Pension Freedoms – one year on

It was in March 2014 when the Chancellor announced in his Budget speech what was to become possibly the biggest shake up of pensions since pensions taxation was introduced in 1921. From April 2015 it was no longer more or less obligatory for most pension savers to buy an annuity on their retirement.  Instead, they could take their pension pot as cash or draw down, in the Chancellor’s words “as much or as little of their pension pot as they want, any time they want”.  The people were to be “trusted with their own finances” or at least those who had reached age 55.

This was heralded at the time as giving retirees the opportunity to treat their pension savings like ISAs, but simultaneously there were fears that many could run out of cash too soon or splash out such as on a holiday of a lifetime. This was put into shorthand as the Lamborghini effect.  The pensions industry itself saw it as the death knell of the annuity.  But what is the reality?

Firstly, the reforms only apply to defined contribution (aka Money Purchase) schemes and do not directly affect final salary pension savings. Normally, only 25% of an amount drawn down is tax free.  In the 2015/16 tax year a drawn down of £100,000 would have incurred a tax liability of about £29,400, assuming no other income.  Nowadays, would-be raiders of their pension pots have to get their heads around the terminology as well as the meaning.  We have, for example, “flexi-access drawdown” and “uncrystallised funds lump sums” or UFPLS for short.  There are important differences that are particularly relevant to those still in work or have other sources of income.  A hot towel may be needed and an independent financial adviser highly recommended.

It is often overlooked that there is no duty on a pension scheme trustee to offer the flexibilities lauded in the Chancellor’s statement. In that situation it will generally be open to a scheme member to transfer funds to another arrangement, which does facilitate flexibilities.  Even then, 70% of final salary schemes reportedly do not allow partial transfers.  The Government was quick to recognise though that transfers out of final salary schemes to defined contribution schemes in order to access pension funds is fraught with risk.  It is, therefore, a requirement that those seeking to access funds valued at £30,000 or more must get advice from a specially qualified adviser, and the adviser must disclose certain information to the Trustee before it can go ahead.

When all is said and done, the objective is to ensure that sufficient pension savings are accrued to enable each retiree to afford and enjoy the lifestyle in retirement that they expect. This was the rationale behind Auto-Enrolment.  However, the low minimum statutory contributions mean that someone on average earnings who are auto-enrolled from age 22 and along with their employer paying in only the minimums, would have to work until age 77 in order to achieve a retirement income of two-thirds of their pre-retirement earnings.  Add to that the state pension age will rise to age 66 in 2020, with further rises in the pipeline.

Then there is inheritance tax. Like most tax rules it is complicated, but if the deceased was age 75 or over and had their pension in a draw down or uncrystallised (untouched) arrangement, the inheritor is likely to incur a tax charge potentially up to 45%.  At least this is an improvement on the previous 55% burden on inherited pensions.

Finally, when large sums of money are involved, there are certain to be unscrupulous individuals lurking, and even at this early stage there have been reports of scams involving pension pots.

The watchword is beware, and be advised.

Shared Parental Leave – one year on

 

5 April 2016 marks the first anniversary of the launch of Shared Parental Leave (SPL), the revolutionary policy that allows couples to share leave surrounding the arrival of a new addition to the family.  The hope is to help women back into the workplace quicker and give men the opportunity to care full-time for their new baby or adopted child in the important first year.

My Family Care and the Women’s Business Council conducted research on the story so far and found that just 1% of men (all men that is, not just eligible men based on their feedback) have so far taken up the opportunity to share their partner’s parental leave, while 55% of women say they wouldn’t want to share their maternity leave.

The combined survey of over 1,000 parents and 200 businesses found that taking up SPL was very much dependent on a person’s individual circumstances, particularly on their financial situation and the level of paternity pay available from their employer.  The main reasons for lack of take up by men are affordability, lack of awareness and unwillingness of women to share the leave entitlement.  While take up is still low, the research found that men are interested in taking SPL in the future.  Of those surveyed, 63% of men who already had children and were considering having more said it was likely they would choose to take SPL.

Of the 200 employers asked, the majority said that they enhanced both maternity (77%) and paternity (65%) pay.  The core reasons were to be consistent with their culture of fairness and equality and to increase employee retention and gender diversity.

Outwith the survey’s findings there is perceived a reluctance to engage on the part of fathers in case this is interpreted as lack of career commitment.

Employment Tribunals Scotland – Devolution

 scales of justice

The Scotland Bill is currently working its way through Westminster. One of the provisions allows for the Employment Tribunal in Scotland to become a devolved matter. In anticipation of this, the Scottish Government is currently consulting regarding the transfer of certain functions of the Employment Tribunal to the First-tier Tribunal for Scotland, which currently deals with a variety of matters, including immigration housing and welfare.

 Scottish Engineering has submitted a response to the consultation (which is due to close on 24th March 2016) expressing a number of reservations about the current proposals, including parity of service with other parts of the UK, the position of the current Employment Tribunal Judges, and the possibility of UK wide legislation being interpreted differently north and south of the border.

 We will report on the outcome of the consultation once that is published by the Scottish Government.

 

Holiday Pay Update

The Employment Appeal Tribunal issued its decision in the Lock v British Gas case at the end of February 2016.

The EAT, rejected British Gas’ appeal and confirmed that Mr Lock is entitled to holiday pay which includes an element for the amount of commission he would normally receive when working his regular hours. The Lock decision follows on from the EAT’s judgement in the  Bear Scotland case, which confirmed that all regular overtime, which employees are obliged to perform if requested by the employer, should be included for holiday pay purposes. However it is important to remember that this top up only needs to be paid for 20 days’ worth of annual leave per year.

 

Unfortunately, the Lock decision does not provide any further clarity on the reference period over which average earnings must be assessed in calculating holiday pay. Accordingly uncertainty remains over how to calculate claim for previous underpaid holiday and how it should be calculated going forward. British Gas has stated that it intends to appeal the EAT’s decision, so watch this space for future developments……