Pensions Weekly Update – 8 February 2023

February 2023
Region: Europe

Here is our weekly summary of key legal and regulatory developments relevant to occupational pension schemes that you might have missed, with links for further information.

  • HMRC has published pension schemes newsletter 146. While mainly providing an update on an administrative front, HMRC notes that it has updated its transfer guidance so that anyone seeking confirmation of the status of a receiving scheme can now request an email response from HMRC provided that they follow a certain process.
  • The Institute for Fiscal Studies (IFS) has published its blueprint for a better tax treatment of pensions. This contains five key proposals for pension tax reform.
    • First, the IFS proposes that there should be a cap on the 25% tax-free lump sum, which it considers unduly benefits higher rate taxpayers. This could be achieved either by a cap on the amount that is tax-free, for example 25% of the first (say) £400,000, or by having a taxable 6.25% top up on all pension withdrawals. In essence, the latter option would work by every pensioner having their pension amount topped up by 6.25%, which would be taxable at their marginal rate. A £1,000 pension pot would, therefore, result in a pension pot of £1,062.50. Tax would be paid at the person’s marginal rate, so non-taxpayers would end up with a pension pot of £1,062.50 (giving an incentive to save). The change would be cost neutral for a basic rate taxpayer (who would end up with a net payment of £850 either way) while higher rate taxpayers would receive a lower net payment than if the 25% tax-free lump sum had applied.
    • Second, the IFS proposes that the treatment of employee national insurance contributions (NICs) should align with the income tax treatment of pension savings. This would mean that employee pension contributions would be free from NICs but pension payments (over time) would become subject to NICs.
    • Third, the IFS proposes that employers pay NICs on pension contributions but that a subsidy would be introduced.
    • Fourth, the IFS recommends that income tax should apply on withdrawals from all inherited pensions, whether the person is under age 75 or over age 75 at death, and that pension pots should form part of a person’s estate for inheritance tax purposes.
    • Finally, as part of this package of reforms, the IFS proposes that the lifetime limits should be redesigned, with distinct approaches for defined benefit arrangements (lifetime cap on benefits) and defined contribution arrangements (lifetime cap on contributions), but that they should be roughly equivalent in generosity. Alongside this, the IFS recommends that the annual allowance should be increased substantially and the tapered annual allowance for high earners should be removed.
  • Various consultations will close in February. We highlight some key consultations below.

If you would like specific advice on any of these issues or on anything else, please contact a member of our Pensions team.

Related Content