On 8 July 2015, Chancellor of the Exchequer George Osbourne delivered the first Budget under a majority Conservative government in 19 years. The Chancellor divided political opinion with a wide- ranging Budget, balancing contentious policies such as the significant welfare cuts with the surprise implementation of the national living wage and a reduction in corporation tax.
With the extensive pensions freedom policies having played a central role in recent pre-election Budgets, it came as no surprise that the Summer Budget did not feature further sweeping pension reforms. Significantly, the Chancellor made no mention of withdrawing the pension flexibilities, dispelling some commentators’ fears that this would be a short-term policy. However, while pensions policy may have played a smaller role in the Summer Budget, that does not mean that the announcements were any less significant.
This article sets out some of the key pension policies included in the Summer Budget, focussing on the taxation of pension savings and pension flexibilities.
Tapered annual allowance for high earners
As anticipated, from 6 April 2016, annual tax relief on pension savings will be restricted for high earners. From this date, the annual allowance for those earning an adjusted income of between £150,000 and £210,000 will be tapered. The taper will reduce an individual’s annual allowance by £1 for every £2 that his adjusted income exceeds £150,000, limited to a maximum reduction of £30,000. In essence, this means that a person with an adjusted annual income of £210,000 or more will, from 6 April 2016, have a reduced annual allowance of £10,000. The carry forward of unused annual allowance will still be permissible but this will also be limited to the unused tapered annual allowance.
As an ancillary measure, legislation will align pension input periods (PIPs) with the tax year with immediate effect. It is further thought that PIPs may at some stage in the future be removed all together.
These changes have been included in the Finance (No. 2) Bill 2015 currently before Parliament.
Reduction of the lifetime allowance
To be enacted in the Finance Bill 2016, the Chancellor confirmed that the lifetime allowance for pension savings will be reduced to £1million from 6 April 2016. The lifetime allowance was previously fixed at £1.25 million from 6 April 2014. Originally announced as part of the March 2015 Budget, transitional protections will be introduced to offer some protection to those affected by the reduction.
Changes to taxation of pensions at death
As announced at the Autumn Statement 2014, from 6 April 2016, taxation of lump sum death benefits payable from a registered pension scheme or a non-UK scheme on the death of a member aged 75 or over will be reduced from the current rate of 45% to the recipient’s marginal rate. This follows the earlier policy to remove from tax lump sum death benefits payable on the death of a member under age 75, provided that payment is made within two years of the member’s death.
Consultation on the future of pensions tax relief
A consultation paper has been published by the Treasury, to consider whether reform to the tax system could further encourage pensions saving whilst better managing the costs of pensions- related tax reliefs. One suggestion is that the tax treatment of pensions could become more like that of ISAs, that is moving from the current “exempt, exempt, taxed” system to a “taxed, exempt, exempt” system topped up by the Government. This consultation will conclude on 30 September and we will keep you updated on the outcomes.
Of particular interest to employers operating salary sacrifice arrangements, the Summer Budget stated that the Government will be actively monitoring the growth of such arrangements and their effect on tax receipts. As the popularity of salary sacrifice arrangements rises, employment-related taxes decrease and the cost to the Exchequer increases.
Extension of pension flexibilities
The Chancellor announced further pension flexibilities’ policies including:
- Having announced plans in the March 2015 Budget to allow individuals to assign their annuities in exchange for a lump sum or alternative benefit, a consultation was held which closed on 18 June 2015. A formal response will be published in the autumn, and the implementation of the secondary annuities market has been delayed by a year to 2017.
- Consultation on barriers on using pension flexibilities. The Government has published a consultation regarding whether action should be taken to remove barriers to individuals wishing to take advantage of the new pension flexibilities. Barriers include the imposition of excessive exit charges. The Government’s stated aim is to make transfers from one scheme to another “quicker and smoother”. If there is evidence of excessive early exit penalties, it will consider imposing a legislative cap on these for those aged 55 or over.
- Access to guidance. The scope of those eligible to receive access to the free Pension Wise service is to be extended to those aged 50 and above. Further, a nationwide marketing campaign to raise awareness of the service will be launched.
In conclusion, the 2015 Summer Budget was one of small but significant change to pensions policy. For employers, the outcome of the current tax relief consultation will be one to look out for. For individuals, high earners may wish to seek advice on how to best manage their annual and lifetime allowances as soon as possible. Finally, the Summer Budget proved that the implementation of pension flexibilities remains an important policy for the Government and it will be interesting to watch how this evolves, particularly in relation to the removal of barriers to accessing the flexibilities.