Rejuvenation of Jersey's pensions regime
08 November 2013
On 8 October 2013, the tax policy unit of the States of Jersey issued a consultation paper entitled "tax rules applying to pensions and pension schemes" ("Consultation Paper"). The Consultation Paper seeks to modernise and simplify the current arcane rules concerning pensions provision under the Income Tax (Jersey) Law 1961, as amended, which are said to be "lengthy, complex and difficult to understand". This briefing will outline the key proposals in the Consultation Paper.
The consultation is open until 10 January 2014, however, it is proposed that the changes will be introduced in two different stages. The first set of changes will be lodged with the States by 17 March 2014, and the proposed legislative amendments will be debated on 29 April 2014, with the amended legislation introduced shortly thereafter. The second set of changes will be lodged with the States in the summer of 2014.
One of the key objectives of the Consultation Paper is to introduce flexible retirement into Jersey law. Flexible retirement describes the situation where members of pension schemes are allowed to commence their pension payments whilst continuing to work. Currently, members of occupational pension schemes in Jersey are prohibited from drawing on their pensions whilst still working. By contrast, the UK has allowed flexible retirement since 2006. Flexible retirement is an important tool for the modern workforce as people tend to work until they are much older but in doing so they may wish to have greater flexibility with regard to how many hours they work and how they use their pension savings. Therefore, by allowing flexible retirement, and scheme permitting, workers approaching retirement age will no longer need to choose between retiring or drawing their pension.
Removal of the restrictions on pension income
Under the existing tax rules, there are significant restrictions on the amount of pension income that can be paid by an occupational pension scheme or a retirement annuity trust. These restrictions are by reference to final salary and years of service and are of no relevance in the context of a defined contribution arrangement. It is proposed that all of the rules restricting the amount of pension income payable are removed. Instead, "the amount of pension income payable will be determined by the rules of the scheme in the context of a defined benefit scheme and by the size of the fund in the context of a defined contribution scheme, subject to the overriding requirement that the scheme must continue to pay pension income for the remainder of the member's life".
This proposal will cover pension income payable to dependents as well.
Removal of contributions limit to pension schemes
Under the existing tax rules, an individual can only make pension contributions of up to the lower of £50,000 or his net related earnings per annum. It is proposed that this cap of £50,000 is removed. However, the rules on tax relief will remain the same. Therefore, individuals earning less than £150,000 will continue to receive tax relief on the lower of £50,000 or their related earnings in the year of assessment. For individuals earning over £150,000, the calculation of tax relief is more complex, but the maximum tax relief remains £50,000.
There will be a new definition for ill-health which mirrors the definition under the UK Finance Act 2004.
This would bring certainty as to when a pension holder who suffers from ill-health can commence drawing his pension before age 50.
It is proposed that when a pension holder is diagnosed with serious ill-health, the pension holder will be able to elect to receive a lump sum payment that commutes his pension into a lump sum payment. If the pension holder has not commenced his benefits (i.e. by receiving pension income or a lump sum payment of 30%) he will be able to receive the lump sum payment tax free up to £1.8 million. However, if he is in receipt of his benefits, or if the lump sum payment exceeds £1.8 million, the payment will be subject to a 10% tax charge.
Refund of contributions
Members can currently elect to receive a refund of their contributions plus interest on those contributions when they leave their employer. However, there is no restriction on the number of years in respect of which contributions can be refunded. Therefore, an employee who has been working for an employer for 20 years could elect to receive a refund of their contributions in respect of 20 years plus interest. It was stated in the Consultation Paper that tax relief for pension contributions is intended to encourage people to save for their retirement, therefore the availability to elect for a refund of contributions on leaving service, irrespective of the period of service, appears inappropriate. The tax policy unit is seeking comments on what, if any, time limit should be placed on the election to receive a refund of contributions when a member leaves his employer.
It is proposed that a self-certification approval system will be introduced so that it will become the responsibility of the scheme manager to certify that the scheme meets the conditions of approval. Standard forms will be made available and the Taxes Office will issue approval status if the form is completed correctly and the requisite information is furnished. However, the Taxes Office will then review a number of schemes on an annual basis to determine if they continue to comply with the conditions of approval. Schemes that are found to be non-compliant will have their tax approval withdrawn. Guernsey has already moved to a self-certification approval system.
Lump sum payments
The existing tax rules allow 30% of a member's fund value to be paid as tax-free lump sum payments. The Consultation Paper proposes an additional cap of £540,000 on the amount of this tax free lump sum. The rationale for the additional cap is to discourage the overfunding of pensions. The amount of the lump sum payment or payments that exceed the £540,000 cap will be subject to 10% tax.
It is further proposed that the payment of very small pension funds and the refund of contributions (prior to retirement) will be taxed at 10%, so that all lump sum payments from approved pension schemes will be subject to a 10% tax rate.
The Consultation Paper also seeks to introduce a lifetime allowance cap of £1.8 million on lump sum payments (which would include the 30% elected lump sum payments up to £540,000) made out of all approved schemes to either the pension holder or his estate. The tax policy unit acknowledges that this proposal may incentivise pension holders to save in multiple pension schemes in order to maximise the amount of tax free lump sum they receive because, under the proposals, once benefits in respect of a scheme commence, all the payments made subsequently (including lump sums) would be subject to a 10% tax.
Taxation of non-residents
Currently, the Taxes Office offers a concession on taxation of pension income and lump sum payments where such payments are made to a person resident outside Jersey (including that person's widow, child or dependent) whose employment was carried on outside Jersey. It is proposed that this concession be removed because as otherwise there is a risk that schemes will not comply with the requirement under UK's Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 on the basis that non-residents would receive preferential tax treatment compared to residents.
It is proposed that the current tax rules be revised to allow members to transfer their pension savings to overseas pension schemes. However, such transfers would be subject to a 10% tax. The tax policy unit is seeking comments on whether international transfers should be allowed on such a wide basis; whether the 10% tax charge is appropriate, whether there should be other restrictions imposed on international transfers, for example to restrict international transfers to a scheme established in the jurisdiction in which the pension member is tax resident; and whether partial transfers should be allowed.
Additional consultation topics
It is proposed that the following topics will be legislated for in summer 2014:
- increasing the minimum age at which people can ordinarily obtain pension benefits from age 50 to 55;
- removing the upper age limit of age 75 for commencing pensions benefits;
- whether to retain or remove the ability for a member to take the 30% tax free lump sum in more than one tranche;
- introducing a sanction regime so that a tax charge of 50% on the value of the fund can be imposed in the event of scheme breaches that do not justify a withdrawal of tax approval.
The above is a brief summary of the key proposals outlined in the Consultation Paper. The Consultation Paper proposes various other amendments which are not covered above, which largely seek to enact the Comptroller's current practice in legislation.
The Consultation Paper is likely to have a significant impact on all existing Jersey pension schemes. If you wish to understand more about any aspect of the Consultation Paper, and how your scheme would be affected by the proposed changes, or would like our assistance with putting together a response to the consultation, please do not hesitate to contact a member of Bedell's pensions team listed below.
Related Service: Pensions & Employee Incentives