PFS What's new bulletin - September II

TAXATION AND TRUSTS

 

England and Wales High Court rule litigation costs must be kept separate from 1975 Act awards

(AF1, JO2, RO3)

 

A recent case in which the England and Wales High Court have ruled that litigation costs in disputes under the Inheritance (Provision for Family and Dependants) Act 1975 should be dealt with separately from substantive awards

This recent case (Jassal vs Shah, 2024 EWHC 2214 Ch) concerned the estate Fiaz Ali Shah (the deceased), a single man with four children, who entered a relationship with Srendarjit Kaur Jassal in 2000, and later cohabited with her. In 2006, describing Jassal as ‘my wife’ the deceased created a will under which he left everything to her. However, later that year the deceased created another new will, under which he left Jassal, now described as his ‘close friend’ only half of the proceeds of a particular property he owned. The will also instructed that the residue of his estate was to pass to two of his children, Sajad and Shabana Shah.

The relationship and cohabitation between the couple had ended in 2012. Six years later, the deceased created yet another will which made Sajad sole beneficiary. In 2020, Fiaz Ali Shah died, leaving an estate valued at £1.4 million. Jassal, having been left nothing, launched a claim for reasonable provision under the Inheritance Act 1975 (The 1975 Act), claiming that she and the deceased had resumed their relationship prior to his death. Executors, Sajad and Shabana Shah fought this claim, arguing that at no point had Jassal and the deceased resumed cohabitation and she had been living as his tenant in another of his properties, Salt Hill Mansions.

The case was first heard in November 2021 by Deputy Master Marsh. He favoured Jassal’s evidence that she and the deceased had been living together in the same household for two years prior to his death, as if they were a married couple. Therefore, Jassal qualified for an award under section 2 of the 1975 Act. Jassal was granted a half share of the Salt Hill Mansions property, along with a £385,000 lump sum for her maintenance needs. There was no further order made by the Deputy Master in respect of costs, as the award expressly stated that costs had already been dealt with as part of the lump sum granted.

 

The executors appealed this decision on the grounds that Deputy Master Marsh had made an error of law by awarding Jassal her litigation costs, equating to £140,000 plus VAT, as part of the substantive award for her maintenance needs. They argued that the costs should have been kept separate from the award in accordance with the usual practice under the Court Procedure Rules, stating that the court will almost always determine the substantive claim first and then proceed with a decision on whether to make an order with regards to any litigation costs. As claims under the 1975 Act are governed by the Court Procedure Rules, this procedure should be adhered to.

When deciding how to determine the substantive claim under the 1975 Act, the court must have regard to the claimant’s financial needs. This includes an obligation to pay litigation costs. Therefore, a court may wish to consider the claimant’s litigation costs as part of the substantive determination of the claim.

 

The appeal went to the England and Wales High Court under Deputy High Court Judge James Pickering. He examined precedents set in the previous cases of Lilleyman v Lilleyman in 2012 and Hirachand v Hirachand in 2021, both of which were under the 1975 Act.

Pickering said that his decision was determined by the fact that ‘as things stand, proceedings under the 1975 Act are squarely governed by the CPR’ and with that being the case ‘the approach taken by Briggs J in Lilleyman was (with respect) the correct and indeed the only approach which was properly open to him. Indeed, the subsequent decision in Hirachand, albeit not directly on point, only seems to confirm this’.

Pickering went on to say that: ‘it was simply not permissible for Srendarjit's [Jassal’s] litigation costs to be considered as part of the substantive award’ and that, instead, Deputy Master Marsh should have ‘considered the appropriate substantive relief ignoring those litigation costs (however unrealistic that may have been) and should then, subsequently and separately, have gone on to consider the matter of costs.’

Eventually, the executors’ appeal was duly allowed with Marsh’s original order being varied such that the lump sum awarded to Jassal would be reduced to exclude any litigation costs and VAT. Pickering also ordered the executors to pay Jassal her costs for the original proceedings (but not the appeal), as she was the clear winner of that part of the dispute.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

 

Whether ISAs can hold fractional shares

(FA5)

 

With fractional shares, rather than owning a share in a company, individuals own fractions of one or more shares. This could be useful, where, for example, the price per whole share in a company is prohibitively high, or a whole share would cost more than the £20,000 annual ISA subscription.

 

The emergence of fractional shares post-dates the ISA regulations. Last October, HMRC issued a definitive answer on the topic of fractional shares in ISAs, by way of its tax-free savings newsletter.

 

At that time, HMRC said, a fraction of a share is not a share and therefore cannot be held in ISAs. ‘Shares’, as referred to in paragraph 7(2)(a) of the ISA Regulations, refers only to whole shares and not parts or derivatives thereof. A fraction of a share does not give the investor the same legal rights as a whole share does. Fractional shares could only qualify for inclusion in ISAs if the ISA Regulations were amended to allow them.

 

HMRC’s newsletter went on to say that, where fractional shares are an underlying investment in a collective investment scheme or fund (for example an exchange traded fund), they are

not subject to the same restrictions.

 

At that time, HMRC said that any ISA managers who allow fractional shares to be purchased or held within their ISAs as a qualifying investment under Regulation 7(2)(a) should contact HMRC by email at savings.compliance@hmrc.gov.uk.

 

Then, after considerable public pressure, the previous Government announced, in the November 2023 Autumn Statement, that it intended to “permit certain fractional shares contracts as eligible ISA investments” and would engage with stakeholders on the implementation of new legislation. This commitment was repeated in the March 2024 Spring Budget, with it saying that it was “working as quickly as possible to bring forward legislation by the end of the summer”. This was then put on hold by the general election in July.

 

However, according to a recent AccountingWEB article, a spokesperson for the new Government has now said: “We have committed to changing the ISA rules to allow certain fractional shares. Taking a pragmatic approach, HMRC will not raise an assessment on

managers or investors for fractional shares acquired before these changes are made.”

 

The department is working with the industry to make clear what the new regulations require of them and the timeframe for implementation. The amended regulations will be publicly available in advance of coming into force, to give ISA managers and investors time to assimilate the new legislation into their processes.

 

 

 

 

NS&I rate changes

(AF4, FA7, LP2, RO2)

 

NS&I's latest rates. It has cut rates on its British Savings Bonds (Guaranteed Growth Bonds and Guaranteed Income Bonds)

 

Six weeks after expanding its general offering of British Savings Bonds (aka Guaranteed Growth Bonds and Guaranteed Income Bonds), NS&I has announced an immediate cut to the interest rates for all terms:

 

Product	Term	Old rate	New rate from 11 September
Guaranteed Growth Bonds
	2 years	4.60% gross/AER	4.25% gross/AER
	3 years	4.35% gross/AER	4.00% gross/AER
	5 years	4.10% gross/AER	3.90% gross/AER
Guaranteed Income Bonds
	2 years	4.50% gross/4.60% AER	4.17% gross/4.25% AER
	3 years	4.26% gross/4.35% AER	3.93% gross/4.00% AER
	5 years	4.02% gross/4.10% AER	3.83% gross/3.90% AER

 

Before NS&I’s announcement the best rates in the market according to Moneyfacts were 4.72% AER for two years, 4.51% AER for three years and 4.36% AER for five years.

 

The nearest equivalent gilts, Treasury 0.375% 2026 (maturing 22 October 2026), Treasury 1.25% 2027 (maturing 22 July 2027), and Treasury 0.875% 2029 (maturing 22 October 2029) have gross redemption yield of 3.64%, 3.56% and 3.46% respectively. 

 

For higher and additional rate taxpayers, these gilts all offer better net returns (a little over 3%) than the NS&I bonds because they are priced comfortably below par and thus boosted by tax-free capital gains.

 

 

 

 

 

 

 

 

 

August inflation numbers

(AF4, FA7, LP2, RO2)

 

The UK CPI inflation rate for August 2023, which was 2.2%, unchanged from July.

 

Source: ONS

 

The CPI annual rate for August was 2.2%, unchanged from July, in line with the Reuters consensus forecast but 0.2% below the Bank of England’s expectations.

 

The monthly UK CPI reading was up 0.3% from July. The CPI/RPI gap narrowed 0.1% to 1.3% with the RPI annual rate falling by 0.1% to 3.5%. Over the month, the RPI index rose by 0.6%.

 

The Office for National Statistics (ONS)’s favoured CPIH index was unchanged at an annual 3.1%, maintaining its unusually high margin above the CPI. As we have said in recent months, a large part of that excess is due to the owner occupiers’ housing (OOH) category, which has a 16.5% weighting in the CPIH but is absent from the CPI. The OOH is up 7.1% over the past year, 0.1% higher than last month.

 

The ONS attributed the flat CPIH inflation primarily to three factors pulling in opposite directions:

 

Main upward driver

Transport. Prices in the Transport category rose by 1.2% in the year to August 2024, compared with a rise of 0.1% in the year to July. This is the largest annual price rise since May 2023, when the rate was 1.3%. On a monthly basis, prices rose by 1.3% in August 2024 compared with a rise of 0.2% a year ago.

 

The increase in the annual rate was the result of upward effects from air fares and, to a lesser extent, second-hand cars, partially offset by a downward effect from motor fuels. Air fares rose by 22.2% between July and August 2024, against a 2.1% fall in the corresponding period a year ago.

 

Main downward drivers

Restaurants and hotels. Prices in this division fell by 0.7% in August 2024 compared with a, smaller, 0.1% fall a year ago. The annual inflation rate for restaurants and hotels was 4.4% in August 2024, down from 4.9% in the year to July, and the lowest rate since July 2021.

 

The easing in the annual rate principally reflected a downward effect from restaurants and cafes, where prices rose by 0.2% on the month, less than the 0.8% rise between July and August 2023. The downward contribution was largely driven by pub and restaurant prices for various alcohol products rising by less than a year ago.

 

Alcohol and tobacco. Overall prices of alcohol and tobacco were little changed between July and August 2024, compared with a rise of 1.5% a year ago. On an annual basis, prices rose by 5.7%, down from 7.2% in the year to July, and the lowest annual rate since March 2023.

Eight of the twelve broad CPI divisions saw annual inflation decrease, while three rose and one was unchanged. The category with the highest annual inflation rate remains alcoholic beverages and tobacco (3.9% of the Index) which recorded a 5.8% annual increase. Five divisions (Food and Non-alcoholic Beverages; Clothing and Footwear, Housing, Water, Electricity, Gas and Other Fuel; Furniture; Household Equipment and Maintenance; and Transport), accounting in total for 50.1% of the Index, posted an annual inflation rate below 2.0%.

 

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) rose 0.3% to 3.6%. Goods inflation in the UK fell 0.3% to -0.9%, while services inflation saw an uptick of 0.4% to 5.6%, 0.1% above the Reuters consensus.

 

Producer Price Inflation input prices fell by 1.2% in the 12 months to August 2024, against a revised figure of +0.2% in the year to July 2024. The corresponding output (factory gate) figures saw a 0.2% annual rise against a previous revised 0.8% increase. 

 

Comment

These inflation numbers are going to weigh on the Bank of England’s interest rate decision, due out on 19 September. While the headline CPI is better than the Old Lady was expecting, the 0.4% rise in annual services inflation will reinforce the chances of the Bank (Base) Rate staying put on 19 September, despite an 18 September cut from the Federal Reserve.

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

HMRC Pension Scheme Newsletter 162 – September 2024

(AF8, FA2, JO5, RO4)

 

Pension scheme newsletter 162 covers the following:

 

• lifetime allowance abolition;
• relief at source;
• managing pension schemes service.

 

Areas of particular interest:

 

Lifetime allowance abolition

 

HMRC concluded their consultation on the draft regulations to correct the errors in the legislation on 14 August.  They have considered the feedback and the regulations will be introduced as soon as parliamentary time allows.   Unfortunately, they have not provided any expected timescales.

 

Lump sum reporting workshop

 

HMRC will be holding a workshop in early October to look at Real Time Information changes.  Invitations will be sent out shortly for those who have already registered their interest. 

 

If you have not contacted HMRC and would like to be involved, email: ltaadministration@hmrc.gov.uk. You should put ‘lifetime allowance (LTA) lump sum reporting workshop’ in the subject heading.

 

Look up service to confirm protections and enhancements – user research

 

HMRC will moving the lifetime allowance protection look-up service onto the Managing pension schemes service.

 

This will allow HMRC to provide additional information to registered pension scheme administrators and practitioners, when checking whether the member’s higher lump sum protection is valid. HMRC plan to update the service to include if a member holds an enhancement as well as protections. HMRC are looking for scheme administrators and practitioners to help develop this feature.

 

You can take part in this user research by joining the Managing pension schemes user panel. To sign up or to get more information email: pensionsuserresearchrecruitment@hmrc.gov.uk.

 

 

 

 

 

The IFS view on the adequacy of current pension contribution levels

(AF8, FA2, JO5, RO4)

 

The IFS has publish a 91-page report entitled ‘Adequacy of future retirement incomes: new evidence for private sector employees’.

 

The IFS uses new modelling to examine what pension income today’s employees will receive in retirement, if they continue to place the same share of those earnings in a pension as currently and the State Pension rises in line with earnings. It compares the outcomes with the Pensions Commission replacement rate targets (set back in 2004) and the retirement living standards set out by the Pensions and Lifetime Savings Association (PLSA) - please see our earlier Bulletin.

 

The key findings of the report are:

 

1. The many changes to the economic environment, life expectancy and State Pensions since the Pensions Commission reported in 2004 have not made a significant overall difference to the required contribution levels to hit the Commission’s target income replacement levels. On the IFS’s current central assumptions, uprating earnings from 2004:

 

 

Earnings level (2023 terms)	Target income replacement rate	2004 contribution rate	2023 contribution rate
Low (£16,000)	80%	0.0%	3.3%
Medium (£38,500)	67%	9.2%	10.3%
High (£90,000)	50%	8.5%	10.0%

 

The sharpest increase, for the low earner with an 80% replacement target, is due to the loss of SERPS.

 

2. Overall private sector employers were contributing a similar amount (as a fraction of total earnings) to their employees’ private pensions in 2021 to what they were in 2005 – approximately 6% of total pay. There have been increases in pension contributions for smaller employers (fewer than 100 employees) over this period (from 2.9% of pay to 3.5%), while among larger employers (at least 1,000 employees) overall pension contributions are almost unchanged at around 8% of pay.

 

3. The IFS’s baseline calculation projects that 57% of current private sector employees in defined contribution (DC) schemes will have an ‘adequate’ replacement rate (as defined by the Pensions Commission) on current trends. The same modelling implies that 68% of private sector employees are projected to have an income that would allow them to meet the PLSA’s ‘minimum’ retirement living standard (expenditure of £14,400 per year in today’s terms, assumed to rise with the growth in average earnings). 
4. As is often the case, these projections are very sensitive to the assumptions made. In the IFS’s downside scenario, if the real return achieved on pension saving is lower by one percentage point (2.3% rather than 3.3%), over half of individuals are saving too little to hit a target replacement rate and around 40% would not hit the PLSA ‘minimum’ living standard. However, a one percentage point higher return and a 10% higher State Pension, plus the inclusion of predicted inheritances as a source of future retirement resource, reduces projected rates of undersaving to just under two in ten, with nearly 90% expected to hit the ‘minimum’ income level.

 

5. Compared with the Pensions Commission replacement rate measure, those on higher levels of earnings are more likely to be undersaving than lower earners. For example, 86% of those in the bottom quarter of earners when in their 50s are projected to hit their target replacement rate against just 40% of those in the top quarter of earners. The IFS attributes this to the flat-rate nature of the State Pension, which provides more income replacement (in percentage terms) for lower earners.

 

6. When the yardstick is the PLSA ‘minimum’ living standard, lower earners are less likely to reach that level, reflecting their lower lifetime income and thus smaller amounts saved for their retirement. The IFS notes that the combination of lower earners being more likely to reach target replacement rates, but less likely to hit ‘minimum’ retirement incomes implies that the key issue for many of these employees is low lifetime incomes, rather than insufficient savings from earnings.

 

Underlining this point, the IFS calculates that 32% of working couples and 44% of working single people have an income below the PLSA ‘minimum’ retirement income targets. Boosting these low earners’ retirement income without risking eroding their current low living standards would require redistribution of income towards them, either via higher state pensions, more generous total compensation from their employment, or more generous treatment by the tax and benefit system.

 

7. Women are slightly more likely to meet replacement rate measures of adequacy but less likely to meet ‘minimum’ income standard measures, a corollary of the fact that they typically have lower levels of earnings than men. The IFS suggests that appropriate policies to reduce this gender pension gap would require redistribution of income towards women rather than any move to encourage women to save more of their own earnings than men.

 

8. Within the group of individuals aged 35–59, the overall outlook for adequacy is improved if it is assumed that retirement resources will be shared within current couples. Those on higher incomes are more likely to be on track to hit a replacement rate defined at the couple level instead of the individual level. A much higher proportion of women (82% compared with 57%) are on track to have at least a ‘minimum’ retirement income, if their retirement resources are equally shared with their partner. People who live alone in retirement cannot benefit from this resource sharing and are projected to be much less likely to have a ‘minimum’ retirement income than those living in couples (59% compared with 93%).

 

9. When measuring incomes adjusted for housing costs, private renters in retirement are much more likely to be undersaving than those who are not privately renting. Just under half of private renters are on track to meet the Pensions Commission replacement rate target compared with around two thirds of those not privately renting. Almost 90% of those not privately renting are projected to hit a ‘minimum’ retirement living standard, compared with just under half of private renters. 

 

10. Results from an IFS economic ‘life-cycle’ model of when people should be saving during working life (please see our earlier Bulletin)indicate that there are good reasons for many people to save a greater proportion of their earnings for retirement in the later stages of their working life (50-55 onwards). By that stage their earnings are typically higher and their outgoings – such as mortgage payments, childcare costs and student loan repayments – are lower. 

 

 

Retirement savings and the self-employed

(AF8, FA2, JO5, RO4)

 

The Institute for Fiscal Studies (IFS) has returned to one of its favourite pension topics: provision for the self-employed, or rather the lack of it. The self-employed population (i.e. sole traders and partners in a partnership – not company directors or limited companies) is 4.272m, about 13% of the employed workforce and, by definition, is outside automatic enrolment by employers.

 

The IFS research’s key findings are:

 

1. The distribution of self-employed total wealth is similar to that of employees who are not currently saving into a defined benefit (DB) pension.

However, the self-employed hold less of their wealth in private pensions and more of it in property wealth, financial wealth and, at the higher end the distribution, business wealth. There is substantial variation in the amount of wealth that self-employed workers have accumulated, with around a quarter having no more than £10,000 in total wealth.

 

2. Among self-employed workers making annual profits of more than £10,000, only one in five is saving into a pension, down from three in five in 1998.

In contrast, automatic enrolment has boosted workplace pension participation among employees earning more than £10,000 a year to over four in five. Of those self-employed saving in a pension, many do not increase contributions as earnings grow, keeping to the same cash amount, year after year.

 

3. If the self-employed were to continue building up private pension wealth at their current rate, around 55% of the self-employed would not have any pension savings to supplement their State Pension entitlement in retirement.

In the absence of private resources to draw on in retirement, two in three would fall below their Pensions Commission earnings replacement rate benchmark and three in four would not reach the Pensions and Lifetime Savings Association’s ‘minimum income’ standard. These proportions assume that all today’s self-employed workers continue to save the same percentage of earnings into a pension as today for the remainder of their career. In practice this is unlikely because many will spend significant time in future working as employees, for whom pension saving rates are higher. 

4. Inadequacy rates are much higher for the younger self-employed, with only one in five of 25- to 34-year-olds projected to reach their target replacement rate, compared with almost half of those in their 50s.

This partly reflects the falling rate of pension participation over time among the self-employed. Replacement rates are also lower for higher earners, because the State Pension represents a lower share of their earnings.

 

5. The saving rates required to get back to the retirement benchmarks appear more achievable for the young than for older people.

On average, self-employed workers not currently saving into a pension, aged 25–34 and in the third quartile of earnings (annual earnings of £22,200 to £39,000), would need to save 9% of their income to hit their replacement rate target. That compares with 18% for those in their 50s and in the same quartile.

 

6. For those in their 50s, if non-main-property wealth, financial wealth and business assets are considered as sources of retirement income, 20% more of the self-employed are on track to hit their target replacement rate. 

Much of this improvement stems from people higher up the wealth distribution. A corollary is that the outlook for higher earners in younger age groups is in probably better than that of the overall self-employed population.

 

7. Once partners’ resources (i.e. those of the spouse, civil partner or significant other) and potential future inheritances are considered, a larger proportion of the self-employed reach adequacy benchmarks, particularly among those with lower earnings.

While individuals – and Government policymakers – may prefer not to rely on such resources, it shows that, for a substantial proportion, the retirement prospects may not be as grim as individual-level modelling implies.

 

8. In the IFS’s judgement, the current self-employed pension provision framework is no longer fit for purpose.

It stands in stark contrast to the effort the state has put into making pension saving easy for employees and is exacerbated by the self-employed sector’s disengagement with personal pensions.

 

9. One of two options proposed by the IFS is to require all self-employed individuals filling out a self-assessment tax return to make an active choice about the level of pension contributions to make at that point (with zero being an option). 

Any contributions made would then go into either a nominated private pension plan, a Government-chosen default pension plan or a Lifetime ISA. The IFS believes that this would boost pension participation, though is unsure about the quantum. The increase would be expected to be smaller than under automatic enrolment but might be considered appropriate given that for some – or indeed many – self-employed individuals, private pensions might not be the right saving option. 

 

10. The IFS’s second option is a form of automatic enrolment, again operated through the self-assessment tax return.

HMRC would select a pension provider if no decision were made by the individual. The IFS says this should be limited to those with self-employment income above a certain trigger, perhaps set at the level of the equivalent trigger for employees or at the level of the New State Pension. Default contributions could be introduced at a moderate level and increase over time to equal the default total contributions for an employee with the equivalent level of earnings. A straightforward way to opt out should be available for those who do not wish to make a pension contribution. Those declaring to be already making pension contributions on their self-assessment form could either be not enrolled or be enrolled with contributions equal to the default level less their declared contributions. An option to instead divert savings to a Lifetime ISA could also be introduced. 

 

11. The defaults on direct debit contributions should be changed.

Currently, contributions typically remain fixed in cash terms. A range of options for automatically increasing contributions each year should be provided, perhaps with a default of rising in line with the CPI. 

 

Comment

Any Government concerned with the gap between expenditure and receipts may not be anxious to encourage an increase in pension contributions. In a recent speech to executives at the London Stock Exchange from the Pensions Minister, Emma Reynolds, she made clear her priorities were to increase pension investment in UK productive assets and to improve returns from pension pots. Increases to auto-enrolment were for later consideration.