Despite the leaks that the Chancellor would not be reforming pensions tax relief, speculation had been rife that the Budget 2016 would herald further major changes for pension schemes. Instead, the Budget 2016 was a (mainly) quiet one on the pensions front.
This edition of Insight sets out the main Budget 2016 announcements as well as the measures previously announced which come into force on 6 April 2016.
The Chancellor commented that the current pensions tax regime was inflexible and poorly understood. As had been expected, he did not announce any changes to the regime itself. Indeed the Chancellor specifically stated that the 25% tax free pension commencement lump sum would remain. However in order to prioritise transparency, choice and flexibility for savers, the Lifetime ISA will be introduced with effect from 6 April 2017.
The Lifetime ISA will be available to all adults under age 40 into which they can save a maximum of £4k per year. The government will pay a 25% bonus for every £1 paid in until the saver is aged 50. The saver may withdraw the funds at anytime but the bonus (and any interest or growth on it) will need to be repaid to the government together with a 5% charge unless the funds are used to purchase a first home or used in retirement after age 60.
Understanding pensions saving
The Chancellor commented that people find it difficult to keep track of their pension savings with their various different employers. He announced that the pensions industry will have to design, fund and launch a pensions dashboard by April 2019. This dashboard will allow someone to view all their retirement savings in one place.
The government is also going to consult on the introduction of a pensions advice allowance. This would allow a person before age 55 to withdraw up to £500 tax free from his or her defined contribution pension to redeem against the cost of financial advice.
The government will also restructure the delivery of public financial guidance to make it more effective. A new pensions guidance body will merge the functions of The Pensions Advisory Service and Pension Wise and some of the pensions guidance provided by the Money Advice Service. The new guidance body will be funded by an industry levy.
Pensions salary sacrifice
There had been much speculation that the Chancellor would look to clamp down on the proliferation of salary sacrifice arrangements. The Chancellor announced that the government is considering limiting the range of benefits which may be provided as part of salary sacrifice arrangements. Pension salary sacrifice arrangements will not be affected by this review.
Technical amendments to pensions tax flexibilities
The Chancellor announced that there would be further technical changes to the pensions tax regime to ensure that the pensions tax flexibilities work as intended. These changes include allowing defined contribution pensions already in payment to be trivially commuted where the total pension savings are under £30k.
Public sector pensions
The government has reviewed the discount rates which are used to set employer contribution rates to the unfunded public sector pension schemes. Employer contributions to these schemes will rise from 2019-2020.
Changes with come into effect from 6 April 2016
There are a number of changes to the pensions tax regime which come into force on 6 April 2016. These include:
- The lifetime allowance reduces from £1.25m to £1m.
- The tapered annual allowance applies to those earning £150k or more.
- The pension input period used to assess the annual allowance (and the tapered annual allowance) will be aligned with the tax year for all schemes.
The pensions industry will be heaving a collective sigh of relief that the Chancellor made no major announcements in relation to the pensions tax regime this time around. However, this may only be a temporary reprieve. We will just have to wait and see whether or not the new Lifetime ISA will lead to a new Pensions ISA in due course. In the meantime there is another new savings vehicle on the block and it becomes more and more important that savers understand the upsides and downsides of the various savings options open to them.