The Chancellor has announced that the lifetime allowance will be reduced from £1.25 million to £1 million from April 2016.
This cut will result in savings to the Treasury of £600 million. It is not an unsurprising move (the lifetime allowance has been significantly reduced since its inception in 2006) and will impact upon only 4% of pension savers. However, Osborne did announce that the lifetime allowance will be indexed by CPI from 2018 in a bid to introduce inflation proofing.
Annual allowance remains static
No change has been made to the annual allowance which will remain at £40,000. This announcement was also expected following the Conservative’s criticism of Labour’s proposals to reduce the annual allowance to £30,000, and will no doubt be a popular decision. It remains to be seen how long this will be case following the results of the election on May 7 2015.
Secondary annuity market – freedoms to be extended
The Chancellor has confirmed that the defined contribution freedoms will be extended to people who have purchased annuities (i.e. existing annuitants will be permitted to sell their income to a third party).
Further, a consultation has been launched on how to create such a market, with the Chancellor inviting views as to how to ensure that individuals are given the right level of advice and guidance. Presently, pensioners who sell their income from their annuity face a tax charge of 55%, whereas under the new regime effective from April 2016, the money can be taken as a lump sum or drawn down over a period of years, and taxed at the individual’s marginal rate.
This flexibility will be welcomed by many annuitants, but it is imperative that satisfactory regulation is put in place otherwise there is a risk that this could result in the next mis-selling scandal if it is abused by fraudsters. As such, the consultation is a positive move but, of course, the devil will be in the detail of how the new regime is to be regulated.