Guidance

Pension schemes newsletter 75 - January 2016

Published 28 January 2016

1. Inheritance tax treatment of pension scheme drawdown funds on death

Finance Bill 2016 will include legislation to clarify the treatment of pension scheme drawdown funds on death for Inheritance Tax (IHT) purposes.

Under current legislation an IHT charge may arise if a person reduces the value of their estate by failing to exercise rights they have over property. This general rule does not apply to funds held in pension schemes to which a person fails to become entitled.

However when a scheme member takes their pension benefits, or elects to draw down all or part of their pension, they become entitled to those funds. Having become entitled, if they fail to exercise their rights over those drawdown funds leaving funds undrawn on their death, the general rule applies and an IHT charge may arise. It was not intended that an IHT charge should arise in these circumstances.

Legislation will be included in Finance Bill 2016 to cover cases where the scheme member elects to draw down funds from a registered pension scheme, but the drawdown funds are not used up before death, so that the undrawn funds aren’t subject to an IHT charge.

The Finance Bill 2016 legislation will apply to deaths on or after 6 April 2011.

2. Pension flexibility

a. Real Time Information (RTI) - Reporting non-taxable payments from April 2016

HM Revenue and Customs (HMRC) have received a number of queries about the guidance we previously provided on reporting non-taxable payments through RTI.

In Pension Schemes Newsletter 67 we gave details of tax-free payments that did not need to be reported through RTI.

In Pension Schemes Newsletter 72 we gave guidance on the reporting of taxable and non-taxable death benefits through RTI from April 16.

In Pension Schemes Newsletter 74 we further explained the reporting requirements for lump sum death benefits.

HMRC can clarify that the guidance in Newsletter 67 is only relevant to the 2015 to 2016 tax year and HMRC apologise if this wasn’t made clear.

Due to the forthcoming changes to the taxing of certain death benefits from 6 April 2016 and following feedback from the industry about the reporting of pension flexibility payments from April 2015, HMRC have introduced 3 new RTI data items to enable the reporting and quantifying of flexibly accessed pension rights (including UFPLSs) and death benefits. You can find details of these in Pension Schemes Newsletter 74.

The introduction of these new data items from 6 April 2016 will allow you to report, quantify and separately identify both the taxable and non-taxable elements of flexibly accessed pension rights (including UFPLSs) and death benefits.

Draft legislation makes amendments to the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) regarding information which employers and scheme administrators are required to report to HMRC on making a payment to an employee (including a pensioner).

With the exception of:

• uncrystallised funds lump sum death benefits paid on the death of member before age 75 and within 2 years of notification of death
• defined benefits lump sum death benefits (DBLSDB) paid on the death of member before age 75 and within 2 years of notification of death

All other death benefits should be reported through RTI, including payments that are now non-taxable. This information will help us to monitor the impact and effectiveness of the changes to the pension tax rules. It will also enable HMRC to provide HM Treasury with appropriate statistical information regarding these changes.

b. Defined Benefits Lump Sum Death Benefit (DBLSDB) on death of member before age 75

In article 5b of Pension Schemes Newsletter 74 HMRC listed those lump sum death benefits that will not be reportable through RTI from April 2016.

HMRC have received a number of queries from the industry regarding the payment of a DBLSDB if a member dies before age 75, but payment is not made within 2 years of notification of death.

Currently, such payments are not a DBLSDB but are treated as unauthorised member payments and are not reportable under RTI.

From 6 April 2016, when paid to an individual these payments will no longer be treated as unauthorised payments and will be taxable at the recipient’s marginal rate. From this date you will need to report these payments under RTI.

Such payments made to non-individuals must be treated as special lump sum death benefits and the special lump sum death benefits charge applies.

c. Pension Flexibility Statistics

The quarterly release of official statistics on Flexible Payments from Pensions was published on 27 January 2016.

Further to this announcement we can now provide more information on the number of tax repayment claim forms (P55s, P53Zs and P50Zs) processed in respect of pension flexibility payments.

From 1 October to 31 December 2015 we processed:

P55 = 3,528 forms
P53Z = 5,816 forms
P50Z = 1,629 forms
Total Value Repaid: £ 24,135,645

Figures for the period 1 January to 31 March 2016 will be published in April 2016.

3. Scottish rate of Income Tax

The Scottish rate was announced by the Scottish Government on 16 December 2015 as 10%. This means that Scottish Taxpayers will pay the same overall rate as the rest of the UK for the 2016 to 2017 tax year.

Scheme administrators operating PAYE must still ensure the S tax codes are applied via RTI for Scottish Taxpayers. HMRC will send the relevant S tax codes via the annual P9 or daily P6 coding runs as we do now for all other tax codes.

4. Relief at source – annual returns of individual information

As you know, in February of each year we issue Notices to each registered pension scheme operating relief at source to submit annual returns of individual information.

For 2015 to 2016 year onwards the issue date of the Notices has changed from February to January. However the filing deadline for the 2015 to 2016 return remains the 5 October 2016.

Please remember that failure to submit by this deadline as specified in the Notice will result in any subsequent interim repayment claims being suspended pending receipt of the completed annual return of individual information.

If you expect to receive a Notice to provide this information but have not received one by the end of February 2016 or alternatively, if you receive a Notice for a scheme to which you no longer administer, please email:pensions.businessdelivery@hmrc.gsi.gov.uk and put ‘Relief at Source’ in the subject line of your email.

We have changed the date that we issue the Notices in preparation for the filing deadline being brought forward from October to July each year.

From the 2016 to 2017 tax year you will need to file your annual return of individual information by 5 July instead of 5 October (the first changed deadline will be 5 July 2017). This earlier filing deadline will enable HMRC to respond to scheme administrators regarding which members should receive tax relief at the Scottish rate.

You can find more information on relief at source repayments and the member information we may ask for relating to relief at source at Pension administrators: reclaim tax relief using relief at source.

5. Lifetime allowance reduction

a. Applications for individual protection 2016 (IP2016) and fixed protection 2016 (FP2016)

In Pension Schemes Newsletter 74 we provided more details about the interim process for applying for IP2016 and FP2016.

We have received a number of queries from scheme members making requests to apply for interim protection.

Scheme members can’t apply for FP2016 or IP2016 before 6 April 2016 because as part of the application members must either:

• provide certain values as at 5 April 2016 relating to their pension savings (for IP2016)
• declare that they don’t hold other protections (enhanced protection, primary protection, fixed protection or fixed protection 2014) before 6 April 2016 (for FP2016)

So because scheme members cannot provide these values or make these declarations before 6 April 2016, we are unable to process any interim applications for protection that are received before these dates.

Any requests received before that date will not be retained and the scheme member will need to resubmit their application for protection on or after 6 April 2016.

Interim applications received on or after 6 April 2016 will be dealt with in date order and provided the details that have been sent are correct and no other valid protections are held, we will write to scheme members with a temporary reference number.

As explained in Pension Schemes Newsletter 74, a temporary reference number issued under the interim application process will only be valid until 31 July 2016. Scheme members who take benefits and rely on this interim process to protect their pension savings temporarily must make a full online application and receive a permanent reference number to ensure their pension savings continue to be protected from the lifetime allowance tax charge.

If a pension scheme member is not planning to take benefits between 6 April 2016 and July 2016, they should wait and apply for protection using the online digital service which will be available in July 2016.

Further details on the interim process including how to contact us will be provided in the next pension schemes newsletter.

b. Retaining FP2016

Scheme members who are intending to apply for and rely upon FP2016 may inadvertently lose this protection in certain circumstances.

Scheme members intending to rely on FP2016 need to be aware that they will normally have needed to stop building up benefits under every registered pension scheme that they belong to by 5 April 2016. This means that scheme members will lose FP2016 if they (or someone on their behalf) make pension contributions or their scheme has benefit accruals on or after 6 April 2016.

6. Annual allowance

a. Alignment of pension input periods and tapered annual allowance (AA)

In Pension Schemes Newsletter 73 we explained that all pension input periods will be aligned with the tax year from 6 April 2016.

Alignment of pension input periods – the transitional rules for 2015 to 2016

Transitional rules for the AA and pension input periods were introduced for tax year 2015 to 2016.

A feature of these transitional rules is that tax year 2015 to 2016 is now split into two ‘mini’ tax years - the pre-alignment tax year (6 April 2015 to 8 July 2015) and post-alignment tax year (9 July 2015 to 5 April 2016). This split applies for AA purposes only (including the money purchase annual allowance (MPAA)).

An AA test applies for both the pre and post-alignment tax years to determine if there is an amount subject to the AA charge for any of the ‘mini’ tax years. If there is a chargeable amount for either, or both, of the ‘mini’ tax years a single AA charge applies for 2015 to 2016 overall.

The alignment of pension input periods affects all scheme members irrespective of the level of their income. Some scheme members may have made pension savings (pension input amounts) of more than £40,000 prior to 9 July 2015 on the expectation that these savings would be tested against the AA for the tax years 2015 to 2016 and 2016 to 2017. These pension input amounts will now only be tested against a single AA for 2015 to 2016 but the transitional rules mean that these members’ pre-9 July pension input amounts are tested against an AA of £80,000 (ie the AA for the pre-alignment tax year is £80,000) plus any unused AA that can be carried forward from the previous 3 tax years.

The AA for the post-alignment tax year is nil.

However pension input amounts for the post-alignment tax year are tested against an AA that comprises any unused AA from the pre-alignment tax year, up to a maximum of £40,000 plus any available unused AA carried forward from the previous 3 tax years before the pre-alignment tax year.

Where a member joins the scheme on or after 9 July 2015 (and hasn’t been a member of a registered pension scheme during the pre-alignment tax year) they will have an AA of £40,000 for the post-alignment tax year.

Alignment of pension input periods: MPAA rules

Where a member has flexibly accessed their money purchase pension savings and triggered the MPAA rules - different AA limits apply.

MPAA: pre-alignment tax year

If the member first flexibly accessed their money purchase pension savings in the pre-alignment tax year they will have a MPAA of £20,000 available against any subsequent money purchase pension input amounts they make in the pre-alignment tax year. They will also have an alternative AA (AAA) of £60,000 plus unused AA carried forward from the previous 3 years that can be used against any other pension input amounts.

MPAA: post-alignment tax year

The MPAA available against money purchase pension input amounts made in the post-alignment tax year for a member who first flexibly accessed in the pre-alignment tax year is an amount representing the unused balance of the £20,000 MPAA from the pre-alignment tax year - subject to a maximum of £10,000.

The AAA for the post-alignment tax year is nil.

However other input amounts are tested against an AAA that comprises any unused AA from the pre-alignment tax year, up to a maximum amount, plus any available unused AA carried forward from the previous 3 tax years before the pre-alignment tax year. The maximum amount of AA that can be used from the pre-alignment tax year is £30,000 if the member’s chargeable amount for the pre-alignment tax year is the alternative chargeable amount: otherwise the maximum is £40,000.

If the member flexibly accesses their money purchase pension savings and triggers the MPAA rules in the post-alignment tax year, they will have a MPAA of £10,000 and an AAA of up to £30,000.

The transitional provisions for aligning pension input periods provides more detailed information on the different allowances applicable for the pre and post-alignment tax years, and how the AA charge is calculated for 2015 to 2016.

Tapered AA – effective from 6 April 2016

Scheme members affected by the tapered AA for a tax year will have a reduced AA for that tax year. Their AA for the tax year will be reduced by £1 for every £2 of adjusted income they have over £150,000 up to a maximum reduction of £30,000. Based on an AA of £40,000 for 2016 to 2017, for those with ‘adjusted income’ of or above £210,000, this will mean their reduced AA for the year is £10,000.

The £150,000 ‘adjusted income’ amount includes a measure of the member’s pension input amounts for the tax year concerned.

If a member’s ‘adjusted income’ exceeds £150,000, the tapered annual allowance will not apply if the member’s ‘threshold income’ is £110,000 or less.

The ‘threshold income’ test allows for scheme members who would not usually be affected by the tapered AA but receive a one off increase in their employer pension contributions in a tax year that takes them over the £150,000 adjusted income level.

Where a scheme member is subject to the MPAA and the tapered AA for the same year, the AAA is found by subtracting £10,000 from the amount of the member’s reduced AA for the tax year. Therefore if the member has the minimum reduced AA of £10,000 their AAA is nil.

b. Annual allowance draft information regulations

We have published the Draft legislation: the Registered Pension Scheme (provision of information) (amendment) Regulations 2016 for a short consultation.

These regulations cover the AA information that pension scheme administrators are required to provide HMRC with for the 2015 to 2016 tax year and later years. We are particularly interested in your comments on how pensionable income is defined.

You can email your comments on these draft regulations to pensions.policy@hmrc.gsi.gov.uk by 17 February 2016.