Compared to his March 2014 Budget, which fundamentally changed how individuals could access their defined contribution pension savings by abolishing the requirement to buy an annuity, UK chancellor George Osborne’s seventh Budget on July 8, 2015 was relatively restrained from the pensions point of view. However, it does bring greater complexity to pensions and hints at further radical changes to pensions tax relief with a new consultation by the Treasury.
Briefly, some of the most important details are:
- As expected, the amount of pensions tax relief for high earners will be reduced from April 6, 2016. A taper will be applied to the “annual allowance” – the total amount that people can pay into their pensions and qualify for tax relief – for those earning between £150,000 and £210,000 per annum. The maximum reduction will be £30,000 so the annual allowance will be £10,000 for those with incomes of £210,000 or more. Pension contributions will be counted as part of the individual’s income for these purposes.
- Pension input periods for testing against the annual allowance will be aligned with the tax year from 2016/17, which seems a sensible change as this was a confusing area previously. Transitional measures will apply for the rest of the 2015/16 tax year.
- As previously announced, the lifetime allowance will be reduced to £1m for 2016/17 from £1.25m at present. It will be indexed in line with consumer price index inflation from April 6, 2018. Protection will be introduced for individuals with pension savings above the new lifetime allowance.
- The government launched a wide-ranging consultation reviewing pensions tax relief more generally in light of concerns about the sustainability of the cost of such relief. No decisions have been taken by the Chancellor but it is consulting about fundamental changes to the current system. At present, contributions and investment growth receive tax relief but pensions on retirement are taxed (Exempt-Exempt-Taxed "EET"). The consultation floats the possibility of a system where contributions are taxed (but with some sort of government top-up) and investment growth and pensions on retirement are not taxed (Taxed-Exempt-Exempt "TEE") in a similar way to how ISAs are treated. Less radical options are also floated such as altering the lifetime and annual allowances further or retaining the current system.
- The government said it will proceed with its plan to legislate to allow a secondary market for existing holders of annuities, first announced in the March 2015 Budget. However, this will not be implemented until 2017 and the government will publish its formal paper on the subject “in the autumn”.
- The government is extending the scope of those eligible to receive the free guidance under “Pensions Wise” about how defined contribution pension savings can be accessed to individuals aged 50 and older. It is only available to those aged 55 and older at present. It will launch a further marketing campaign about the service. It may also consider legislating to impose a cap on excessive early exit penalties on transfers from one scheme to another.
- Lump sum death benefits payable on an individual’s death over age 75 will be taxed from April 6, 2016 at the recipient’s marginal rate rather than the special 45% rate.
This article was first published in Insurance Day on 23 July 2015