The Chancellor has managed to surprise us again. There had been mounting speculation that he would use the March 2016 Budget to announce far-reaching changes to pensions tax relief following the consultation paper issued after last year’s July Budget, Strengthening the incentive to save: a consultation on pensions tax relief.
Many commentators believed that the Government would decide to move from the current "exempt, exempt, taxed” system to a "taxed, exempt, exempt” system or to introduce a flat rate of tax relief on contributions. This speculation was squashed by the Treasury announcing that there would be no radical changes to pensions tax relief in the March 2016 Budget.
Whilst that was correct as far as it went, the Chancellor believes that he has found “a different answer to the same problem". The problem being that many people in their 20s and 30s have no pension and few savings. He said that, as there was no clear consensus in the consultation responses received as to whether the current pensions tax relief system should be changed, he will introduce the Lifetime ISA “a completely new flexible way for the next generation to save”.
The Lifetime ISA
The new vehicle is fashioned on the ISA model, where contributions are made out of post-tax income but investment growth on savings and future withdrawals are tax-free.
From April 2017, anyone under the age of 40 will be able to contribute up to £4,000 in each tax year to a Lifetime ISA. The Government will provide a 25% bonus on the contributions at the end of the tax year. So, a person who saves the maximum each year will receive a £1,000 bonus each year. Individuals will be able to make contributions and receive a bonus from the age of 18 up to the age of 50.
The funds in the Lifetime ISA will be able to be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account or to make full, or partial, withdrawals from age 60 for any other purpose. A person diagnosed with terminal ill health will be able to withdraw all of the funds tax-free, regardless of age. The Lifetime ISA will have the same inheritance tax treatment as all ISAs.
Savers will be able to make withdrawals at any time for other purposes but will lose the bonus element of the fund (including interest or growth on that bonus) and be subject to a 5% charge. However, the Government intends to explore whether savers should be able to access contributions and the bonus for other specific life events.
Will the Lifetime ISA prove to be the Trojan horse of pension provision as has been suggested in some quarters? It has the potential to be but whether that potential is fully realised will depend on many factors including the political will to maintain the current pensions tax system, how schemes choose to communicate the benefits of their pension provision and the development of automatic enrolment legislation.
The Chancellor may have given pension schemes breathing space to concentrate on dealing with more immediate changes, some of which are highlighted in this newsletter, but we can be sure that the future of pension provision will continue to exercise the minds of Government.
Other measures announced in the Budget
Another pensions vehicle rumoured to be on the Chancellor’s hit list was salary sacrifice. Although the Government acknowledged that it is considering limiting the range of benefits that attract income tax and national insurance contributions (NICs) advantages when provided as part of salary sacrifice schemes, it added “the government’s intention is that pension saving… should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements”.
Of interest to pension schemes will be the lesser technical changes proposed in the Budget to ensure that the pension flexibilities introduced last year work as intended. The changes include:
- re-aligning the tax treatment of serious ill-health lump sums with lump sum death benefits, so that they can be paid tax-free (when the provider is content to do so) when someone aged under 75 has less than a year to live but has already accessed his or her pension;
- making serious ill-health lump sums taxable at an individual’s marginal rate when paid in respect of individuals aged 75 and over;
- legislating to convert dependants’ flexi-access drawdown accounts to nominees’ accounts when dependants turn 23, so they do not have to take their funds as a lump sum taxed at 45%;
- legislating to allow defined contribution pensions already in payment to be paid as a trivial commutation lump sum, where total pension savings would be under £30,000;
- making top ups to fund dependants’ death benefits authorised payments; and
- removing unnecessary legislation relating to charity lump sum death benefits.
The Government has also committed to the introduction of a pensions dashboard, that is, a digital interface where individuals can view all their retirement savings in one place. It states that it will ensure “the industry” designs, funds and launches a pensions dashboard by 2019.
In line with the recommendations of the Financial Advice Market Review, the Government intends to:
- increase the tax and NICs relief available for employer-arranged pension advice from £150 to £500 from April 2017;
- consult on introducing a Pensions Advice Allowance over summer 2016 to allow individuals to withdraw £500 tax-free before the age of 55 from their defined contribution pension pot to redeem against the cost of financial advice; and
- consult on amending the definition of regulated advice in the existing Regulated Activities Order so as to introduce a single definition of regulated advice.
The Government also intends to restructure the statutory financial guidance providers – the Money Advice Service, The Pensions Advisory Service and Pension Wise – to ensure that consumers can access the help they need to make effective financial decisions.