run schemes are included in the reforms or not, but everyone (including me) has assumed that these new rules, including the unpopular £1.4 million cap, would apply to all UK pension arrangements, funded or not. If there is any possibility that the problems that will be imposed on the senior people in private firms will not apply to senior Civil Servants and MPs then I think there will be uproar about it.
We have supported the broad thrust of the proposals from the Revenue and do believe that the red tape currently suffocating UK pensions will be cut away if they go through. But, like many others, we do have concerns about the starting level of the Lifetime Limit and the fact that it will not be increased in line with increases in the general level of earnings. If MPs and senior Civil Servants have similar doubts about the cap and do not want it to apply to them, then I would hope they will think the same about the effects on the rest of us too and do something about it by raising the limit and ensuring it keeps pace with earnings in the future.
Whatever else all this means, I am sure the one thing we can count on is that A-Day will not be forced on us in April 2004 as was suggested in the consultation document. The consultation is clearly a long way from being over.
Green Paper on ice?
by Steve Bee
Another breaking story in the press this week concerns an interpretation placed on a view expressed by the Prime Minister who reportedly said he wanted to redraw the Welfare State, and specifically, State pensions. Some are taking this to mean that the more radical proposals outlined in the recent Green Paper may be deferred until Adair Turner’s committee have produced their report into the pensions system. If that’s the case, then I would be quite concerned by it, particularly as the so-called ‘compulsion committee’ is not expected to even put in an interim report until mid 2005.
What we need coming out of these recent proposals is a joined-up approach from the Inland Revenue and the Department for Work and Pensions, particularly in the way contracted-out rights are treated in the new single tax regime, and a full set of detailed rules and regulations well in advance of A-Day. If we get that we can get on with the important job of advising our clients and rebuilding our processes for the new post A-Day realities. If, instead, we get a half done job with a five year wait for the DWP to get things together then I think the gloss on these current reforms will be looking tarnished already.
That would not only be a shame, but would certainly be giving the wrong message to the millions of us in this country who are good enough to save for our own pensions.
US Insurance Scheme in Deficit
by Steve Bee
Many of you will have read the BeeLine I put out a few weeks ago on the thorny issue of the proposed Central Discontinuance Fund (if you haven’t read it, that’s between you and your conscience, obviously). Anyway, in that article I went into some detail about the American insurance fund, the Pension Benefit Guarantee Corporation (PBGC). During April the PBGC reported that it is currently 5.4 billion dollars in deficit. This represents a big change from its position in 2001 when it was 7.7 billion dollars in surplus.
The scheme was set up in 1974 to protect the pensions of workers in failed companies and currently insures pension benefits to the tune of 1,500 billion dollars. The recent Green Paper suggested that a similar scheme should be considered for the UK, and many see the US PBGC as a good model for us to follow. Clearly, though, there are problems with the PBGC at the moment and it is easy to understand why many of us are not convinced an insurance-based model is the answer to the problems being experienced in the UK.
by Maureen Ripley
Well, we waited for the Budget with bated breath, the room with the TV was booked and we all sat around in anticipation. It’s not that we expected too much from it, what with all the issues already up for discussion in the Inland Revenue Proposals and the Green Paper. More that there had been some rumours the previous day that changes were going to be made to tax-free cash after all. And so we waited.
And well, nothing happened. Well, nothing that we hadn’t expected anyway. The Chancellor confirmed the details of the tax changes that had been trailed in advance, and announced further details of the Child Trust Fund. So what were the main tax changes;
- Income Tax personal allowance frozen at £4,615 for the under 65s, those between 65 and 74 get £6,610 and if you are age 75 or over you get £6,720.
- 10% tax rate band was extended to £1,960, and the level above which you pay higher rate tax was increased to £30,500. So you now pay 10% tax on the first £1,960 above the personal allowance, 22% on the next £28,540, and 40% on anything over and above this.
- Capital Gains Tax annual exemption increased to £7,900.
- Inheritance Tax nil rate band increased to £255,000, with the annual exemption staying at £3,000.
- Earnings Cap now £99,000.
As regards the Child Trust fund it was announced that this would apply to all children born from September 2002. There will be an initial endowment from the Government at birth of £250, which rises to £500 for those families on lower incomes. Additional contributions of up to £1,000 can be made by anyone, more likely to be a parent or grandparent. The fund cannot be accessed until age 18, at which point it can be used for any purpose. Final details on the new trust fund are expected in the summer.
And that was it really, tax-free cash survived again! Not that we thought it wouldn’t.
Honey I Shrunk the Pension!
by Steve Bee
The Statutory Money Purchase Illustration (SMPI) basis hit the streets last month, with the first of the new-style illustrations going out to pension savers. They are designed to provide a more sensible look at the real level of pensions money-purchase schemes are likely to provide, but for many they may come as a bit of a shock. The Government is clearly hoping it will provide a wake-up call to people who are not saving enough and that the general level of pension savings will increase. Obviously, after only one month it’s too early to say how things will turn out. Time will tell.
“Oh my Gad!”
by Steve Bee
The Government Actuaries Department (GAD) published a survey* in April showing the state of health of occupational pension schemes in mid-2000. At that time there were 10.1 million employees who were active members of company pension schemes, and those schemes had £860 billion in assets.
5.6 million of the 10.1 million people were in private schemes and 4.5 million were in public schemes. Compared to the previous GAD survey** (in 1995) there appears to have been an increase in the proportion of people in public schemes compared to private schemes, a trend many believe has accelerated since 2000 with the large number of scheme closures in the private sector.
The number of people receiving occupational pensions has increased to 8.2 million, with 5.2 million of those coming from private sector schemes. A further 6.7 million people (5.2 million in the private sector) have deferred pensions and have yet to retire. Given that the UK workforce currently numbers around 26 million, calculations on my trusty calculator indicate that up to a quarter of the people at work today have a paid-up pension hanging around somewhere. Either that or a few people have each got loads of them.
Revenue Remove Tax-Free Cash Relaxation
by Jamie Clark
In October last year, the IRSPSS advised certain insurers of a relaxation to paragraph 16.22 of the Occupational Pension Schemes Practice Notes. This paragraph says that where a transfer value from an occupational pension scheme is split between two different receiving plans (e.g. s32 and PP), the tax-free cash must be split on a proportionate basis.
Following submissions from insurers, the Revenue relaxed this stance firstly for non-regulated individuals then for regulated individuals so that the tax-free cash did not have to be split in this way. This meant that a scheme member could transfer just enough to a s32 to provide the IR maximum tax-free cash and the rest to a PP with a ‘nil certificate’
Using this method, the maximum tax-free cash could be paid from the s32 (from age 50) and the income from the PP could be deferred up to age 75.
In January this year however, the Revenue removed this relaxation for regulated individuals and then in April, for non-regulated individuals. In their letter to the ABI of 2 April 2003, the Revenue gave some of their reasons for this U-turn:
- for non-regulated individuals, there is no tax-free cash certification requirement (other than a ‘nil’ certificate in some circumstances). The relaxation effectively introduced a requirement for certification which the Revenue were reluctant to do.
- the Green Paper proposals will introduce flexibility in the way benefits are taken in the future.
- there could be an issue with DWP legislation.
IRSPSS have promised to confirm this change in practice in a future Pensions Update which will also include changes to paragraph 16.22 to clarify the position.
In the meantime, full details of how a split transfer should be apportioned can be found on our Technical Central website by following the link below.
Tax-Free Cash Entitlement When A Transfer Value is Split
European Pension Fund Directive
by Steve Bee
After the scare last month when the European Parliament seemed to be on the point of doing away with tax-free cash from UK pensions, the European Pension Fund Directive palaver seems to be drawing to a close.
You will remember that it was only lobbying from UK pensions specialists that stopped the draft EU Directive from having an unfortunate knock-on effect on our pension rights. There were also concerns about death-in-service and disability cover becoming compulsory for all European pension schemes, but these requirements were watered-down in the lobbying process too.
This done, the draft Directive, which is trying to pave the way for cross-border pensions, now only needs to be ratified by the EU Council of Ministers to come into being. What this all means is that sooner or later we will see a whole new layer of regulation on pensions coming from Europe, to make further changes to our already complex pensions environment. Don’t believe anyone who says pensions are going to get simpler. It doesn’t look that way to me.
Pensions in Parliament
by Annabel Berdy
This year’s Budget announcement contained few new measures. Introducing his seventh Budget, the Chancellor announced that growth this year would be between 2% and 2.5%, down from his earlier prediction for 2.5-to-3% growth (meaning that tax revenue has been lower and Government borrowing has been higher than expected) but this announcement was not a surprise.
The only surprise for pensioners was the abolition of the bingo tax. Other measures included the announcement of the abolition of pension reductions during hospital stays, an extra annual payment of £100 to pensioners over 80 on top of the existing £200 winter fuel payment and all single pensioners with income below £139 a week and all couples below £203 a week will benefit from the new Pension Credit, none of which were a surprise.
Response to the Budget has not been overwhelming, probably because the measures announced had mostly been predicted well in advance. The CBI said they were disappointed by the lack of new incentives to encourage individuals or employers to increase contributions - believing without which voluntarism cannot succeed and the TUC is now calling for the earnings link to be re-instated at the next Budget.
Further calls came from pension groups (Age Concern, NAPF, NPC, Help the Aged) to abandon the means-test. They say the stigma associated with it and the complexity of the system has led to a situation where over two million pensioners were not claiming benefits that they were entitled to. Research by the Public Accounts Committee revealed that between a quarter and a third of pensioners had missed out on the minimum income guarantee and one third failed to claim council tax benefit. The Committee criticised the Department for Work and Pensions, which administers the Treasury-designed system of benefits, for setting low targets for take-up rates (it expects only 73% of pensioners eligible for the pension credit to claim).
The Work and Pensions Select Committee finally published their report – ‘An Inquiry into the Future of UK Pensions’ which was also a bit of a damp squib. The committee failed to make any real criticisms of Government policy – they even shied away from describing a pensions crisis settling instead for 'a crisis in confidence’. In preparation of the report, the Committee voted on contentious issues. With an in-built Labour majority, the votes show that Government policy was backed every time - making the whole exercise one designed more for show than anything else.
The Treasury Committee published 'The UK and the Euro' which warned that if the UK rules out membership then it will miss a 'window of opportunity' to influence the workings of the European Central Bank. At the same time, the report says there are 'obstacles' to Britain joining the single currency.
The Treasury has committed itself to publishing the results of an analysis of the economic issues surrounding potential UK membership of the Euro - the famous ‘five tests' by June 2003 and there is speculation that it may be much sooner. If the Treasury concludes that the economic conditions have been met, the Government may well then announce a referendum on the issue, to seek a popular mandate to open negotiations.
Amongst the key issues that will need careful consideration when a decision is made about UK membership is fiscal policy within the Economic and Monetary Union (EMU). Whilst the conduct of taxation and spending policy remains in the hands of individual member states, a degree of coordination of deficits is required. Limits on the level of deficits have been set at 3% of GDP in order to prevent high fiscal deficits run up by individual members from damaging the credibility and value of the Euro and prevent excessive debt levels amongst EMU members. However, countries such as Germany and France are struggling with these terms - with sluggish economic growth exacerbating their efforts to keep the deficit below 3% of GDP.
For pensions, these problems are likely to increase over time - as changes in demographics leads to an aging pensioner population whose retirement income must be financed from taxation - given Europe’s pay-as-you-go pensions systems. The pensioner explosion forecast over the next 10-20 years in much of Europe implies that spending on pensions will have to increase with consequent pressures on national budgets. Whilst this could be overcome by increasing taxation - Europe is already highly taxed and such a step could well weaken countries’ competitiveness. A re-structure of social welfare and a reduction of benefits costs is the other alternative, but politically very unlikely. While member states cannot adhere to the 3% deficit, added pressure is placed on the Euro and the decision to join for Britain becomes harder – and more risky.
The views expressed in this article are the views of the Jackson Consultancy Group.
Well, that’s about it for this issue. There’s still plenty going on in the pensions field and we can look forward to seeing some of the detail coming out over the next month or so now that the consultation periods are over for the Green Paper and the Inland Revenue review. If May contains as many surprises as April it will be lots of fun. I can’t wait. If you want to keep up with this stuff as it happens, you know where you can find it, right here on the gobbledegook-free BeeHive.
Keep smiling, it suits you!
7 May 2003
*Occupational pension schemes 2000 – eleventh survey by the Government Actuary April 2003.
**Occupational pension schemes 1995 – tenth survey by the Government Actuary January 2000.
The information provided is based on Scottish Life’s understanding of current legislation and regulations, the Inland Revenue’s proposals and the Pensions Green Paper issued on 17 December 2002. These proposals are subject to consultation and may change in the future.