On 5 December 2012 the Chancellor of the Exchequer, George Osborne, outlined several measures in his Autumn Statement to Parliament which will impact on UK pension schemes.
From 6 April 2014, the lifetime allowance ("LTA") will be reduced from £1.5m to £1.25m. The LTA relates to the total amount of pension savings that an individual can make within a registered pension scheme during his lifetime. If the LTA is exceeded, the excess pension saving is subject to a tax charge (the lifetime allowance charge).
From 6 April 2014, the annual allowance ("AA") will be reduced from £50,000 to £40,000. The AA refers to the maximum pension saving that can be made in a period of 12 months ("pension input period") without triggering a charge to tax for the member (the annual allowance charge).
There will be no changes to the "carry forward" principle that enables an individual's unused allowances for up to 3 years to be carried forward.
Protection for existing members
The existing "fixed protection" regime will be extended to individuals whose pension savings already exceed the revised LTA, provided they satisfy prescribed criteria. Basically this entails no further contributions being paid by and in respect of them and no further pension accrual arising.
The Government will also discuss with interested parties whether to offer a personalised protection regime as well. This would allow further contributions/accrual, with a lifetime allowance charge levied when the benefits are paid.
These proposals will further inhibit the payment of large pension contributions into defined contribution occupational and private pension schemes.
They will also impact on defined benefit and cash balance schemes, because the increase in the value of the member's pension savings during a pension input period has to be tested against the AA.
Our e-bulletin of September 2011 set out in detail how members' pension scheme benefits are valued against the AA, and pointed out the difficulties arising from one-off spikes in the pension input that could arise e.g. upon redundancy or in the event of career promotion.
The existing "Scheme pays" facility whereby a member's AA tax charge exceeding £2,000 can be offset against a reduction in his accrued benefits is likely to become more popular.
The continued cutbacks to the AA and LTA may encourage more employers to establish employer financial retirement benefit schemes (EFRBS) for employees affected. Our e-bulletin of September 2011 commented on these and the "disguised remuneration" rules which may affect them.
The upper cap on income drawdown (where an individual opts not to buy an annuity in respect of his defined contribution pension arrangement) will be raised from 100% to 120% of the expected annuity value, allowing a larger annual drawdown.
The Chancellor also confirmed that the Government will introduce a single-tier State pension (currently expected to be worth £140 per week) to replace the current basic and second State pension schemes. A Government White Paper on this will be issued soon.
The basic State pension, which is increased annually subject to a "triple lock guarantee", will be increased by 2.5% in April 2013.
The introduction of a single-tier State pension will have an impact on many defined benefit occupational pension schemes because it will entail the abolition of contracting out of the State second pension.
Furthermore, many occupational pension schemes operate contribution/benefit structures whereby an amount reflecting the basic State pension is deducted from pensionable pay and/or pension accrual. The design of these schemes may need to be reviewed.
DWP Consultations announced
The Chancellor also announced that the Department for Work and Pensions will be consulting on two matters.
Firstly, the DWP will consult on whether defined benefit scheme actuarial valuations will be allowed to "smooth" the discount rates that are used to calculate scheme asset and liability values.
Secondly, the DWP will consult on providing the Pensions Regulator with a new statutory objective to consider the long term affordability of deficit recovery plans for sponsoring employers.
These consultations are likely to be welcomed by employers with defined benefit schemes.
Finance Bill 2013
Relevant legislation will be included in the Finance Bill 2013, to be published in draft on 11 December 2012.