New terminology: registered occupational pension scheme
The first step is to adapt to the new terminology. What was previously known as an “exempt approved scheme” will now be known as a “registered occupational pension scheme”. This type of scheme is the most tax-efficient available and is likely to be the most commonly used structure going forward. However, the new legislation also provides oppor-tunities for high-earning employees and equity partners who previously used unapproved group life policies.
Non-registered schemes will permit carry forward of high levels of benefit
A range of products to be called “non-registered schemes” will be available. Broadly speaking, these have been intro-duced to allow high-earning individuals who have accrued benefits under previous tax regimes to carry forward levels of benefit which are, or may in time prove to be, in excess of lifetime allowances within a protected environment. The reason for this is that changes in taxation cannot be applied retrospectively, and whilst the new legislation will gradually apply to more and more people, it is deemed unfair to impose new restrictions on people who have been planning for retirement for many years.
New tax-free employee individual lifetime allowance
One impact on payment of group life benefits is that the traditional maximum tax-free levels of cover that could be provided by companies (4 x salary up to a cap of GBP 105,600) have been scrapped. Any death benefit payments made by trustees will now be set against the employee’s indi-vidual lifetime allowance (set at GBP 1,500,000 for 2006/7 and increasing to GBP 1,800,000 by 2010/11). This means that an employee can receive total benefits up to GBP 1,500,000 free of tax (from either a registered group life scheme, accrued savings benefits under a pension contract, or more likely, a combination of the two). Benefit payments in excess of this figure will be taxed at a flat rate of 55%. Dependant’s pensions do not count towards this limit, since they are currently and will continue to be taxed as income in the hands of the recipients.
Higher lump sum death benefits, lower or no dependant’s pensions attractive
The practical impact of this is that in future, companies may choose to provide a higher level of lump sum death benefit with a correspondingly lower or indeed no level of dependant’s pension. In addition to the changes in taxation which makes this more attractive, providing lump sum cover makes integration within flex schemes far easier, and also sits more comfortably with the current demograph-ics of the UK insofar as the muddled area of dependant’s classifications is concerned.
Protection available for employees who expect to exceed the lifetime allowance
The rules on the protection offered to individuals who have already or may in future accrue entitlement to assets in excess of the lifetime allowance are too complex to address in this article. However, by way of brief summary there are two levels of protection: primary and enhanced. Primary protection allows an individual to continue participating in tax-advantaged plans that provide benefits in excess of the lifetime allowance, subject to an exit test against a pre-agreed enhancement percentage. Enhanced protection ring-fences the current entitlements accrued with no exit test against the lifetime allowance, but severely restricts, if not eliminates, the possibility of the individual accruing further entitlements under tax-advantaged plans.
New scheme administrator role
First and foremost, the legislation creates the role of the scheme administrator, who is responsible for the bulk of reporting duties. These include payments of lump sums, changes in scheme rules, membership fluctuations and scheme wind-ups. Companies need to be very clear about who is responsible for providing this information to the Revenue, as product providers will offer guidance, but at this stage seem unlikely to provide the service itself. For group life schemes linked to pension schemes, logically the trustees will be appointed as the administrator.
Tax implications need to be watched for non-registered schemes
The different types of schemes now available have different taxation structures, whether in respect of the tax deduction given to the employer, or the way benefits are taxed on distribution. The tax treatment of a registered group life scheme should not materially change from that currently applying to exempt approved schemes, but if the company wishes to provide benefits under non-registered arrangements, the taxation implications for members need to be studied in detail.
Special attention necessary for senior employees
Where companies are providing benefits under registered schemes, great care needs to be taken when recruiting senior employees. If these individuals have applied for enhanced protection, it may be inappropriate for them to enrol in a registered scheme for fear of prejudicing their enhanced protection status.
New scheme rules may be required for additional benefits
If a company wishes to take advantage of the changes in legislation to provide additional benefits (the most com-mon scenario might be to provide excess earnings cap cover for executives who were previously capped) it will need to adopt new scheme rules. Existing advisors and product providers will give guidance on how this can be achieved most efficiently, depending on factors such as whether the scheme has a stand-alone life assurance trust or whether the employer is providing benefits through the pension scheme trust. In most cases a simple rule amendment will suffice. For companies that decide not to change scheme designs immediately, it may be opportune to simply review the struc-ture at the next rate review. In any event it is good practice to instruct the local advisor to go to the market when the existing rate guarantee expires.
Reporting deadlines must be observed
Companies with employees who need primary or enhanced protection must observe several deadlines when reporting these individuals to the Revenue. The deadlines are not particularly imminent, but trustees need to be aware that there is a finite timeframe.
Changed definition of children may affect dependant’s pensions
There are some changes to the definition of children which may restrict both the entitlement to, and duration of, the pension. Schemes where children could potentially become recipients of a pension should check that the definitions currently in force still fall within the registered scheme definitions.This article has only been able to scratch the surface of an exhaustive piece of legislation. For clients with existing arrangements in the UK, we recommend that you ask your financial advisor, product provider or Swiss Life contact for advice on your specific circumstances.