The Chancellor’s Summer Budget, delivered on 10 July 2015, promises further upheaval on the pensions tax front and a Green Paper which may lead to fundamental reform of pensions tax relief.
Key points included:
- From 6 April 2016, a further restriction on pensions tax relief by introducing a tapered reduction in the amount of the annual allowance – currently £40,000 pa – for high earners:
- the test for the taper is not based solely on income, because the Government has preempted the risk of individuals avoiding the restriction by exchanging salary for employer contributions to the pension scheme;
- the taper will apply to anyone whose income exceeds £110,000 pa, and whose 'adjusted income' – being income plus the value of defined contribution scheme employer and employee contributions or defined benefit scheme accrual – exceeds £150,000 pa;
- where the taper applies, for every £2 of “adjusted income” between £150,000 and £210,000, the £40,000 annual allowance will reduce by £1 (so could be as low as £10,000 for some individuals); and
- draft legislation implementing the taper and bringing in transitional provisions is included in the summer Finance Bill 2015.
- The Government is consulting on whether there is a case for reforming pensions tax relief to strengthen incentives to save, offering savers greater simplicity and transparency. It is seeking views on various options, ranging from fundamental reform (for example, moving to a system which is “taxed-exempt-exempt” like ISAs and providing a government top-up on pension contributions) to less radical changes (such as retaining the current system and altering the lifetime and annual allowances), as well as options in between
- As trailed before the Budget, the Government will consult immediately on options to make the process for transferring pensions from one scheme to another quicker and smoother, including in relation to any excessive early exit penalties. If there is evidence of such penalties, it will consider imposing a cap on charges for those aged 55 or over
- In the Autumn, the Government will set out plans for a secondary annuities market to be implemented in 2017
- The Government intends to extend access to Pension Wise, the free and impartial guidance service, to those aged 50 and above.