In recognition of the global changes that are affecting how societies manage the funding of financial provision in old age, a range of legislative changes have been proposed for Jersey's tax rules for pension schemes.
Following a period of consultation, a significant proportion of the anticipated reforms (contained in amendments to Jersey's existing income tax legislation) are due to be lodged with the States of Jersey this month.
The States' original consultation white paper was issued in 2013. More recently the States' response to that consultation was published, identifying changes to the initial proposals, which have been made after taking account of industry feedback.
The UK's new laissez-faire approach, enabling pensioners free access to their pension pots, has been noted but not yet embraced. The Jersey proposals would retain the existing 30% limit on tax-free lump sum withdrawals. However, pensioners would be given greater flexibility in relation to the number of tranches by which that 30% lump sum entitlement may be drawn.
In a related move, there would no longer be a prohibition on a pension saver being able to enter into a drawdown contract (attractive for those not wanting a pension secured by way of annuity) if they have already received a tax-free lump sum from their "traditional" occupational pension scheme.
To address the risk of tax revenue loss due to pension overfunding, the 2013 pension consultation paper had proposed a maximum cap on tax-free lump sums (a cap of £540,000 or £1.8 million depending on the circumstance in which the lump sum was to be taken), with amounts drawn over that threshold being subject to tax. However, these changes have been dropped from the latest proposals. In another move affecting higher earners, the rules governing the limits on tax relief on pension contributions for those with incomes over £150,000 are to be amended following recognition that they are not operating as intended.
Industry feedback on the more recent consultation paper showed strong support for removal of the prohibition on the ability to transfer part only of a person's pension pot from one Comptroller-approved scheme to another. In response, allowance for a limited form of partial transfer has been made, subject to express consent of the Comptroller. Potential further relaxation of that limitation in the future is to be considered.
It is still proposed to relax the restrictions on transfers from Comptroller-approved schemes to foreign schemes, so as to enable movement to "equivalent" non- Jersey schemes, but the 10% tax that it was suggested might be levied on such transfers is not now being sought.
The States' latest consultation response confirms that no legislative changes will be proposed in 2014 to either increase the minimum age to access pensions (currently 50), or to remove the upper age limit (of 75) at which a person is required to start drawing their pension. It also made it expressly clear that the proposed changes would not affect international schemes established solely for non-residents (e.g. Article 131A and 131C schemes).
In line with the original 2013 white paper, the upper limit on an individual's annual pension contributions (i.e. the lower of (i) £50,000 and (ii) total net related earnings) would be removed. The maximum cap on tax relief for contributions would remain, and so tax charged on contributions over and above those upper limits.
The requirement that a person of retirement age retires before drawing a pension would no longer apply, and the prescriptive rules restricting the amount of pension income a scheme can pay will be replaced by what is hoped will be a far simpler mechanism, determined by the scheme rules for defined benefit schemes, and the size of the pension pot for defined contribution schemes.
A move to self-certification is also proposed, which will remove the need to seek express Comptroller approval, and instead place the onus on the scheme administrator to conclude that its scheme complies with the requirements of approval and is therefore eligible for tax concessions.
To prevent abuse of the greater flexibility provided by the revised pensions regime, the legislative amendments would also include a "benefit in kind" charge on contributions above a certain threshold made by employer companies for their owner/ manager employees who have an ownership/ controlling interest in the contributing company.
Following adoption by the States it is expected that these amendments will be in force from the beginning of next year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
