HM Treasury has today (9 December 2010) published draft legislation released as part of the Finance Bill 2011, which confirms the Government's intended approach on a number of key issues.
Restricting pensions tax relief
The draft legislation largely confirms the proposals announced by the Treasury in October in relation to restricting pensions tax relief. The key points to note are as follows:
- The annual allowance will be reduced from £255,000 to £50,000 and the lifetime allowance from £1.8 million to £1.5 million.
- The new annual allowance will come into effect in the 2011-2012 tax year (i.e. on and from 6 April 2011), and the reduced lifetime allowance will take effect in the tax year 2012-2013 (i.e. on and from 6 April 2012).
- The annual allowance charge will be linked to the individual's marginal tax rate.
- Unused annual allowance can be carried forward for three years.
- The valuation factor used to calculate the value of defined benefits pension savings will increase from a factor of 10 to a factor of 16.
- Exemptions from the new annual allowance rules will apply in the year of death or where the individual retires because of severe ill health.
- Transitional rules will apply from 14 October 2010 where individuals have pension savings relating to a pension input period that started before 14 October 2010 and which will end in the 2011-2012 tax year (making it subject to the new annual allowance limit).
Although the draft clauses are substantially the same as those published in October 2010, clarificatory detail has been provided on a number of points. For example:
- The exemption from the annual allowance on grounds of ill-health has been expanded and will now apply to "severe ill-health" where an individual retires through ill health. The Government had expressed concern that a wider exemption could be open to abuse and an exemption on health grounds had been available only in cases of terminal illness.
- Addressing the need for "pensions growth protection", dispensation from the reduced lifetime allowance will be available to those who have ceased accruing benefits and whose savings exceed £1.5 million as at 6 April 2012 or to those who expect the value of their investments to exceed this sum through investment growth after this date. In such cases, a personalised lifetime allowance of £1.8 million will be permitted.
- Anti-avoidance measures have been introduced to take account of post-entitlement enhancements. These are intended to address arrangements whereby a pension will increase on an annual basis after a member has become entitled to that pension.
Despite the pledge by the Government that all proposals would be settled by the end of 2010, not all proposals have been addressed in the draft legislation and some remain outstanding. For example, the issue as to whether annual allowance charges can be met out of pension benefits rather than current income is undecided and remains the subject of consultation; draft legislation on this point is not expected before February 2011. This timeframe leaves only a very small window available for implementation of necessary measures.
Removal of requirement to annuitise by age 75
Part of the draft legislation published as part of the Finance Bill 2011 has confirmed that the requirement for pension savers to purchase an annuity by age 75 is to be abolished with effect on and from 6 April 2011. The move should create greater flexibility; savers will be able to leave their pension funds invested in drawdown arrangements and make withdrawals throughout retirement subject to an annual cap, although no annual cap will apply where an individual can demonstrate that they have a secure income for life of at least £20,000 per annum.
Switch to CPI: Override powers
The Minister for Pensions, Steve Webb, has announced an industry-wide consultation on the decision to use CPI as the measure of price increases and the likely impact this might have on private sector occupational pension schemes. Contrary to press and industry speculation however, it was also announced that, where the rules of a scheme specify RPI indexation and do not contain a power of amendment, no modification power would be granted to permit a switch to potentially cheaper CPI indexation. However, it was also made clear that where schemes stayed with RPI, legislation would be introduced to ensure that no additional payment would be required of them in years where CPI is greater than RPI.
Employer Financed Retirement Benefit Schemes ("EFRBS")
Draft legislation has been issued aimed at arrangements for rewarding employees which seek to avoid or defer the payment of income tax or national insurance contributions. This is intended to include EFRBS, with limited exclusions for schemes providing benefits in certain restricted circumstances, and will take effect from 6 April 2011. Anti-forestalling provisions are to apply from 9 December 2010 until 6 April 2011.
We will issue a more detailed briefing on the issues dealt with in this bulletin in due course.