UK Pensions Law Update November 2024

Whilst some of the ‘headline’ pensions changes trailed in the run up to 30 October did not materialise, Rachel Reeves’ first Budget announced several adjustments to the UK pensions landscape – including bringing unused defined contribution (“DC”) funds and death benefits back into the inheritance tax (“IHT”) net.

Inheritance Tax on Unused DC Funds and Death Benefits

Effective from 6 April 2027, inherited pensions and death benefits will be subject to IHT. It seems that this broad change encompasses almost all lump sum death benefits, unused DC assets, and dependants’ annuities. However, life policy products purchased with pension funds or as part of a pension package from an employer are excluded from these changes.

Notably, the responsibility for calculating and paying IHT will fall on scheme administrators, who will use information provided by the deceased member’s personal representatives.

The interaction between the new IHT charges and existing tax liabilities, particularly for lump sums received after the death of a member over 75 or distributed more than 2 years post-death, remains unclear. It is possible that both income tax and IHT could apply to the same lump sum in certain scenarios.

Further detail is set out in HMRC’s consultation paper.

Overseas Transfers

Changes to the taxation of overseas transfers will see the removal of the exemption from the 25% tax charge on the value transferred to schemes established in the EEA or Gibraltar from 30 October 2024. From 6 April 2025, the criteria for acceptable receiving schemes in these locations will align with those for schemes elsewhere in the world. Further detail on this is set out in HMRC’s policy paper.

Scheme Administrators

From 6 April 2026, all scheme administrators must be UK residents. This change will necessitate a review of the current scheme administration against the new residency requirements.

Introduction

Since 2015, trustees of money purchase occupational pension schemes and independent governance committees (“IGCs”) for contract-based schemes have had to report on the extent to which their schemes have provided value for money (“VFM”) for their members. At present it is for trustees and IGCs to decide what is relevant for assessing VFM. Since 2023, the Department of Work and Pensions (“DWP”), the Pensions Regulator (“TPR”) and the Financial Conduct Authority (“FCA”) have been working towards a common framework of metrics, standards and disclosures to assess VFM. The FCA’s recent consultation paper, CP24/16, is the latest development and sets out detailed proposals for the new framework to ensure that contract-based pension schemes are consistently scrutinised on VFM.

Overview of the VFM Framework

IGCs will be required to conduct annual VFM assessments. Key elements of the framework include:

1. Investment Performance and Asset Allocation Disclosures: The framework mandates standardized public disclosures on investment performance and asset allocation, enabling more effective comparison and assessment of default arrangements.
2. Costs and Charges Transparency: A detailed breakdown of costs and charges, including service costs and investment charges, will be required to be disclosed
3. Quality of Services: The framework introduces quantitative metrics to evaluate the quality of services provided to savers, covering aspects such as transaction accuracy, customer satisfaction, and support for retirement planning.
4. Assessment and Outcomes: IGCs will need to compare their scheme against at least 3 other providers and use a Red, Amber, Green (“RAG”) rating system to determine the value delivered to savers. Schemes assessed as Amber would have to submit an action plan for improvement to the FCA. A scheme assessed at Red would need to consider transferring affected savers into a new scheme which provides VFM.

HMRC has laid out two further sets of regulations detailing technical changes to the legislative framework arising from the abolition of the Lifetime Allowance (“LTA”). Subject to Parliamentary approval, both sets of regulations will come into force on 18 November 2024, with retrospective application from 6 April 2024.

The amendments introduced by the regulations are summarised in HMRC Newsletter 163. They include, among other things, clarifications / amendments in relation to the following areas:

• Calculations of the amount of the lump sum and death benefit allowance (“LSDBA”);
• The impact of certain LTA protections on the applicable amount of lump sum allowance (“LSA”) and LSDBA;
• The applicable overseas transfer allowance and overseas transfer charge in certain circumstances;
• The information and timing requirements in relation to transitional tax-free amount certificates; and
• Certain information and reporting requirements applicable to members and scheme administrators.

The Normal Minimum Pension Age (“NMPA”), established as part of the 'A-Day' pension reforms in 2006, represents the earliest age at which most individuals can access their pension benefits without incurring additional tax charges. In anticipation of the upcoming increase of the NMPA from age 55 to 57 (effective from 6 April 2028), the Pensions Administration Standards Association (“PASA”) has released guidance aimed at helping trustees and administrators of pension schemes prepare for the change. A particular focus of the guidance is ensuring that those with a Protected Pension Age (“PPA”) are treated fairly.

A PPA is a right to take benefits before NMPA if the scheme rules grant an 'unqualified right' to take benefits before age 57, and the rules have done so since at least 11 February 2021. This right will usually be to take benefits from age 55 (or age 50 in certain cases). The guidance outlines the legal framework in respect of PPAs, helping trustees identify members with a PPA who may be impacted by the changes and ensuring their rights are preserved amidst the NMPA transition. The guidance also sets out how PPAs may be transferred into a scheme and how these should be dealt with under the new rules. Further, the guidance explains how these NMPA changes differ from the previous increase to the NMPA in 2010 (where the NMPA was raised from 50 to 55) – in particular outlining the differences in eligibility conditions for a PPA, which necessitates a revised approach to managing PPAs under the new regulations.

The guidance contains a detailed checklist of what trustees can do now to prepare for the legislation, including suggested actions such as reviewing and updating benefit statements, scheme rules, transfer packs, and communication materials. It also recommends initiating a communication exercise to inform members directly impacted by the changes and to advise how it may affect their retirement plans. Further recommendations include the updating of administrative systems and procedures to prevent unauthorised early retirement and ensure compliance with the new NMPA requirements. The guidance anticipates further 'transitional regulations' from the Government (expected later this financial year), aimed at addressing minor inconsistencies that the NMPA increase might introduce. Trustees are advised to stay informed of these developments to ensure their schemes remain compliant and effectively managed during this transition period.

In a significant move to reshape the UK pensions landscape, the Government has initiated a comprehensive review aimed at enhancing investment, increasing returns for savers and addressing inefficiencies within the system. Spearheaded by the Chancellor and the Minister for Pensions, this review targets DC workplace schemes and the Local Government Pension Scheme.

As noted in our last legal update, the review has been split into two stages. The first stage will focus on investment, with the findings to be reported later in 2024 (ahead of the introduction of the Pension Schemes Bill). The second stage, set to start later in 2024, will consider additional steps to improve pension outcomes, alongside investment.

As part of the first stage of the review, a Call for Evidence ran between 4 September and 25 September, which invited stakeholders to provide insight on the following:

• the impact of a more consolidated DC market on UK pension savers and economic growth;
• the role of single employer trusts, master trusts and group personal pension arrangements in a more consolidated market (including which arrangements are more likely to boost UK productive finance investment and better saver outcomes); and
• the potential for increased investment in UK asset classes by pension funds.

For further details, please see here.

TPR unveiled its final pensions dashboards compliance and enforcement policy on 4 September 2024, following an initial consultation in November 2022. A blog explaining how TPR will exercise its powers was published along with the policy as was its consultation response. The policy outlines TPR’s strategy to ensure that pension schemes provide savers with a complete and accurate view of their pension data. It highlights the following key points:

• Connection Compliance: Schemes must connect to the dashboards by the deadline, take into account the connection guidance, and maintain continuous connection as per regulations and the Money and Pensions Service (“MaPS”) standards.
• Audit and Monitoring: Schemes are required to keep detailed audit trails showing their progress, compliance with MaPS' reporting standards and including actions taken to rectify issues and improve data accuracy.
• Regulatory Supervision: TPR will use data from MaPS and other sources to identify non-compliance and best practice.

On 14 October 2024, PASA published the first part of its pensions dashboards toolkit, focusing on AVCs. This release aims to guide scheme administrators on their approach to connecting to the pensions dashboards ecosystem, offering two options: a "single source" approach when one party (generally the main scheme administrator) connects for both main scheme benefits and AVCs or a "multiple source" approach where the AVC provider connects the AVCs directly to the pension dashboard, separately to the main scheme benefits.

The toolkit features:

• A checklist for the single source approach.
• A questionnaire for AVC providers to connect directly to the dashboards.
• A list of AVC providers, detailing their connection methods.