Pensions Update Programme
Learning Outcome 2
By the end of this learning outcome you will be able to explain the:
 Legislative
 Reporting
 Compliance
Requirements arising from the pensions reforms
.
© Aviva
-1-
v 2016
The increased pension flexibilities bring with them dangers which do not arise with the
traditional annuity and pension commencement lump sum (tax-free cash). Requirements
have been put in place by HM Treasury, HMRC and the FCA (Financial Conduct Authority) to
ensure that customers can take their benefits on an informed basis and they do not run
unforeseen risks.
Using the forms of flexible benefits available makes clients liable to the Money Purchase
Annual Allowance (MPAA). This brings with it reporting requirements placed on both the
client and the Scheme Administrator of the scheme within which the benefits were
crystallised, reporting to HMRC and to other schemes. The MPAA also brings with it changes
to the requirements for pensions savings statements, since the client’s annual allowance for
the relevant scheme may be £10,000 rather than the previous £40,000.
Reporting requirements
The following table summarises the information that must be given, who must receive it,
and the associated time limits:
From?
To?
Scheme
administrator
Member
Scheme
Administrator
Receiving
Scheme
Administrator
Member
Scheme
Administrator
Member
Scheme
Administrator
of other
schemes
where they
are an active
member
Trigger?
 1st payment of flexi-access
drawdown
 Payment from capped
drawdown arrangement in
excess of GAD limit
 UFPLS payment
 Stand alone lump sum from
money purchase arrangement
 Transfer, when ceding SA
believes that member has
flexibly accessed benefits
 Payment of UFPLS/full flexiaccess drawdown
 Payment of flexible benefits
(as listed in the top box
above)
 Converting capped drawdown
to flexi-access drawdown
 Receiving a notification from a
Scheme Administrator that
they have flexibly accessed
their benefits
What information?
Deadline?
 They have flexibly
accessed their benefits
 Inputs to money
purchase schemes in
excess of £10,000 per
tax year will attract
annual allowance charge
31 days after
payment
 That they believe that
member has flexibly
accessed benefits
 No requirement to
provide yearly
statements of lifetime
allowance usage if
associated
arrangement/policy is
empty
 They have flexibly
accessed pension
benefits
31 days after
transfer
n/a
91 days after
payment
NOTE – must
also inform
administrator
of new
schemes they
join other
than by
transfer
The potential penalty for late information is £300, plus £60 per day.
If incorrect information is negligently or fraudulently provided, the penalty is up
to £3,000.
© Aviva
-2-
v 2016
Effects on taxation
Taxation of lump sum payments
Flexible benefits, both uncrystallised funds pension lump sums (UFPLSs) and single flexiaccess lump sums, are subject to PAYE taxation, which for pensions allows only 1/12 of the
personal allowance, basic rate and higher rate bands on first (and therefore single)
payments. This means that many clients can pay tax at 45% on part of their payment when
that is not their final liability. They may find themselves needing to use self-assessment to
reclaim the over taxation. [NOTE: that is the line taken by the R08 syllabus: in fact, there
are means for reclaiming tax in year, and provision in HMRC’s processes for an automatic
recalculation at the end of the tax year, followed by a refund of any over-deductions]. If
the client takes more frequent withdrawals from the same scheme, the provider should be
given a customer-specific tax code by HMRC, resulting in the correct tax being deducted.
Annual allowance charge
The money purchase annual allowance is only £10,000, rather than the standard £40,000.
As a result, more people will find themselves subject to a charge. This is due if the MPAA is
exceeded, even if the client has input of less than £40,000 overall. This is also payable via
self-assessment and is the member’s responsibility.
Additional tax relief
Don’t forget that higher and additional tax relief on contributions to personal pension
schemes (and any other Relief at Source schemes) have to be claimed via self-assessment.
Pensions Savings Statements
Up to April 2015, these statements only had to be issued where the member had exceeded
£40,000 annual allowance usage within the scheme.
If the Scheme Administrator believes that the member has triggered the MPAA, this is now
reduced to £10,000.
The deadline for issuing the statement remains 6 October following the end of the tax year,
i.e. six months.
There are other subtle changes to the pensions savings statements to reflect the MPAA.

HMRC have also adjusted the way that pension schemes making payments to
members must report the payments and the information they must give under the
RTI reporting system for PAYE. This informs HMRC that benefits have been
accessed flexibly.
Pensions dashboard
The FCA has proposed a “pensions dashboard”. The idea behind the pensions dashboard is
that it will be a facility that allows an individual to see all of their pension savings (including
State benefits) in one place.
© Aviva
-3-
v 2016
However, the complexity involved with designing and administering such a system means
that no substantive plans are currently in place.
Scheme rules override
Trustees of money purchase schemes are able to give members access to flexible benefits,
even where the rules do not make any such provision. They are also able to refuse access
to flexible benefits.
FCA compliance requirements
FCA have updated their requirements on firms, including personal pension providers, to
reflect the additional options provided by pensions flexibility and the associated risks. They
are co-ordinating their efforts with the Pensions Regulator and the Department for Work and
Pensions, who deal with the trustees of occupational schemes.








© Aviva
Firms must inform their customers about Pensions Wise, the government information
service: how to contact them, online access, description (i.e. free and impartial
information to understand their options at retirement) and a recommendation that
they should get the right information or advice to understand their options on
retirement.
Firms must give their customers a summary of their options on retirement, including
the open-market options.
This must include information about the scheme; the amount held within it, any
features or restrictions on the way in which benefits may be taken, any
charges/market value reductions and any other relevant factors, as well as
information about Pensions Wise.
This information must be fed to the client at certain prescribed times.
Firms must warn their clients about the risks associated with the options they wish to
exercise. These include the client’s health, as well as tax and other implications such
as intrinsic features of the pension itself.
Requirements which previously only covered income drawdown have now been
extended to cover UFPLS as well. FCA will be making further amendments having
considered the two together.
Changes to suitability reports:
o Must include potential disadvantages of income withdrawal or short-term
annuity
 Capital value may be eroded
 Investment returns may be less than shown
 Annuity/Scheme Pension rates may be worse in future
 Income may not be sustainable
 Tax implications – tax on a full withdrawal must be made clear before
that option is chosen.
o FCA sees UFPLS as equivalent to drawdown, so would expect same
information to be given.
Firms are required to issue new projections following UFPLS payments and to give
other information to help clients understand the implications of these payments.
-4-
v 2016








There are also changes to illustrations. KFIs do not have to show full projections for
drawdown or UFPLS, or an effect of changes table and reduction in yields.
Illustrations will still have to show associated charges and enough information for
clients to understand the implications of lump sum payments.
Drawdown illustrations will still have to include:
o Assumed level of income
o Amount of income and projected value of funds at 5 yearly intervals to age
99 using lower, medium and high returns
o Projected open market option values and the amounts of annuity available
after 10 years
o Amount of annuity available currently in the market.
FCA is planning wider review of illustrations.
No changes to projection rules before maturity.
Critical yields are based on annuity purchase, and may be simplified in respect of
lump sum benefits.
Firms will be expected to improve the information given about the annuity open
market option, particularly the potential availability of enhanced rates, and actively
encouraging customers to shop around.
Changes to wake-up packs to make them shorter and easier to understand are
intended.
Governance standards for money purchase schemes
There are parallel provisions for trust-based and contract-based schemes, regulated by TPR
and FCA respectively.





Chair must sign annual statement, which must confirm compliance with new charge
cap of 0.75% per annum
Explain how they meet the requirement to have enough information to run the
scheme effectively
Ensure core transactions are processed promptly and accurately
Consider whether member costs and charges constitute good value
Meet requirements for default investment option, including statement of investment
principles and reviewing strategy and performance at least every three years.
Workings of the charge cap



© Aviva
Charge must be no more than 0.75% of the member’s fund per annum, if that is the
sole basis on which charges are worked out.
Otherwise, there are further regulations covering flat fees and charges on
contributions.
Cap covers all member-borne fees, including payments to administrators and
advisers, member communications, investment management fees and costs
associated with running the pension scheme.
-5-
v 2016
Transaction costs are currently excluded, but this will be subject to consultation in 2017.
Cap must be implemented by April 2015 on default investment.
Master trusts/multi-employer schemes
There are further standards applied to such schemes:




Must have at least three trustees, or a corporate trustee with at least three directors,
unless that trustee is a professional trustee company.
Majority of trustees/directors, including chair must not be affiliated with any
company that provides services to the scheme.
Non-affiliated trustees must be appointed openly and transparently, e.g. following
advertisement
Trustees must invite feedback from members.
Independent Governance Committees
These are required for contract-based schemes, including personal pension schemes, where
they are being used as workplace pension provision. They will focus on the default
investment used in any such scheme, and on the associated charges and other
arrangement.
Their key duties are:





To act in the interests of relevant policyholders
To assess value for money for workplace pension schemes, and to report on this
To raise any concerns about value for money with the firm’s governing body
To escalate such concerns and report to members and employers if the firm does not
address them
To publish an annual report of their findings.
Consumer protection, the guidance guarantee and Pension Wise
Pension Wise, which was referred to earlier, was set up by the Treasury to provide the
guidance which has been guaranteed to those taking their retirement benefits.
Guidance, for this purpose, is defined by an amendment to FISMA 2000:
Guidance given for the purpose of helping a member of a pension scheme to make decisions about
what to do with the cash balance or other money purchase benefits that may be provided to the
member.
This has also been extended to include the survivors of members.
This service is subject to certain standards, which aim to:


© Aviva
Ensure that guidance is impartial, consistent, of good quality and engaging across
the range of options
Create trust and confidence in the designated guidance providers and content of the
guidance so that consumers actively use the service
-6-
v 2016


Ensure that the framework works for both contract based and trust based schemes,
aka occupational and personal schemes.
Refer consumers on to specialist advisers as appropriate after giving them relevant
information about their retirement options.
Guidance vs. Advice
Full advice, based on a fact-find and detailed information about the customers’
circumstances, goals etc. remains firmly in the hands of IFAs. They are also the only people
who may recommend specific products and provide the guarantees which go with full
advice.
Guidance:





Is intended to be free, impartial information provided to consumers about the
options available to them.
The aim is to boost their confidence in making informed decisions about using their
savings.
Customers will remain responsible for the decisions they make
It should look at broad questions such as needs of the customer’s family.
It will also look at tax consequences of the options available.
As we have already said, firms must “signpost” to Pension Wise at retirement.
FCA must establish standards and monitor standards for the guidance given. They are then
responsible for enforcement and seeing that necessary improvements are made.
The Pensions Advisory Service is providing guidance by telephone.
Citizens Advice Bureau are providing face to face guidance.
Customers are being advised to follow six basic steps:






Check the pot value
Find out their options
Plan how long the funds are needed
Work out their needs in retirement
Be aware of tax implications
Find the best deals by shopping around
Advice on safeguarded benefits
Where a member’s benefits include safeguarded benefits, advice from an IFA with pension
transfer provisions must be sought before benefits are transferred out of such teams or
accessed flexibly.
© Aviva
-7-
v 2016
Safeguarded benefits include:



Benefits in Defined Benefit schemes
Money purchase benefits where there is a guaranteed annuity rate
With-profits holdings to which a market value reduction applies
This is subject to a £30,000 minimum value (though providers/trustees may vary in their
approach).
© Aviva
-8-
v 2016