After the seismic changes to the pensions landscape announced in the 2014 budget, many people feared what the summer 2015 budget would contain for the pensions world. We knew the Lifetime Allowance was coming down to £1m from next April and other changes had been trailed in the Government’s election manifesto, but there were also some significant changes announced by the Chancellor, together with a wide-ranging consultation on pensions tax relief:
- From 6 April 2016, there will be a tapered annual allowance for very high earners – reducing from £40,000 to £10,000. Broadly speaking, for every £2 of income an individual has over £150,000 there will be a £1 reduction in the annual allowance, down to a minimum of £10,000 for those earning £210,000 or above. Income for these purposes is adjusted to include employer DC pension contributions and the value of DB benefit accrual.
- To facilitate the implementation of the new annual allowance rules, all existing pension input periods (PIPs – the period over which accrued benefits and contributions are tested against the annual allowance), will come to an end on 8 July 2015. All members will then have a new PIP starting on 9 July 2015 and ending on 5 April 2016. In broad terms, this means that members will have two pension input periods ending in the 2015/16 tax year with a total annual allowance of £80,000 for periods ending in the tax year (plus any available carry forward from the previous three tax years). There are complex transitional rules for valuing accrual over the period, including provisions allocating DB benefit accrual between the two PIPs.
- From 2016 onwards, all members will have a PIP aligned with the tax year. Schemes will need to consider the administrative implications of this.
- Certain lump sum death benefits (mainly where paid after age 75) attract a tax charge of 45%. The Government intends to change this so that where such lump sums are paid on or after 6 April 2016, they will be taxed at the recipient’s marginal rate.
- The Government intends to consult on options for making transfers quicker and smoother, this will include the consultation on excessive charging already announced.
- Further details on the Government’s proposals for a secondary annuity market will be provided in the Autumn and implementation will be delayed until 2017 to ensure that sufficient information is available to individuals contemplating the sale of an annuity.
- Potentially the most fundamental changes could follow on from a consultation on pension tax reliefs launched today. The Government is looking at whether the way in which pensions are taxed and contributions and investment returns receive tax relief remains the most appropriate way of doing things. The consultation paper does not actually set out any favoured Government proposals for an alternative but it does mention a system where all contributions would be taxed and pensions would be tax free. Consultation closes in September but whether it will lead to any changes remains to be seen. The Government acknowledges that the result of the consultation may well be that there is no better alternative than the current system.
The full Budget document is available here. Although the changes are not as significant as last year’s, they will have implications for schemes which are open to accrual and trustees and employers need to consider what, if any steps they will need to take.