HMRC publishes proposed tax changes to enable operation of CDC schemes

[RobertT]

https://www.pensionsage.com/pa/HMRC-pub ... chemes.php" onclick="window.open(this.href);return false;

HMRC has published a policy paper outlining proposed changes to tax legislation to enable collective money purchase (CMP) pension schemes to operate as UK registered schemes.

The legislation for CMP schemes, previously known as collective defined contribution (CDC) schemes, was introduced in the Pension Schemes Bill, which has passed through the House of Lords and will move onto the House of Commons later this year.

From April 2021, the legislation allowing CMP schemes to operate in the UK is scheduled to take effect, and the proposed changes to tax legislation will tax effect from 6 April 2021.

HMRC noted that its measure to provide changes to tax legislation was necessary to avoid unintended tax consequences to members and schemes once CMP schemes can operate.

If tax laws were not amended for their introduction, any payment to new CMP schemes may have led to unauthorised payment charges for the scheme and member.

Furthermore, it may have prevented CMP schemes from registering for tax purposes, meaning that tax relief would not be available and the scheme could not be used for auto-enrolment purposes.

The tax legislation will be introduced in Finance Bill 2020-2021 and will allow CMP schemes access to tax relief and certain exemptions, such as from tax for certain lump sum benefit payments and lump sum death benefits.

HMRC estimated the changes would have not have any significant economic impacts or impact on the exchequer.

However, it did say the legislation would have a “negligible impact” on pension scheme administrators and employers who decide to use CMP schemes.

HMRC noted: “One-off costs will include familiarisation with the change and advising individuals affected. There are not expected to be any continuing costs.

“This measure is not expected to impact on civil society organisations.

“Customer experience is expected to stay broadly the same because enabling the new pension scheme to operate as a UK registered pension scheme will not change when and how a pension scheme will need to interact with HMRC.”

It estimated that necessary changes to HMRC’s IT systems to support the implementation of the tax changes would cost around £2.5m.

*** More in depth info can be found here: https://www.gov.uk/government/publicati ... e-benefits" onclick="window.open(this.href);return false;

[Dindin]

Can you clarify this CDC? So I pay in for twelve months to get £280 out? Each year minus 5 percent for taking early before age 67.

[RobertT]

Can you clarify this CDC? So I pay in for twelve months to get £280 out? Each year minus 5 percent for taking early before age 67.

The accrual rate for CDC is 1/80ths of pensionable pay and 3/80ths for the Defined Benefit Lump sum Scheme. So based on current full time basic pay that would mean a pension of £287 and a lump sum of £861 for each year you're a member.
The aim is that those amounts will increase each year by inflation, but there's no guarantee they will, and they could go down.

Had the CSDB scheme stayed open, section B members would be building up roughly the same amounts of pension and lump sum, while section C would(based on my pensions contrib pay) be a pension of £343.

We don't yet know what the reduction will be for taking the CDC pension before NRA, but 5% per year is probably as good a guess as anything else.

[Woody Guthrie]

Just an aside and a bit of a guess but do you think as the NRA for the CDC is later would the ability to take your pension early also move later to prevent members from devaluing their pension too much?

It may be covered in the existing loose framework but I can't remember seeing it.

[RobertT]

The legal minimum age for taking any pension is currently 55, the only time that doesn't apply is if it's for health reasons.

There are plans to increase that age to 57 by 2028 and then keep it 10 years earlier than state pension age from then on. But at the moment there is no legislation in place to say that's actually going to happen and how. For example: Will it be an overnight change, or phased in over a period of time.

As far as I'm aware employer DB schemes can in theory set their NRA's to whatever age they choose, but the minimum age you can access any pension is set in law.

[Dindin]

Thanks Robert T

[renrag40]

This is the first time i have seen a time line for when the CDC legislation is expected to come into force alongside the changes to tax legislation. 6th April 2021. So that is the earliest that the RM scheme can start. It will be interesting to see if it does start at the earliest opportunity or not.

[Dindin]

Can you clarify this CDC? So I pay in for twelve months to get £280 out? Each year minus 5 percent for taking early before age 67.

The accrual rate for CDC is 1/80ths of pensionable pay and 3/80ths for the Defined Benefit Lump sum Scheme. So based on current full time basic pay that would mean a pension of £287 and a lump sum of £861 for each year you're a member.
The aim is that those amounts will increase each year by inflation, but there's no guarantee they will, and they could go down.

Had the CSDB scheme stayed open, section B members would be building up roughly the same amounts of pension and lump sum, while section C would(based on my pensions contrib pay) be a pension of £343.

We don't yet know what the reduction will be for taking the CDC pension before NRA, but 5% per year is probably as good a guess as anything else.

If these figures of £287 a year and £861 lump sum a year take a 5% hit it won't be worth paying in to it.

[RobertT]

If these figures of £287 a year and £861 lump sum a year take a 5% hit it won't be worth paying in to it.

The lump sum is via the Defined Benefit Lump sum Scheme(DBLSS), which is very similar to the current DBCBS. There's been some debate on how much the reduction is for taking the DBCBS before NRA, the result is that it's less than 5%, but nobody really seems to know how much.
I expect the reduction for taking the DBLSS early won't be as high as 5% either?

But I wouldn't be surprised to see a roughly 5% per year reduction for taking the CDC pension itself early.

The plan is also that CDC will have similar flexibility as individual DC schemes, so there will be the option to take a 'cash transfer' to a DC arrangement. But that is pending the legislation.

I would expect my contributions, based on full time £441 per week, to be about £26.50 into CDC/DBLSS, but factoring in tax relief and PSE it would only actually cost me £18, plus RM contributions of £60 per week.
Still well worth paying in!

[Dindin]

If these figures of £287 a year and £861 lump sum a year take a 5% hit it won't be worth paying in to it.

The lump sum is via the Defined Benefit Lump sum Scheme(DBLSS), which is very similar to the current DBCBS. There's been some debate on how much the reduction is for taking the DBCBS before NRA, the result is that it's less than 5%, but nobody really seems to know how much.
I expect the reduction for taking the DBLSS early won't be as high as 5% either?

But I wouldn't be surprised to see a roughly 5% per year reduction for taking the CDC pension itself early.

The plan is also that CDC will have similar flexibility as individual DC schemes, so there will be the option to take a 'cash transfer' to a DC arrangement. But that is pending the legislation.

I would expect my contributions, based on full time £441 per week, to be about £26.50 into CDC/DBLSS, but factoring in tax relief and PSE it would only actually cost me £18, plus RM contributions of £60 per week.
Still well worth paying in!

Thanks again Robert T.

[Woody Guthrie]

Just an aside and a bit of a guess but do you think as the NRA for the CDC is later would the ability to take your pension early also move later to prevent members from devaluing their pension too much?

It may be covered in the existing loose framework but I can't remember seeing it.

I guess we have our answer now.
1973 and 2028 being the key dates that's if the CDC is up and running by 2028.

[RobertT]

Just an aside and a bit of a guess but do you think as the NRA for the CDC is later would the ability to take your pension early also move later to prevent members from devaluing their pension too much?

It may be covered in the existing loose framework but I can't remember seeing it.

I guess we have our answer now.
1973 and 2028 being the key dates that's if the CDC is up and running by 2028.

It's nothing new really!
It was announced in 2011 that state pension age would be increasing to 67 between 2026 and 2028, and the government said in 2014 that the minimum age you would be able to access private and workplace pensions would be 10 years before SPA. But there's not been much info about it since.
The government has just confirmed the plans will go ahead.

The change to 57 will obviously affect when many can take existing RM pensions too.