A further significant step towards the introduction of stakeholder pensions was announced by Social Security Secretary Alistair Darling today, with the publication of draft clauses for inclusion in this year’s Finance Bill.
These clauses set out details of the simplified tax regime and follow consultation on proposals issued last year.
Mr Darling said:
“We are radically simplifying the tax regime for stakeholder and personal pensions. This will help make pensions provision available to millions of people who have previously not been able to save into a pension.
“These reforms will make pensions easier to understand, and advice on pensions simpler and cheaper. They will give tax breaks to millions of people to save for their retirement. Anyone not in a defined benefit scheme will be able to save at least 3600 pounds a year for their retirement.
“These changes will allow people to save for their retirement during career breaks and while they’re caring or studying.
“We have always said that stakeholder pensions will be good value, reliable and secure. These reforms make sure that they will also be simple and accessible.”
From April 2001 there will be a new single tax regime for stakeholder and personal pensions. Retirement savers currently excluded from taking out personal pensions will then be able to do so, enabling:
people taking career breaks, mature students and carers, for example, to take out a stakeholder pension and benefit from the tax relief it attracts;
self employed people on low earnings to receive more tax relief on their pension contributions;
costs to be kept down so that pension savers can be offered low cost, good value stakeholder products.
Ministers will invite the pensions industry and employers to show whether cost-effective and workable proposals can be developed that help low- and middle-earning employees make better use of their occupational pension limits through access to stakeholder pensions (i.e. partial concurrency). The Government will consider proposals constructively.
NOTES TO EDITORS
1. This new tax regime for stakeholder pensions will come into effect from 6 April 2001. The legislation will be introduced in the forthcoming Finance Bill 2000 and related tax regulations. The Finance Bill will be published in early April.
2. Draft Finance Bill clauses, with an accompanying commentary explaining the detail, are published today. They can be accessed on the Inland Revenue website at www.inlandrevenue.gov.uk. Printed copies can be obtained by telephoning 020 7438 7514.
3. Detailed comments on the draft clauses are invited by Monday 13th March 2000 to be considered for inclusion in the Finance Bill. Comments received after 13th March will still be welcome but may not be in time for inclusion in the Finance Bill.
4. Draft tax regulations will be issued for comments towards the end of March.
5. The Pensions Reform Green Paper, published in December 1998, included information on the Government’s proposals for stakeholder pensions. Six consultation briefs on the detail were subsequently issued:
No 1 -Minimum Standards 2 June 1999
No 2 -Employer Access 29 June 1999
No 3 -Clearing Arrangements 12 July 1999
No 4 -Regulation, Advice & Information 2 August 1999
No 5 -Governance 2 August 1999
No 6 -Tax Regime 16 September 1999
6. Decisions on the first five briefs were announced on 10 January 2000. Legislation for the non-tax aspects of stakeholder pensions was included in the Welfare Reform and Pensions Act 1999. Draft supporting regulations will be issued for consultation in March and the regulations laid shortly after Easter.
7. Necessary changes to the taxes acts will be included in the Finance Bill 2000 and supporting regulations. Draft Finance Bill clauses are on the Inland Revenue’s website and consultation drafts of the supporting tax regulations will be issued by early March.
8. All legislation will be finalised following Royal Assent to the Finance Bill, which usually takes place in late July or early August. However, to help the pensions industry with their preparations for stakeholders, a final draft of the tax regulations (adjusted to reflect comments received) will be issued when Parliament are considering the Finance Bill clauses.
9. It is currently planned that stakeholder pensions and the reforms to the DC pension schemes will be introduced from April 2001. Stakeholder schemes will be able to register with Inland Revenue and the Occupational Pensions Regulatory Authority (Opra) from October 2000.
Outline of the new integrated regime for DC pensions
10. The simple integrated tax regime for all defined contribution (DC) pensions, including stakeholder schemes will contain the following main features:
contributions of up to 3,600 pounds each tax year irrespective of earnings;
higher level contributions under the existing personal pension age and earnings related limits. These can continue for up to 5 years after earnings have ceased;
all contributions from individuals will be paid net of basic rate tax with the pension provider reclaiming that tax from the Inland Revenue;
employers’ money purchase schemes may opt onto this new tax regime;
new and simpler rules will replace the existing personal pension “carry forward/carry back” rules;
10% of the pension contribution can be used for life assurance;
tax relief for waiver of pension contributions insurance will be simplified, and broadened to circumstances other than ill-health, such as unemployment;
shares from an approved employee share scheme can, within the contribution limits, be put into the pension and attract tax relief;
contributors must be resident in UK unless serving, or the spouse of someone serving, abroad and undertaking “Crown duties”;
contributions cannot be made by an individual who is also contributing to a defined benefit occupational scheme ;
simplification will also be carried through into the administrative arrangements for DC pensions – for example, electronic and telephone applications will be permitted and information requirements relaxed;
the rules regarding benefits are being altered to allow phased vesting from within a single arrangement. This technical change will ease administration for new and existing PP providers.
Comments received on tax consultation brief no. 6
11. Virtually all respondents enthusiastically welcomed the radical reform to the tax regime for all DC pensions including stakeholders. They particularly appreciated that the proposals will:br> open up pension provision to non-earners (such as carers, people on career breaks, and the unemployed);
introduce an easier and more flexible system for all individuals;
help simplify the advice needed when taking out a pension and reduced the costs of that advice; and
help providers lower costs.
Other specific issues raised during the consultation are set out in the following paragraphs.
12. Concurrency (or parallel running) Many respondents argued that someone paying into a defined benefit occupational pension should also be able to contribute to a stakeholder pension.
13. Simple, good value stakeholder pensions are being introduced to encourage people not currently paying into an occupational or personal pension to take out pension provision. Clearly people already paying into an occupational scheme do not fall within this category. Allowing such people to have stakeholder pensions could lead to providers “cherry picking” by selling to the better off rather than to people without existing pension provision.
14 Nonetheless, Consultation Brief 6 sought suggestions on how concurrency could be introduced easily and at low additional cost. Suggestions made have however involved combinations of increasing the costs to the Exchequer, increasing complexity for providers and individuals and introducing unfairness for groups of individuals.
15. In all of the circumstances, the Government has decided that full concurrency between DC and defined benefit occupational pension schemes would not represent good use of Exchequer resources. It would, in many cases, be used by those who already have good pension provision rather than the lower and middle earners who are the target of the stakeholder initiative. Ministers have, however, said that they will be prepared to examine ideas for partial concurrency aimed at helping those on modest earnings. Such approaches would have to be both cost effective and workable. The Inland Revenue will be contacting employers’ and pension industry representatives to see whether they wish to be involved in this process.
16. Carry forward/carry back. In line with its earlier proposals, the Government has decided to simplify these complicated rules from April 2001. A new arrangement will be introduced under which a payment made before the 31 January (the filing date for a self assessment return) can, on election on or before it is paid, be treated as a payment for the previous tax year. There will be no carry forward of unused reliefs since this is no longer needed for the majority of people. The new facility to make payments of up to 3,600 pounds a year without reference to earnings will allow the vast majority of people to catch up on their pension contributions. The minority of people wishing to make higher contributions (less than 5% of existing DC contributors) will in future have to plan their affairs on the “use it or lose it” basis that exists with other tax favoured savings schemes such as ISAs. Use of the “earnings holiday” arrangements described in the next paragraph will however provide some additional flexibility for them.
17. Contributions above 3,600 pounds. The Government has decided to extend the concept of the earnings holiday – where someone whose earnings cease can continue contributing for five years – to contributions above 3,600 pounds. Under these proposals contributions over 3,600 pounds pounds will be based on the highest level of earnings in the previous five years. Put another way earnings in a particular year can allow higher contributions for that year and the next five.
18. Life assurance Many respondents argued that it should be possible to include an element of life assurance cover within a pension. But they did not support the use of a flat rate limit referred to in the consultation brief. The Government has decided that life insurance can be included so long as it does not exceed 10% of the contributions paid. This restriction will apply to all DC pensions where the contract for insurance is made after 5 April 2001. Contracts made under the existing rules on or before 5/4/01 will continue to be subject to the existing rules (life assurance contributions should be no more than 5% of earnings).
19. Waiver of pension premium insurance This is insurance which pays the pension contributions in certain circumstances – with existing personal pension only when the contributor cannot pay due to ill health. Respondents views were mixed and the Government has decided that, after 5 April 2001, the method of giving tax relief on waiver of premium insurance will be changed and the circumstances when it applies broadened.
20. Waiver premium payments as part of the tax exempt pension contribution will not be allowed. But amounts paid out under any waiver policy will be treated like any other DC pension contribution. The pension provider will claim back tax at the basic rate in respect of the contribution. This approach focuses tax relief where it is really needed (when the waiver insurance actually pays the contributions) and opens up tax relief to waiver insurance pay outs in circumstances other than ill-health, such as unemployment. It also means that the overall sum assured can be reduced which off set the loss of tax relief on the contributions themselves.
21. Transfer of shares from approved employee share schemes After 5 April 2001 it will be possible, within the contribution limits set out above, to transfer shares from an approved employee share scheme into a DC pension. This mirrors the arrangement available for transfers into an Individual Savings Account (ISA).
22. “Crown duty” arrangements Consultation paper 6 proposed that individuals undertaking overseas duties on behalf of Crown (such as the armed or diplomatic services) should be able to contribute to a DC pension. It has also been decided to extend this facility to their spouses.
23. Simplifying information requirements No information about earnings is needed for the vast majority of people who make contributions of less than 3,600 pounds . This is a significant simplification. It will remove one of the hassles some people saw as an obstacle to taking out pensions cover. It will also help pension providers reduce their costs and meet the 1% standard on costs which can be charged for stakeholder pensions.
24 The information needed if contributions are made above #3,600 is also being significantly simplified. Higher level contributions into a DC pension will be possible up to the existing personal pension age and earnings related limits. Currently, information about earnings levels has to be provided annually. From April 2001, information about earnings for one year will be able to cover higher level contributions for the next 5 years. This will not only simplify matters but will also introduce additional flexibility to help contributors plan their payments when they have fluctuating high levels of earnings.
25. Pension applications not on paper Currently, all information needed to open a DC pension has to be provided in paper form. From the introduction of stakeholder pensions, information can be provided over the telephone, e-mail or over the Internet. The arrangements will be the same as those in place for ISAs. Where the information is submitted in a paperless form, the pension provider must send out confirmation of the details so that there is a proper acceptance for contract purposes. This confirmation could be via e-mail, although currently with ISAs is usually on paper.
26. Phased Vesting The draft clauses contain technical changes that will allow pension providers to pay multiple annuities from a single arrangement. These technical changes will make administration easier for pension providers. Currently, the rules require all the benefits for a personal pension arrangement to be taken together. Consequently, to allow for the possibility of flexible retirement pension providers structure their schemes with clusters of arrangements. Sometime these clusters contain hundreds or thousands of arrangements.