The Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2016
HMRC is consulting on draft regulations and an accompanying draft explanatory memorandum on changes to the information requirements for pension scheme administrators following the introduction of the pensions tapered annual allowance (AA). Once in force, the new regulations will amend the Registered Pension Schemes (Provision of Information) Regulations 2006 (the Information Regulations).
In this response
- General comments
- Definition of “pensionable earnings”
- Responsibility for providing information
- Impact on automatic enrolment
We agree in principle with the proposal to provide individuals with certain information to assist them in determining whether or not they are liable to an AA charge in a particular tax year. However, we have some concerns as to the way in which implementation of the new requirements is envisaged, which we outline below.
Given the complexity of tapered AA and the potential cost impact for individuals, its introduction needs to be supported by publicity and technology (in terms of the self-assessment tax return) from HMRC.
Draft regulation 5 seeks to amend regulation 14A of the Information Regulations, by limiting the annual information requirement to administrators of public service pension schemes and occupational pension schemes.
By excluding personal pension schemes, a discrepancy is introduced. Whilst the onus for collating all information relevant to the AA taper falls on the individual where they are a member of a (contract-based) personal pension scheme, it falls on the trustees, as scheme administrators, in trust-based arrangements. We query the rationale for this difference in treatment.
Draft regulation 3 proposes a new definition of “pensionable earnings”, based on a member’s salary, wages or fee” relating to the employment in question. Whilst we understand the aim of the new definition, the terminology used does not tie in with the requirements for calculating an individual’s “adjusted income” or “threshold income” that will be introduced into the Finance Act 2004 from 6 April 2016.
Information on “pensionable earnings” will not necessarily be available to trustees, as it is does not fall within the information that an employer is required to provide under regulation 15A in relation to pension input amounts.
Given the aim of achieving accurate calculations for the purpose of the tapered AA, is the intention here to use pensionable salary rather than earnings? In our view, the definitions used for the automatic enrolment alternative certification requirements (regulation 32E of the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010) are a closer match for calculations needed. This is because the definitions allow the information to be based on information that is available to the trustees as a matter of course. The definition introduced here needs to be consistent with the requirements under regulation 15A.
Further, given the requirement in regulation 14A to provide a pension savings statement in specified circumstances (which, as the amendments are drafted, will include a reference to “pensionable earnings”) it is essential that all elements of the requirement are unambiguous.
As noted above, information on pensionable earnings (as defined in the draft regulations) may not be generally available to trustees. It may therefore be more appropriate for employers, rather than scheme administrators, to provide this information.
An alternative would be a simpler notification from an individual’s employer, aimed at those whose “employment income” (the term used in the calculation of the taper and defined by reference section 7(2) of the Income Tax (Earnings and Pensions) Act 2003) is more than £110,000, alerting an individual to the fact that they may be affected by the taper and recommending that they seek appropriate advice. In our experience, this is what many employers are already doing in practice.
A simple notification could very usefully be accompanied by guidance from HMRC on the factors which individuals need to take into account in calculating their adjusted and threshold income. This would help trustees and employers who are increasingly faced with questions from members. An AA calculator as part of HMRC’s tax return would also help individuals achieve the correct calculation.
We note that, unless an amendment is introduced to the draft regulations, the existing requirement in regulation 14A to provide a member with a pension savings statement, will apply automatically to members who are subject to the tapered AA. Given that employers will not know in every case whether an individual is affected by the AA taper, we assume that this is not the intention.
In the light of the introduction of the AA taper, one option being contemplated by some employers is the use of a £10,000 cap on pension contributions. In some cases this may be spread over a 12 month period, but in others it may be paid up front.
There is a risk with the latter approach in the context of automatic enrolment that, whilst the minimum contribution threshold is met, minimum contributions will not be paid in every pay reference period. Given that anyone to whom the AA taper is being applied is not within the Government’s target group for automatic enrolment pension saving, this could reasonably form the basis of a further exception to the automatic enrolment requirements. We have also raised this point with the DWP in our response to its recent consultation on technical changes to automatic enrolment.