01 JAN 2024

Technical Newsletter - January 2024

Issue 3 - January 2024

 

Welcome to Issue 3 of our newsletter, and the first edition of 2024.

There has been quite a bit of industry commentary about the Lifetime Allowance removal recently. The Government updated its Lifetime Allowance guidance on 15 January 2024 and one item which will be of interest to the international pension market is the tax treatment of transfers to a QROPS from April 2024. At present, a pension transfer is a benefit crystallisation event (BCE8), and when someone transfers to a QROPs, a Lifetime Allowance (LTA) test is carried out. The excess value over the £1,073,100 LTA figure has a tax charge applied of 25%.

The Government has confirmed that BCE8 will be no more after April 5 2024, but there is a slight sting in the tail. It has been confirmed that where a pension value exceeds the old LTA or £1,073,100, the Overseas Transfer Charge (OTC) will apply and guess what this is? Yes, you guessed correctly, it is 25%. So really it does seem in that scenario to be a case of “as you were”.

On the subject of QROPS transfers, it is perhaps time for a fresh look at whether a QROPS or international SIPP is most appropriate for overseas residents. Traditionally one of the big attractions of transferring to a QROPS was to remove oneself from the LTA tests applied at retirement. With these tests being removed and any excess funds above the LTA  being taxed at marginal rate (which could be £0 for those living overseas in possession of a “nil tax code”) it brings into question what benefits a QROPS offers over an international SIPP. One for advisers to ponder as we move into the new post LTA world.

There is a UK General Election due within the next twelve months, and with Labour currently leading in the polls speculation is rife about what future shape pension regulation in this area could take. Indeed, hidden within the November 2023 detailed policy paper was the following statement: “To facilitate the transition from the LTA regime to the new allowances, the Treasury will have the power, if needed, to make additional necessary primary legislative changes via statutory instrument. This power will only have effect until 5 April 2026”.

So it seems the Government are reserving the right to amend or perhaps retract the new pension tax regime. Labour did initially put out a statement confirming that if they won the next election, they would reintroduce the LTA. Whether this will come to fruition should they win, remains to be seen, but advisers obviously need to consider this scenario when assisting their clients in this area at this time. It is of course possible that any U-Turning might involve introducing another round of protection for those who have accrued above LTA in the meantime (the position taken in the past whenever LTA has been reduced), rather than any reversal being retrospective. If that were the case, the next few months might pose a limited window of opportunity to further accrue or transfer without penalties. IFGL Pensions are happy to assist with any technical questions and provide technical support where required.

 

INSISTENT CLIENT DB TRANSFERS

Although the popularity of DB to DC pension transfers has waned, with rising interest rates and falling cash equivalent transfer values (CETVs), a demand still exists from members who want to move their defined benefit occupational pension schemes to a SIPP for their own personal reasons. Because all such transfers involving pension pots worth over £30,000 require detailed transfer analysis and professional advice from a qualified transfer adviser, most transfers will be on an “insistent client” basis. This is because in most cases, the detailed transfer analysis shows that the member is likely to be better off financially by remaining in their defined benefit scheme and will advise against the transfer. The threshold for recommending a transfer out of a DB scheme is very high. However, once in receipt of advice, customers are still free to then make their own (now more informed) choices about whether or not to transfer. Customers who decide despite advice not to do so are “insistent clients”.

The FCA handbook sets out quite clear guidance on how firms should deal with “insistent clients”. One of the requirements which must be met before a transfer can be accepted on this basis, is an acknowledgement from a client that the transaction is not in accordance with the personal recommendation and is being carried out at their request. The FCA handbook clarifies that where possible the acknowledgement should be in the client’s own words.

This last point is important and at IFGL Pensions we request that insistent clients provide an explanation, in their own words, and bespoke to their own personal circumstances, why they wish to go against the recommendation of their adviser, and that they understand that they are proceeding despite the advice being that it is not in their best interest.

We have recently seen one or two letters where it may appear that the client has been given a generic script to follow, to ‘tick the boxes’ of what an explanation letter should include. Generic or templated letters are not something we can accept, and we would ask all advisers executing business in this area to ensure that they don’t provide any template or suggestions to clients, and that letters of explanation are the clients own words, bespoke and specific to their personal circumstances. Please note that we will reserve the right to decline transfers where this is not provided.

This is an important protection for clients, advisers, and IFGL Pensions, and ensures that clients who are proceeding to transfer pensions against advice are doing so in full cognisance of the facts and their options. Members are free to take their own decisions with their money, but providing an explanation letter is an important safety net step to ensure that in doing so they need to articulate why they wish to proceed against advice. Previous Financial Ombudsman Service rulings in complaint cases have carefully scrutinised the insistent client declaration and in particular the wording, to try and see if it was genuine and not scripted. If the Ombudsman is not comfortable that client did understand the decision they were making, they could potentially uphold the complaint against the firm which provided the advice, and potentially the pension provider.

 

WHAT WILL 2024 BRING?

Thanks to the surprise changes made to the pension taxation regime, 2023 was a very eventful year in the UK pension world. It will be interesting to see what pension developments unfold in 2024, which is likely a UK General Election year. You can be assured that we will be watching closely and will advise of technical changes in due course.

 

IMPORTANT NOTE IFGL Pensions cannot accept any responsibility for any action taken or refrained from being taken as a result of this information.