On 8 July 2015 George Osborne delivered the first Conservative Budget since 1996. The changes announced may have divided the House, commentators and the public and led to ‘#budget2015’ topping the Twitter chart – but what effect will all of this have on the pensions industry? Some of the key announcements are considered below.
Tapered annual allowance
From 6 April 2016 the annual tax-free allowance on pensions saving will be capped at £10,000 for those earning £210,000 or more. The current allowance is £40,000 per year therefore, the maximum reduction will be £30,000. The annual allowance for individuals earning between £150,000 and £210,000 (including pension contributions made by them or on their behalf) will be tapered. Put simply, an individual’s annual allowance will be reduced by £1 for every £2 that their income exceeds £150,000. Any unused allowance can still be carried forward into the next tax year. Those earning £110,000 or less (excluding pensions contributions) will be unaffected by the taper, to ensure those who are lower paid are not affected purely through high pensions contributions.
In order to facilitate this new system the government plans to legislate to align pension input periods (PIPs) with the tax year from 2016/17. There are measures in place to protect savers during the transitional period and there are no further reporting requirements on administrators. However, HMRC have stated in draft guidance that it will consider ‘at a later stage’ whether this regime can be simplified by removing PIPs altogether. Although the transitional provisions may be administratively burdensome in the short term, the alignment of PIPs with the tax year and possible removal altogether is welcome news to aid individual pension planning.
Reform of pensions tax relief
A consultation paper published by the Treasury has highlighted the huge costs to the Exchequer resulting from the tax reliefs in relation to pensions. The government is considering if a reform to this system could both encourage pension saving and manage the overall cost. Reasons cited for this increasing cost are increased longevity and the shift from defined benefit to defined contribution provisions. It is hoped that the introduction of the tapered annual allowance will assist with this problem, but it cannot solve it.
Any reform needs to be ’simple and transparent’, ’encourage personal responsibility on the part of workers’ and ’be sustainable for the public finances in the long term’. One suggestion that has been mooted is treating pensions much like ISAs, i.e. moving from the ‘EET’ (exempt, exempt, taxed) system whereby pension contributions and investment income are not taxed but the resulting pension is taxed to a ‘TEE’ (taxed, exempt, exempt) system with contributions being taxed but the investment income and resulting pension being exempt.
The budget states that the government will ‘actively monitor the growth of salary sacrifice schemes that reduce employment taxes and their effect on tax receipts’. Employers with salary sacrifice arrangements should watch this space.
The consultation will conclude on 30 September 2015.
Extending pension flexibilities
Second annuities market – This was announced in the March budget, and as discussed here. A consultation has been held. The Chancellor announced that the government will publish a formal response to this in the autumn. It was also announced that implementation will be pushed back to 2017 from 2016, which should allay the industry’s previously voiced concerns that this initiative may be rushed.
Access to guidance – The government has pledged an additional £19.5 million in 2015/16 to support Pension Wise, including a further marketing campaign. Pension Wise is the service introduced alongside the new pension flexibilities to enable individuals to access unbiased personal guidance. The service will now be available to those over 50 years old (previously it was only available to those 55 and over). We would also like to see an extension of the service to permit individuals more than one meeting/telephone call with a Pension Wise adviser.
Consultation on barriers to using flexibilities – This was announced previously and it was reiterated in the budget that this will take place ‘before the summer’. The government is concerned that some providers have shown a reluctance to engage fully with the new flexibilities. The government aims to make transfers ‘quicker and smoother’ and will consider a cap on exits charges.
Changes to taxation of inherited annuities – From 6 April 2016, lump-sum death benefits payable from a registered pension scheme or a non-UK scheme on the death of a member over age 75 will be taxed at the marginal rate of the recipient, where the benefits are paid to an individual who is the ‘ultimate beneficiary’. Previously, a flat rate of 45% was applied in this scenario. Earlier this year the taxation of lump-sum death benefits payable on the death of a member under age 75 was changed so that there is no tax payable (subject to a lifetime allowance charge) so long as the sum is paid within two years.
Reduction in lifetime allowance
As announced in March, the lifetime tax-free allowance will be reduced to £1 million from the start of the 2016/17 tax year. Protection from the lifetime allowance charge will be implemented for the benefit of those who have built up savings expecting an allowance of £1.25 million. It was also announced that from April 2018 the lifetime allowance will be indexed and will therefore rise in line with the consumer price index (CPI). The government expects that this reduction will only affect 4% of individuals approaching retirement, and it is therefore aimed at the wealthiest of savers.
Public sector survivors’ pensions
In April 2015 the government introduced new and reformed public service pension schemes which allow for widows, widowers and civil partners of police officers and fire-fighters who are killed on duty, to retain survivors benefits if they remarry, cohabit or form a civil partnership. The government is also considering making similar changes for those who a members of the security services.