The chancellor of the exchequer's Budget 2021, for pensions, has delivered disappointment for pension savers, good news for employees on furlough and new potential investment opportunities for pension schemes. Here are eight points we think scheme employers and trustees need to note:
- The lifetime allowance will not increase in line with the Consumer Prices Index (CPI) as projected. It will remain at the current level of £1,073,100 until 5 April 2026 (the end of the 2025-26 tax year).
- The Coronavirus Job Retention Scheme will run until the end of September 2021. Employees will continue to receive 80% of pay for hours not worked, with employers paying National Insurance contributions and pensions contributions until the end of June, then contributing in addition 10% towards the cost of unworked hours in July and 20% in August and September.
- Following its announcement in November 2020, the government intends to issue its first sovereign green bond (also known as a "green gilt") this summer, with a further issuance later in 2021 and issuance for the financial year expected to total at least £15 billion. These bonds will "help finance projects that will tackle climate change, finance much-needed infrastructure investment and create green jobs across the country", the government said in its financial services statement in November. A green gilt framework will be now published in June, the Budget confirmed, setting out "the types of expenditures that will be financed to help meet the government’s green objectives". The government will in due course report on "the contributions of green gilt-financed spending towards social co-benefits such as job creation and levelling-up". A National Savings and Investment product will be issued for individuals.
- There will be a new UK Infrastructure Bank, which HM Treasury said in its policy design report would "‘crowd in’ private investment to accelerate our progress to net zero, helping to level up the UK. This will invest in local authority and private sector infrastructure projects, as well as providing and advisory function to help with the development and delivery of projects."
- The government is going to "commit £375 million to introduce Future Fund: Breakthrough, a new direct co-investment product to support the scale up of the most innovative, R&D-intensive businesses. The British Business Bank will take equity in funding rounds of over £20 million led by private investors to ensure these companies can access the capital they need to grow and bring prosperity to communities across the UK."
- To make it easier for defined contribution (DC) pension schemes to consider illiquid investments such as venture capital and growth equity, and in line with existing proposals to encourage consolidation of DC schemes and remove barriers to illiquid investment, the government will "consult within the next month on whether certain costs within the charge cap affect pension schemes’ ability to invest in a broader range of assets. This is to ensure pension schemes are not discouraged from such investments and are able to offer the highest possible returns for savers."
- The Department for Work and Pensions will also publish draft regulations "to make it easier for schemes to take up such opportunities within the charge cap by smoothing certain performance fees over a multi-year period."
- The upcoming Finance Bill will also include provisions to ensure that collective money purchase schemes established under the Pension Schemes Act 2021 can achieve tax registered status.
Osborne Clarke comment
The Annual Allowance (£40,000 subject to the taper) and money purchase allowance (£4,000) remain unchanged. In real terms this, together with the freezing of the lifetime allowance, will reduce the amount of tax-relived pension savings that people can make. Trustees and employers should think about how best to communicate the freeze in the Lifetime Allowance to all members, so that they can factor this into their retirement planning, and remind members how benefits in excess of the lifetime allowance will be taxed when benefits are paid.
Members with larger defined contribution pension pots, or defined benefits which are projected to be worth in excess of £1 million, may wish to take financial advice on whether they are eligible to apply for Individual Protection. Broadly speaking, this option is available to those whose pensions were worth more than £1 million on 5 April 2016 and sets the lifetime allowance at the lower of that value and £1.25 million. This may be relevant for those members who have continued saving in the (vain) hope that the lifetime allowance would at some stage be raised back to historic levels. It is fair to say that this further (real terms) reduction to the lifetime allowance has been widely criticised by the pensions industry as a disincentive to savers.
For DC schemes, it is clear the government is keen to remove as many barriers as possible to investment in illiquid assets and trustees and employers should continue to follow developments. The investment vehicles and 'green gilts' proposed offer new potential investment options for pension schemes generally and it is no secret that the government is keen for pension schemes to invest in such initiatives.
The chancellor said nothing about the "net pay" question. This is the concern that, where a net pay arrangement is used for pensions tax relief, people who do not earn enough to pay income tax get no tax relief on their pensions contributions. In contrast, where relief at source is used, they get relief of 20%. This continues to be the subject of lobbying by various parties including the former pensions minister, Baroness Altmann. It remains to be seen whether the government will return to this on "Tax Day" on 23 March 2021 (when further details of consultations and calls for evidence are due to be published) or at a later date.
See here for a round-up of other tax measures announced in Budget 2021.