With an election just around the corner the government trimmed the Finance (no. 2) Bill (now enacted as the Finance Act 2017) to hasten its progress through its final parliamentary stages. Of particular interest to pension schemes and their members is the removal of two particular provisions:
- the reduction in the money purchase annual allowance (MPAA) from £10,000 to £4,000
- the £500 pensions advice allowance (PAA).
Separate from these changes brought on by the dissolution of parliament, but equally important, the fraud compensation levy and auto-enrolment are also worth mentioning.
Money purchase annual allowance
The MPAA is a yearly limit on the future money purchase contributions that can be paid by or in respect of an individual who has accessed cash through the 2015 pension flexibilities.
Broadly, this means anybody who has taken a taxable cash sum. Simply taking the normal 25% tax-free cash sum and either leaving the remainder invested for the future or using it to buy a lifetime annuity is not regarded as accessing under the flexibilities. The MPAA isn’t an absolute limit on contributions but for any individual subject to the limit, if the contributions exceed MPAA then they incur an income tax liability on the amount of the excess.
The limit was due to be reduced from £10,000 to £4,000 with effect from 6 April 2017. This is not now going ahead at this time, and the MPAA will remain at £10,000. Worryingly however, this is not necessarily the end of the matter. The government has indicated that if they are re-elected then the reduced MPAA is likely to be back on the agenda in the new parliament, and it is unclear whether any re-introduction would have retrospective effect.
Watch this space.
Pensions advice allowance
The PAA is the ability of an employer to pay up to £500 in a tax year for an individual to receive relevant pensions advice, or be reimbursed for the costs of such advice without the employee being taxed on this as a benefit in kind.
The removal of this allowance does not affect the ability of an individual to take up to £500 from their own pension savings, up to three times, to pay for financial advice – this is already enshrined in regulations. The removal of the employer’s ability to do this means that, currently, any such payments by employers will create a liability to income tax.
However, like the reduction in MPAA, the stated intention is that if reelected, they will reintroduce this allowance.
Fraud compensation levy
The Pension Protection Fund (PPF) is to raise an occasional levy for the first time in five years.
A number of possible claims on the fraud compensation fund (FCF) run by the PPF have been identified. In advance of these potential claims on the FCF, which pays compensation to eligible work-based pension schemes (including defined contribution) where the employer is insolvent and the scheme has lost out due to offences involving dishonesty, a levy of 25p per member is to be collected from schemes. This will be undertaken by the Pensions Regulator when invoicing for its general levy.
There are two important reminders when it comes to auto-enrolment. The first reminder is the earnings thresholds that are outlined in the table below.
|Pay reference period||Annual||1 week||Fortnight||4 weeks||1 month||1 quarter||Bi-annual|
|Lower level of qualifying earnings||£5876||£113||£226||£452||£490||£1469||£2938|
|Earnings trigger for auto enrolment||£10000||£192||£384||£768||£833||£2499||£4998|
|Upper level of qualifying earnings||£45000||£866||£1731||£3462||£3750||£11250||£22500|
Earnings thresholds for tax year 2017/18
The second reminder is about minimum contribution percentages and what will happen with them next year.
The minimum contribution rates are increasing with effect from 6 April 2018. The Pensions Regulator will be issuing reminders in due course, but forewarned is forearmed. For most schemes the total minimum contribution calculated on pensionable pay is currently 2%, of which the employer must pay at least 1%. That will become 5%, of which the employer must pay at least 2%.
Those schemes whose pensionable pay basis is such that their present minimum is 3%, of which the employer pays at least 2% will move to their new basis of 6%, of which the employer pays at least 3%.