April 2017: Legislative changes affecting UK occupational pension schemes
Bringing a new tax year, April tends to be a popular time for proposed legislative changes to the UK pensions regime to come into force and this year is no different. We look at five changes taking effect from 6 April 2017.
1. GMP revaluation for early leavers
For schemes open to future accrual and affected by the abolition of contracting-out last year, the prescribed fixed rate of revaluation to be applied to guaranteed minimum pensions (GMPs) for members leaving pensionable service from 6 April 2017 reduces from the current rate of 4.65% a year to a new rate of 3.5% a year.
2. PPF long service compensation cap
The PPF’s new long service cap comes into force.
The PPF provides compensation based on 90% of an individual’s accrued pension if they are below the scheme’s normal pension age when the employer enters insolvency, subject to a cap. The standard PPF compensation cap for 2017/18 is £38,505.61.
The long service cap is designed to ensure that the standard compensation cap applies more fairly to those who have worked for a long time for one employer and so who are more likely to be materially affected by the cap. The standard compensation cap will increase by 3% for each full year of a member’s pensionable service above 20 years, subject to a new maximum of double the standard cap.
Members already receiving capped PPF compensation will have their compensation re-calculated with the 3% uplift applied.
3. Money purchase annual allowance: reduction to £4,000
The money purchase annual allowance, which is triggered in certain circumstances where a member accesses their DC pension savings flexibly, reduces from £10,000 to £4,000. The money purchase annual allowance is designed to limit the scope for individuals who are flexibly accessing their DC pension savings to obtain further tax relief by making additional pension contributions.
Schemes are required to communicate with a member about the money purchase annual allowance within 31 days of the member flexibly accessing their DC pension rights.
4. Overseas pension schemes
The requirements that a scheme must meet in order to be an “overseas pension scheme” for HMRC purposes are amended.
Where a member wishes to transfer their benefits in a UK pension scheme abroad, one of HMRC’s conditions is that the receiving scheme must meet the requirements to be an “overseas pension scheme”. An existing rule requiring that at least 70% of UK-tax relieved funds are used by the overseas scheme to provide the member with an income for life will be removed, recognising the greater flexibilities available in the UK since April 2015. In addition, an overseas pension scheme will be allowed to pay benefits earlier than normal minimum pension age if the payment would be authorised were it paid by a registered pension scheme in the UK (e.g. due to the member’s ill-health).
5. Pensions advice allowance
The new pension advice allowance comes into effect allowing scheme members to request payment of up to £500 tax-free from their DC pension pot to fund the provision of independent financial advice. Members will only be able to do so where their scheme’s rules permit this, up to three times in their life and no more than once in any tax year. Further information about the new pension advice allowance can be accessed here.