Other Employee Benefits News

Vat - treatment of pension fund management services

HMRC will remove the Vat exemption for pension fund management services in insured pension funds from 1 January 2018

On 5 October 2017, HMRC published Revenue and Customs Brief 3 2017 which give notice that from 1 January 2018 the UK will no longer permit insurers to treat their supplies of non-special investment fund pension fund management services as VAT-exempt services.

However, all is not lost because the majority of pension fund management services provided by insurers are supplied to DC schemes which qualify for a VAT exemption as special investment funds (SIFs). DC pension funds will therefore be exempt from VAT if three conditions are met:

  • They are funded by the person to whom the retirement benefit is to be paid (it doesn’t matter if pension contributions are paid by the employer)

  • The savings are invested using risk-spreading principles, and

  • The pension customers bear the investment risk.

According to HMRC, the UK policy on exempting insurers’ funds from VAT has been out of line with EU rules since the Card Protection Plan (CPP) ruling in 2005 but no changes were made to UK VAT treatment whilst wider reviews on pension fund management took place.

The EU Commission began reviewing the VAT treatment of financial services in 2006 but after several years of discussion, it withdrew its proposals in 2016, which then led to the change in the UK’s position.

Capita comment

This policy change may be a further driver for trustees and sponsoring employers of legacy insured schemes to review the existing insurance contracts and consider alternative strategies such as pooled funds. This is especially relevant for defined benefit schemes which are not SIFs and so not be able to reclaim VAT as SIFs can. 

Trustee and employers should check with their insured pension funds providers, if their insured funds qualify as SIFs and therefore for a VAT exemption. If not, the resulting additional cost is a further reason to obtain professional advice on reviewing old insurance contracts with a view to deciding on whether to switch to lower cost modern products.

Guide for Employers and Trustees on providing support with financial matters

The Pensions Regulator and the FCA have published a factsheet for employers and pension scheme trustees which explains the help they can give to employees on financial matters without them requiring authorisation from the Financial Conduct Authority (FCA).

An employer or trustee will only need authorisation from the FCA if they are in the business of providing investment advice and if they receive a ‘commercial benefit’ for helping their employees “so in most cases employers should be able to help their staff without needing to be authorised”.

The factsheet also offers guidance on how employers and trustees may promote pension schemes and other financial workplace benefits, the advice an employer or trustee should not give, and what an employer or trustee might want to do. It then finishes with two examples; trustees providing information on an occupational pension scheme and an employer sponsoring ‘at retirement’ seminars.

Cross references to additional information are also included to:

  • The old FSA’s guide on promoting pensions to employees,

  • The TPR guide on talking about DC pensions with employees, and

  • The employer best practice guide produced by the Money Advice Service.