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Happy new tax year: What do the next 12 months hold for UK pension schemes?

06 April 2010

Welcome to the new tax year 2010/11. A new year is always an opportune time to make resolutions, and a new tax year is no exception.

A number of pieces of legislation come into force on 6 April 2010, some of which may help in the running of your scheme, some of which may add to the burden you face.

We are also a year away from some key changes in the tax legislation – the tax changes for ‘high-earners’, and expiry of transitional provisions that enable the pre-6 April 2006 tax regimes for pension schemes to continue. 

While 1 October 2012 is more than two years away, the new ‘auto-enrolment’ regime is worth at least a passing mention. This update covers a number of areas of interest, although it is by no means exhaustive. 

Legislation coming into force on 6 April 2010

Legislation coming into force on 6 April 2010 includes:

A year and counting: Finance Act 2004

It is four years since the old regime of tax approval and limits on benefits and contributions was replaced by the new registered pension scheme regime and the concepts of authorised and unauthorised payments.

Regulations which preserve the old regime for a transitional period will cease to apply from 6 April 2011. These transitional provisions ensured that since 6 April 2006, the pre-6 April 2006 tax regime(s) continued to apply to a pension scheme until that scheme's rules were amended to disapply all or any features of the pre-6 April 2006 regime.
 
If you have not ‘locked’ any chosen features of the pre-6 April 2006 tax regime(s) into your pension scheme by making rule amendments, then features such as the earnings cap and other limits to benefits will cease to apply from 6 April 2011.

If you have made interim amendments to your pension scheme, you may now wish to consider making more detailed amendments. 

A year and counting: High earners

From 6 April 2011, the tax relief available to individuals with annual gross incomes in excess of £150,000 will be restricted.

Gross income will include the value of employer contributions to a defined contribution pension scheme and, in the case of a defined benefit scheme, the value of the benefits earned.  

At the time the changes were announced, the government announced anti-forestalling measures to prevent people affected by the changes from making significant pension contributions benefiting from current levels of tax relief in the run up to the changes in 2011. 

If you are making any changes to your pension arrangements such as moving to a defined contribution scheme, you should consider whether any steps, such as increasing contributions, will be caught by the anti-forestalling measures.

Tax relief will be tapered from 50% down to 20% for individuals with annual gross income between £150,000 and £180,000.  For gross income in excess of £180,000, relief will be limited to the basic rate (currently 20%). Any excess tax relief will be recovered by means of a ‘high income excess relief charge’. 

The Government has proposed a ‘scheme pays’ mechanism whereby charges are made by the member's pension scheme and recouped from a member's benefits. Once more information is available on the way in which this is to be implemented, we can provide more information on what this means for you and your scheme.
 
It remains to be seen what effect these changes will have on the already changing pensions environment and whether they change the way in which employers use pension provision as part of their overall remuneration package.

Any employers considering the use of EFRBS (employer-financed retirement benefit schemes) should be mindful of statements in the latest Budget which suggested that changes might be made which could result in EFRBs being less attractive as an alternative mechanism for pension provision. 

Countdown to 2012

From 1 October 2012, all employers will be required to enrol eligible jobholders into a pension scheme.

The requirements will be staggered over a four year period, starting with larger employers.  Unlike the requirements in relation to stakeholder pension schemes, there are no ‘small-employer’ exemptions.

Once the ‘auto-enrolment’ requirements apply to an employer, that employer's jobholders must be enrolled into a qualifying occupational or personal pension scheme or into NEST – the central government-established scheme. Permanent and temporary employees are included in the term ‘job-holder’. Any job-holder will include anyone between 22 and state pension age earning at least £5,035 a year will be auto-enrolled. There is no exclusion for anyone already in receipt of a pension.
 
Where jobholders are enrolled into NEST, their employer must pay contributions at a rate of 3% of earnings between £5,035 and £33,540 (band earnings) a year. Job-holders will be required to contribute 5% of band earnings. These contributions will be phased in over 5 years. An annual limit on contributions of £3,600 will apply.
 
For an existing scheme to be classified as a qualifying scheme, it must be a registered occupational or personal pension scheme and meet the standards laid down by the legislation.  Broadly, these are:

Additionally, employers may postpone auto-enrolment for a three-month period if its jobholders are to be enrolled in a scheme, other than NEST, which meets certain quality standards: 

We can assist in a review of your scheme and advise on how auto-enrolment will impact on your pension arrangements.

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Get in touch

Suzanne Burrell

Partner
T: 03700 86 8902
I: +44 (0)118 965 8902
E: suzanne.burrell@shoosmiths.co.uk