There were no real surprises in the Budget 2013 announced by the Chancellor of the Exchequer yesterday, as far as pensions are concerned. Most of the measures announced were confirmatory, having been forecast by the Chancellor in the Autumn Statement or last year's Budget. This does not mean that some of the measures will not have a significant impact on pension schemes - acceleration of the reforms to the State Pension, for instance, or further reductions in the annual and lifetime allowances. If there was a surprise in the Budget, it was the abandoning by the Government of proposals to allow schemes to smooth valuation of pension scheme assets and liabilities. Instead, a new "employer" objective for the Pensions Regulator to "support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer" will be introduced. The DWP had consulted on this earlier this year and will provide further details about the new objective in the Spring.

In this bulletin, we considered these and other measures announced in yesterday's Budget.

Reductions in the Lifetime Allowance and Annual Allowance

As announced in the Autumn Statement, the Annual Allowance ("AA") which refers to the maximum pension saving that an individual can make in a year without triggering a charge to tax will be reduced (from its current value of £50,000) to £40,000 from the tax year 2014-15 onwards. The Lifetime Allowance ("LTA") which relates to the total amount of pension savings that an individual can make within a registered pension scheme during their lifetime will also be reduced to £1.25 million (from its current value of £1.5 million) from 2014-15 onwards.

For more about the implications of these changes for pension schemes, see our earlier e-bulletin on the Chancellor's Autumn Statement here.

Protection for existing members

There will, however, be some form of protection for existing members by way of a fixed protection regime (dubbed "Fixed Protection 2014"). This will work in a similar way to the current fixed protection regime. People who earn more than £1.25 million of UK tax relieved pension rights or think they may have so by 5 April 2014 will be entitled to elect for a personal LTA of the greater of £1.5 million and the new LTA. They must, however, elect to do so by notifying HMRC by 5 April 2014.

Also, as announced in the Autumn Statement, an individual protection regime (described previously as "Personalised Protection") will be introduced for individuals with pension rights above £1.25 million. In contrast with fixed protection, it is expected that individual protection will allow individuals to accrue further benefits. The Government will consult on the detail this Spring and include legislation in the Finance Bill 2014.

An "employer" objective for the Pensions Regulator

The Government will not be pursuing its proposal to allow the smoothing of discount rates used to calculate assets and liabilities of defined benefit schemes, having consulted on the proposal early this year.

However, it will introduce a new objective for the Pensions Regulator to "support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation". The Government had consulted on the objective earlier this year, stating that the existing five objectives of the Pensions Regulator focus on protecting members and the Pension Protection Fund but do not explicitly require the Regulator to consider employers.

Following hot on the heels of the Budget announcement, the Pensions Regulator announced that it will amend its Code of Practice for Defined Benefit (DB) funding "as soon as possible this year" to take into account the new objective together with an annual funding statement which will set out the Regulator's guidance to trustees in light of current economic circumstances. The funding statement will include "flexibilities available to trustees and company sponsors in the current economic climate, particularly the freedom to choose a basis on which contribution levels and valuations are calculated". The Regulator will consult on both the revised Code of Practice and the annual funding statement.

Reforms to the State Pension

The reforms to the State Pension, which involve the creation of a single-tier pension and will result in the abolition of contracting out on a DB basis, will now take place from 2016 (a year earlier than previously announced). For further discussion around the implications of the changes to the State Pension for schemes with defined benefits, click here.

More generous drawdown limits for pensioners

The cap on income drawdown will be raised, allowing pensioners to receive an authorised pension from their registered pension scheme up to 120% of the expected annuity value. At the moment, the maximum drawdown is, broadly, 100% of the expected annuity value. This change will be effective from 26 March 2013.

Increase in the Income Tax Personal Allowance

The Income Tax Personal Allowance will be increased to £9,440 for the tax year 2013/14 and to £10,000 for the tax year 2014/15.

Although there is no automatic link between the allowance and the auto-enrolment earnings trigger (the level of earnings which trigger the requirement for an employee to be automatically enrolled into a pension scheme), the earnings trigger was recently increased to £9,440 in line with the income tax threshold. We could, therefore, see a further increase in the earnings trigger to £10,000 for 2014/15. This may be welcomed by some employers as they would have to auto-enrol a smaller proportion of their work force than currently.

Tidying up legislation around 'bridging pensions'

Tax rules on the payment of bridging pensions will be aligned with the DWP's changes to State Pension Age.

Currently under the Finance Act 2004, where a bridging pension is provided, the pension can only be reduced, without giving rise to adverse tax consequences, if the reduction takes place no earlier than age 60 and no later than age 65. Given the impending changes to the State Pension Age announced in the Chancellor's Autumn Statement, amendments will be made to the Finance Act 2004 provisions so that the reduction can take place at any time between the age of 60 and State Pension Age. 

Tighter squeeze on 'QROPS'

As announced in the Budget 2012, further regulations in relation to Qualifying Recognised Overseas Pension Scheme (QROPS) will be introduced. QROPS will need to re-notify HMRC every five years that they continue to meet the requirements for QROPS. Former QROPS will also have to continue to report payments on transfers received while they were QROPS. Further, more reasons will be introduced to exclude a pension scheme from being a QROPS.

Tidying up of tax rules following abolition of DC contracting-out

Following the abolition of contracting-out on a defined contribution basis from 6 April 2012, legislation will be introduced to bring tax legislation into line with DWP legislation. The Finance Act 2004 and regulations issued under it set out rules relating to tax relief on payments into contracting-out defined contribution schemes, including in relation to age-related rebates, minimum contributions and minimum payments which may have been due before the abolition of contracting-out. Draft clauses in relation to this are already in the Finance Bill 2013.

Technical amendments to fixed protection

A regulation-making power will be included in the Finance Bill 2013 to amend the existing fixed protection legislation and make it work as intended. Draft clauses are included in the Finance Bill 2013 allowing HMRC to amend the rules to stop members inadvertently losing fixed protection (it is thought that these may include circumstances that are outside the member's control).

Pensions Infrastructure

Certain pension scheme investment rules will be amended to "encourage the conversion of unused space in commercial properties".

More compensation for Equitable Life with-profits annuity holders

The Government will make flat-rate lump sum payments to living with-profits annuitants aged over 60 who bought their annuity from the insurance company before 1 September 1992. These payments will be made in 2014 if not earlier.

Tax relief for spouse pensions

Legislation will be included in the Finance Bill 2013 removing the tax and NIC incentives for employees and employers respectively, for arrangements where an employer pays a pension contribution into a registered pension scheme for an employee's spouse or family member as part of the employee's flexible remuneration package.

General Anti-Abuse rule (GAAR)

As announced in the Budget 2012, the Government will introduce a general anti-abuse rule ("GAAR") in the Finance Bill 2013 to tackle abusive tax avoidance schemes. No further details around GAAR have, however, been provided; in particular the extent to which GAAR would be used to monitor the use of unfunded pension arrangements.

Other measures that could impact on pensions

As previously publicised, the Government plans to introduce a new form of employment status – the employee shareholder - with effect from 1 September 2013. The aim of the measure is to encourage employees to invest in their employers and reduce the regulatory burden on employers so as to drive growth. Employees will, however, have to give up some of their employment rights in order to become "employee shareholders", which, in turn, could impact on their pension rights.

The Government also plans to remove the presumption of self-employment for limited liability partnership (LLP) partners, to tackle the use of such vehicles to disguise employment relationships. Depending on how this is introduced, this could mean that NICs becomes payable on certain partnership distributions or could involve treating the LLP as opaque for tax purposes.  This measure will likely have a big impact on professional firms and other sectors who commonly operate through LLP structures such as asset managers and is probably aimed at "salaried" or "fixed entitlement" partners in LLPs. It seems very possible that unless partners in an LLP bear the characteristics of a true partner (i.e. genuinely share in profits and losses of the business and have the other usual risks of being a genuine partner), they may be treated as employed for tax purposes so that PAYE would apply to their partnership drawings and the LLP would be subject to employer NICs. No further detail has been published on these measures but if an employee, previously regarded as a partner is regarded as an employee, for tax purposes, this could impact on his status for employment purposes. If so, the individual could be entitled to pension rights of an employee, including the right to be auto-enrolled under the auto-enrolment regime.