Written by Robert Young
As pensions are a form of long term saving, most pension professionals were looking for no or few changes in the budget as planning long term with constant changes along the way is not easy and there have been many changes to pensions recently. However this budget introduced a few more, some not entirely unexpected but others more so. Looking at the details released after the Chancellor finished speaking gave a few more surprises.
The proposed reduction to £1 million in 2016-17 was confirmed and that this would be indexed in line with CPI from 2018-19. No details yet on new transitional provisions.
This confirms the earlier statement, but it is disappointing that we are still waiting to see the transitional provisions. Action will need to be taken by those impacted, possibly before the end of the current tax year. We encourage readers to watch out for the release of the transitional provisions in the coming months.
Pensions Annual Allowance
Most people retain an annual allowance of £40,000 on which they will receive full tax relief. This is the case provided you earn less than £110,000. However if you earn over £150,000, with this figure to include both employee and employer pension contributions, then from April 2016 tax relief will be reduced. The allowance is reduced by £1 for every £2 of income over £150,000, with a maximum reduction of £30,000. This gives those with income of £210,000 or above an annual allowance of £10,000.
While the limitation of tax relief for those on high earnings was not totally expected, with some expecting the ability to save higher rate tax to be withdrawn, the approach taken has not removed higher rate relief but has made the calculation relatively complex. Many self employed and high earners do not know their final earnings until the end of the tax year so planning regular contributions against an unknown allowance becomes impractical, effectively leaving them to make large single contributions at the end of the tax year when the allowance can be calculated. This may become a particular issue for high earners who remain members of defined benefit pension schemes. It will cause more work for scheme trustees and administrators and for members as they will need to decide whether to pay the tax or reduce their benefits.
Aligning Pension Input Periods
All pension input periods open on budget day end on 8 July 2015 with the next pension input period (PIP) being 9 July 2015 to 5 April 2016. From 6 April 2016, all existing arrangements will have a 12 month PIP from 6 April 2016 to 5 April 2017. There will be transitional provisions that essentially grant a £80,000 annual allowance for 2015-16 tax year which is split into two notional periods, 6 April 2015 to 8 July 2015 and 9 July 2015 to 5 April 2016 called the pre- alignment tax year and the post alignment tax year. Any part of the £80,000 not used in the pre alignment tax year may be used in the post alignment tax year subject to a maximum of £40,000.
The aim of this is to align all pension input periods with tax years. The pension input period is used to measure the contributions paid in against the annual allowance. The contributions are allocated to the tax year in which the pension input period ends. This can become confusing for someone with several pension policies, all with different pension input periods. In addition the ability to carry forward unused relief for 3 years remains. Anyone who is seeking to maximise pension contributions is recommended to seek advice. The changes may cause issues for occupational pension schemes that currently align these periods to the company year end.
Lump Sum Death Benefits
Lump sum death benefits paid from registered pension schemes on a death after age 75 are taxed at 45% in tax year 2015-16. It has been confirmed that from 6 April 2016 this will change so it is taxed at the recipient’s own income tax rate. Note that the tax charge will remain at 45% where the benefit is paid to someone other than an individual who is the ultimate beneficiary such as a trust or company.
This confirms an amendment that was already expected.
No changes have been proposed, but the Government has stated that it will be monitoring the growth of such schemes and their impact on tax receipts.
It was widely rumoured before the budget that action could be taken to clampdown on these arrangements. Although action was not taken in this budget it is clearly something that is being kept under review.
Secondary Annuity Market
Alongside pension freedoms, Government is keen to extend this option to those who already have an annuity policy. The original plan was for this to be in place by April 2016 but this has now been delayed by a year so will now be in place by April 2017.
This will give time for all those concerned in this market to build the appropriate systems and to ensure that appropriate safeguards are in place for consumers to consider this option fully. Although annuities have been criticised as providing poor value for money alongside this comes a guaranteed income for life, so the decision to give it up should be carefully considered.
The Government service to provide guidance on pension options is to be made available to those aged 50 or over.
Although there is a limit to the guidance that the Pensions Wise service can provide in the limited time they have available, broadly it should be welcomed that those over age 50 can obtain some guidance on their retirement planning at least a while before they actually need to draw on their retirement funds.
With the introduction of pension freedoms, Government wish to ensure easy access to these so are issuing a consultation on options aimed at making the process of transferring pensions from one scheme to another quicker and smoother and possibly taking action with regard to early exit penalties.
In general terms this is to be welcomed with the pensions industry having an opportunity for comment before final proposals are determined.
Pensions Tax Relief
The Chancellor stated in his budget speech that pensions could be more like ISAs. His rationale for this was that Britain is not saving enough so the Government wished to consider changes, potentially radical changes that would encourage move saving and therefore published a Green Paper seeking comments on a wide range of options.
This was not widely anticipated although calls to review the way in which tax relief is granted on pensions have been raised in the past. For pensions to be more like ISAs represents a significant change and raises many issues with regard to funds already in pensions.
Currently we have pensions which operate on an Exempt-Exempt-Taxed basis as broadly you receive tax relief on contributions input and investment return but income taken out is taxed, whereas ISA’s operate on a Tax- Exempt –Exempt basis. Although this would possible be simpler starting from a blank sheet, this is not the case in the UK.
With the number of employees with pension arrangements growing as a result of Automatic Enrolment this may seem an odd time to change the pensions system. It could create yet another tranche of pension to be worked out in a different way adding another layer of complexity. The pension industry is, however, at least being given an opportunity to comment with a full range of options from adjusting current lifetime allowance and annual allowance to a “merger” of pensions and ISA’s on the table before any final decisions are taken. The consultation runs until 30 September so it will be interesting to see where this ends up.
Overall despite the constant pleas of pension professionals to politicians to stop fiddling with the pension system as this does not help with long term planning, this budget has introduced a number of changes with potentially more to follow.
Contact the Author
I joined Gordon Dadds in 2013 from Culver Employee Benefit Consultants Limited. I have many years of experience as a consulting actuary, providing advice on employee benefits and acting as a trustee of pension and life insurance arrangements. Outside of work I enjoy choral singing, cycling (I am a member of Tandem Club) and cooking.