Pensions and retirement planning

The Pensions Act 2004 established the Pensions Regulator (TPR) as the UK regulator of work-based pension schemes. TPR is funded by levies on all occupational and personal pension schemes.

TPR issues codes of practice and guidance about what it expects from trustees, administrators and advisers in terms of conduct as well as the ways in which it operates. It has the following responsibilities:

Make sure employers put their staff into ...

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TPR also requires employers and anyone else involved with administering a scheme to report irregular or dishonest conduct, i.e. to act as ‘whistleblowers’.

The Pensions Act 2017 gave TPR powers to authorise and de-authorise master trusts.

How is The Pensions Regulator funded?

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FOS is completely independent and impartial and as such if it decides a business has treated the consumer fairly it will explain why. However, if it decides the business has acted wrongly and the consumer has suffered a loss as a result, it can order matters to be put right. 

The FOS can deal with all pension complaints, however complaints about the employer or administrator of an occupational scheme or pers...

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For complaints that occur before 1/4/19 and which are referred to the FOS on or after 1/4/2022, the limit is £170,000

For complaints that occurred before 1/4/2019 but referred to FOS after 1/4/2019 but before 1/4/2022 the limit is £160,000

For complaints referred to FOS before 1/4/2019 the limit is £150,000

In addition FOS can require that any interest, any costs and any interest on the costs is also awarded in addition to the money award made.

How long does a business have to offer a complainant a solution?

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The Pension Protection Fund (PPF) came into force in April 2005 and is an insurance scheme designed to protect members of defined benefit and hybrid schemes. It can provide compensation where a UK-based defined benefit (DB) or hybrid scheme is underfunded and the sponsoring employer becomes insolvent and therefore unable to fund the pension scheme. The scheme must not have commenced wind up before 6 April 2005.

Eligibility to enter the PPF begins when a prescribed insolvency event occurs, at which point an assessment period of at least 12 months starts. During this time, the scheme will be considered to see if it meets the criteria for entry into the PPF. Several criteria and conditions will need to be fulfilled before payments can be made, including the requirement that no further benefits can be earned or transfer values paid ...

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Protection for pension increases in payment: there are no increases for benefits accrued for service prior to 6 April 1997.  Benefits accrued for service after 5 April 1997 is increased in line with CPI to a maximum of 2.5%

A PPF trivial commutation lump sum can be paid to those over 55 and under 75 and with £30,000 maximum overall benefits

Early retirement is subject to an actuarial deduction

From April 2017 until it was disapplied, the PPF compensation cap was increased for those with pensionable service above 20 years by 3% for every extra full year. The maximum was set at double the standard cap. This was known as the ‘long service cap’.

In what circumstances will the PPF provide compensation?

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Signs to watch out for:...

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Cold calling in respect of pensions has been banned since 9 January 2019 - fines can be imposed of up to £500,000.

You should note that FAS has accepted no further applications for assistance since 1 September 2016.

FAS members will be guaranteed 90% of their accrued pension before the scheme start...

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There is provision for a 50% pension for spouses or civil partners

The FAS has accepted no further applications for assistance since 1 September 2016.

Where a scheme commenced wind up procedures on 6 April 2005, which pension protection scheme will potentially provide compensation?

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The phasing in of the reforms started in October 2012 and continued until April 2019.

Who has to be auto-enrolled?

An employer may have several categories of employee, but only eligible jobholders have to be auto-enrolled. An eligible jobholder is a worker who:

Is aged between 22 and State pension age; and

Works (or ordinarily works) in the UK; and

Has earnings of more than the ‘earnings trigger’ in the relevant pay reference period of £10,000

Non-eligible jobholders have the right to opt in.

Entitled workers have the right to ask to join a scheme.

When do employees have to be auto-enrolled?

Employees have to be auto-enrolled into a qualifying pension scheme either from the automatic enrolment date or from the end of any postponement period.

The process is a number of steps that must be done within the ‘joining window’; this is a six week period that starts from the automatic enrolment date.

Employer must provide information on the eligible jobholder to the pension scheme

Employer is responsible for enrolment information being provided to the eligible jobholder in writing

The final step is for them to make arrangements to achieve active membership

Postponement

Employers can choose to operate a postponement (or waiting) peri...

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The employee must give their employer the opt-out notice within one month of the later of:

Becoming an active member of the pension scheme; or

Being told that that they had been, or would be, auto-enrolled into the pension scheme

When the employer tells the scheme administrator of the opt-out notice received, the scheme administrator will treat the employee as though they had never joined the scheme on that occasion. The employer will then give the employee a refund of any contributions they may have already made. Where the relief at source method has been used to pay the employee contributions, the refund will be paid net of basic rate tax and the balance refunded to HMRC.

Instead of opting out of the scheme, an employee may want to remain an active member but pay a reduced level of contribution. Whether they can remain in the pension scheme, effectively as an ‘opted-out’ employee paying lower contributions will depend on the scheme rules specific to that pension scheme. If they do remain in the scheme, the employee will still have to periodically go through the automatic re-enrolment process.

If an employee opts out of a pension scheme, the employer must automatically re-enrol them into a qualifying pension scheme every three years.

Within what period must a jobholder opt-out of a qualifying pension scheme into which they have been auto-enrolled?

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Please note that we will call the person with pension benefits the member and the person claiming part of the member’s benefits on divorce the ex-spouse.

For divorces after December 2000 there are three options.

Offsetting

Offsetting involves ordering the member to pay over a greater share of other non-pension assets than would otherwise have been the case if no pension rights had existed.

Offset has the advantage of leaving pension benefits intact for the pension member, though the obvious disadvantage is that the ex-spouse has no pension provision for retirement. However, offset is still common in the divorce process, with one reason being that it allows a clean break.

Example

Tom and Joyce are divorcing. Their assets are a house worth £400,000, £210,000 in cash and other assets as well as Tom’s pension rights which have been valued at £320,000. Their total assets are therefore £930,000.

If an offset arrangement is agreed, Tom could retain his pension fund plus £145,000 and Joyce should have the house plus £65,000.

Defined benefit schemes

To calculate the gross value of the member’s accrued benefits, the cash equivalent transfer value is used. When establishing the amount of ‘offset’ the following is taken into account:

The ex-spouse will no longer be entitled to any pension and tax free cash once they are in payment

They will not be entitled to a spouse’s pension if the member predeceases them

They will lose any death in service benefits

Defined contribution schemes

The loss to the ex-spouse is worked out by agreeing a percentage or division of the fund taking into account:

Loss of pension benefits

Loss of spouse&...

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With a periodic payment order the ex-spouse is deemed to have received their share of the income from the member; this means the whole income is taxed at the member’s marginal rate.

Earmarking has several major drawbacks:

The member can retire when it suits them and therefore dictate when the ex-spouse will receive any benefit

Benefits stop when the member dies. The ex-spouse could potentially get nothing at all

The ex-spouse cannot define in any effective way how funds are to be allocated and into which types of investment funds. The member could potentially hold all investments in low risk, low-yielding investments

A final salary scheme member could decide to reduce benefits by opting out of the scheme and then starting a new post-divorce pension arrangement

There is a clear incentive to cohabitation in the automatic termination of the court order on remarriage

The whole pension is treated for tax purposes as the member’s and earmarked payments are provided from the net pension received

There is no clean break - something many people desire in this situation

There are advantages however for the member:

No money/assets change hands at the time of divorce

If the ex-spouse remarries the periodic payment order lapses

If the ex-spouse dies before benefits start any periodic payment stops

Member has full control over timing, where funds are invested and decision to transfer

Impact on lifetime allowance

As the member still owns all pension rights, they are valued against their lifetime allowance (even though their pension income will be lower)

The ex-spouse receives a pension that is not valued against their lifetime allowance

What are the two types of earmarking order?

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Age discrimination directive

Pension schemes in the UK are covered by the Equality Act 2010; this makes it unlawful to discriminate against employees because of age.

Since 1/1/21 the British Parliament is able to amend the Equality Act without regard to EU law, but any amendments must be subject to the UK/EU trade agreement. In April 2021 the Equality Act had not been amended but you should keep up to date with any developments.

Key aspects are:

It is unlawful for occupational pension schemes to discriminate against members or prospective members of a scheme on the basis of age

It is unlawful for employers to discriminate in relation to pensions on the basis of age

Discrimination (direct or indirect) can only be lawful if one of the specific exemptions apply or if it can be objectively justified

Trustees must not apply any discriminatory rules under their scheme and are given powers to amend any scheme rules that conflict with the regulations

Workers who suffer age discrimination regarding their pension(s) can b...

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Financial Services and Markets Act 2000

Under the Financial Services and Markets Act 2000 an occupational pension scheme is not classed as an investment. However, management of a pension scheme’s investment fund is regulated, meaning that internal or external fund managers require the necessary authorisation from the FCA.

Trustees of occupational pension schemes can provide advice in certain areas without breaching the terms of the FSMA 2000. These include:

Positively recommending that employees join their pension scheme and pay additional voluntary contributions

Promoting any in-house AVC arrangements, in a general sense, over external pension arrangements (without providing advice on the external contract)

Providing generic criticisms of individual pensions if they wish. Again, care should be taken not to provide specific advice on a particular external provider’s pension

From which date were the default retirement age procedures removed?

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A creditor can only petition for bankruptcy if the debtor owes them at least £5,000.

In most circumstances, the pension benefits/rights will be excluded from the bankrupt’s estate and are protected from the TIB under the Welfare Reform and Pensions Act (WRPA) 1999.

State benefits not yet in payment do not form part of the estate but neither are they available for use by the TIB. State benefits in payment are unlikely to be subject to an income payments order from the TIB as they will be necessary to meet the reasonable domestic needs of the bankrupt and their family, and as such are unlikely to be affected.

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In October 2016, the Court of Appeal upheld the High Court’s decision in Horton v Henry , confirming that an application from a trustee in bankruptcy for access to a bankrupt’s pensions which were not yet in payment should be rejected. The Court held that the statutory position is that all property vests in a trustee in bankruptcy, subject to explicit exceptions. Rights under pension schemes are one such exception, and are therefore protected. The High Court decision provides clarity in this area, and also removes some potential difficulties that the Raithatha v Williamson scenario would have given rise to – for example, determining how and when benefits should be brought into payment when various options would be open.

Which piece of legislation protects most pension benefits/rights from the Trustee in Bankruptcy?

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Estimated study...

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