Pensions changes finalised and coming into effect on 1 January 2015
13 August 2014
Our pensions briefing of November 2013 summarised the consultation paper entitled "Tax rules applying to pensions and pension schemes" ("Consultation"). A summary of the responses to the Consultation was subsequently presented to the States by the Minister for Treasury and Resources on 22 May 2014. The Minister announced the proposed pensions changes as part of the 2015 Budget on 17 July 2014, and draft legislation on those changes was lodged au Greffe on 18 July 2014 ("Draft Law"). If the draft legislation is passed by the States, the proposed changes will come into effect from 1 January 2015.
The proposed changes in both the Consultation and the Draft Law do not affect Articles 131A and 131C schemes which are solely established by non-resident employers for non-resident members.
The main changes, introduced by the Draft Law, to the existing tax rules under the Income Tax (Jersey) Law 1961, as amended (the "Law"), are as follows:
- Members of occupational pension schemes will no longer be required to retire before being able to draw a pension from their pension scheme;
- Occupational pension schemes with members in Jersey and one or more other jurisdictions will be able to seek approval in Jersey for just the part of the scheme relating to the Jersey-based members;
- Retirement Annuity Trust Schemes which are approved under Article 131CA of the Law, and known as RATS, will be renamed as Retirement Trust Schemes ("RTS");
- Non-resident individuals will be allowed to contribute into a RTS;
- Pension schemes will be able to allow a person suffering from serious ill-health to commute their pension fund at any time;
- Pension schemes will have much greater flexibility over how they choose to pay out the 30% tax-free lump sum available from approved Jersey schemes;
- Where a lump sum payment from an approved Jersey scheme is taxable (e.g. a lump sum paid following the death of the pension holder where the pension holder had already commenced benefits), it will be taxable at the rate of 10%, deducted by the scheme manager from the lump sum before it is paid;
- A much wider range of international pension fund transfers, both to and from Jersey, will be permitted;
- Individuals will be able to benefit from the flexibility of drawdown contracts where they have already taken a tax-free lump sum from their pension scheme; and
- The introduction of a potential benefit-in-kind tax for pension contributions made in the context of owner managers.
Key changes to the initial proposals in the Consultation
Allowing greater flexibility over access to the 30% elected lump sum payment - currently, pension savers can access the 30% elected lump sum in up to 3 tranches. However, it is not clear how that 30% should be calculated when each tranche is paid. The Consultation proposed that the option of taking 3 tranches would be retained and it proposed a valuation method in respect of the tranches.
The Draft Law provides that the restriction to a maximum of 3 tranches of lump sum would be removed. This will allow pension savers to take lump sums at times appropriate for them, thereby allowing greater flexibility in retirement. The removal of the restriction would provide parity between RTS (currently Article 131CA Schemes or RATS) and an individual saving by way of retirement annuity contracts, where it is permitted to have up to 100 separate contracts and therefore take a 30% lump sum up to 100 times (i.e. one per contract).
It will also be possible under the Draft Law for an individual to continue saving into a pension plan after the initial 30% lump sum has been taken, and for a further 30% lump sum to be taken in respect of the new contributions.
Removal of proposed £1.8 million/£540,000 cap on tax-free lump sums - it was proposed in the Consultation that any lump sum payment will be tax free up to £1.8 million, but a 10% tax charge would apply to any amount which exceeds £1.8 million. It was also proposed in respect of the 30% elected lump sum payment that it would only be tax free up to £540,000. Again, a 10% tax charge was proposed in respect of amounts exceeding £540,000.
Both caps on tax-free lump sums have been removed from the Draft Law as it was considered that the existing restrictions on tax relief and the introduction of a benefit in kind rule for owner managers would be sufficient to protect from the risk of overfunding for tax purposes.
Availability of partial fund transfers - it was stated in the Consultation that partial transfers would be permitted. Following strong representation from a number of respondents, it is now proposed that partial transfers will be allowed, subject to express approval of the Comptroller.
Removal of proposed 10% transfer tax - the Consultation proposed that a 10% transfer tax would be imposed on the transfer of a pension fund outside of Jersey. It has been decided that this tax charge will be removed. The Draft Law permits individuals to transfer their pensions to a foreign pension scheme which is "equivalent" to an approved Jersey scheme without any tax charge.
Access to approved drawdown contracts - the current restriction which prevents a pension saver from entering into an approved drawdown contract if they have already taken a tax-free lump sum from their pension scheme is removed.
The above changes will not automatically apply to schemes. Schemes may need to change their scheme rules in order to take advantage of the flexibilities under the Draft Law. Whether you are a trustee, employer or scheme manager, we can work with you to consider whether these changes are appropriate for your scheme or business.
For further information, please contact Nancy Chien, who is a member of the Jersey Finance International Pensions Working Group in Jersey, which made submissions in relation to the Consultation. Nancy is also a committee member of the Jersey Pensions Association.
Related Service: Pensions & Employee Incentives