Pensions round-up: VAT, annuities and exit charges

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

There have been a few developments in recent weeks which are worth noting.

VAT: HMRC extends current practice to December 2017

We have previously reported in some detail on the tortuous area of VAT recovery in relation to pension scheme costs.

HMRC has announced that it has decided to further extend the transitional period for the VAT treatment of pension costs as set out in VAT Notice 700/17 to 31 December 2017, with scope for additional further extensions after that. This means that employers and pension schemes can continue to operate a 30/70 split between scheme administration (deductible) and fund management costs (non-deductible) where a single VAT invoice has been issued to the pension scheme.

The reason given by HMRC is that it is taking longer than expected to reconcile the court decision in PPG (a European case which allows the deduction of VAT on fund management costs in certain circumstances) with pension and financial service regulations and accounting rules.

HMRC has confirmed that those who have adopted new VAT structures or contracts in accordance with guidance issued since the PPG case may continue with those arrangements if they wish. Detailed tax and pensions advice should be taken before adopting any of the alternatives mentioned in earlier HMRC briefings.

Secondary annuity market: plans cancelled

The Government has announced that it will not be continuing with its plans to create a secondary annuity market. The reason given was that it has become clear that creating a competitive market, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protections.

Ban on early exit charges

The Pension Schemes Bill 2016 includes a provision enabling a cap to be imposed on early exit charges in occupational pension schemes. The detail will be set out in regulations. There was an early DWP consultation in May 2016, running in parallel with FCA changes in relation to personal pension schemes.

The proposal is that a cap on early exit charges will apply to all occupational schemes which allow members to draw flexible benefits (broadly schemes holding money purchase benefits) and will apply to members leaving the scheme from the age of 55. The intention is that the cap will have retrospective effect on existing contracts that trustees have entered into under the scheme. The FCA is proposing a one per cent cap on existing contracts and a zero cap on future contracts. It seems likely the DWP will follow suit in relation to occupational pension schemes.