In the first Conservative budget for nearly twenty years, George Osborne announced changes in relation to pensions tax relief for high earners – a development which was in the Conservative manifesto, and which will help to pay for their raising of the inheritance tax threshold. In a potentially more radical move, the government has also issued a consultation on pensions tax relief which could involve far-reaching reforms to the current system – although the government is at pains to emphasise that these are only proposals and it is quite possible that there will be no or minor changes only. There were also a number of smaller changes and reconfirmation of various points that have been announced previously.
We set out below a summary of pensions developments announced or reaffirmed in today’s Budget:
- Consultation on pensions tax relief: the government has issued a consultation on pensions tax relief, considering a range of possible reforms to the pensions tax system, with the aim of strengthening incentives to save and offering savers greater simplicity and transparency. Proposals range from a fundamental reform of the system (for example moving to a system which is “Taxed-Exempt-Exempt” like ISAs and providing a government top-up on pension contributions) to less radical changes (such as retaining the current system and altering the lifetime and annual allowances), as well as options in between. We will be issuing a further update with details and our analysis of the proposals shortly.
- Reduction in tax relief for high earners: there will be a taper to the Annual Allowance (AA) for those with total incomes (including taxable earnings and their own and employer’s pension contributions), over £150,000. For every £2 of adjusted income over £150,000, an individual’s AA will be reduced by £1, down to a minimum of £10,000.
- Salary sacrifice: salary sacrifice on pension contributions was widely trailed as an area that the Chancellor may attack in order to make savings. In the event he has not made any announcements of changes yet. However the budget document notes that salary sacrifice arrangements are becoming increasingly popular and that the cost to the taxpayer is rising. The government is going to actively monitor the growth of these schemes and their effect on tax receipts. We may therefore hear more on this area in the future.
- Pension transfers: the government will consult before the summer on options aimed at making the process for transferring pensions from one scheme to another quicker and smoother, including in relation to any excessive early exit penalties. If there is evidence of such penalties, the government will consider imposing a legislative cap on these charges for those aged 55 or over. This is aimed at ensuring that people can access the new DC flexibilities easily and at reasonable cost.
- Secondary annuities market: following consultation, implementation of a secondary annuities market is to be delayed until 2017, in order to ensure there is a robust package to support consumers in making their decision. The government will set out further plans for introducing this measure in the autumn.
- Triple Lock: the government reiterated its commitment to maintaining the triple lock for increases to state pensions.
- Public sector pensions: the government will work with Local Government Pension Scheme administering authorities to ensure that they pool investments to significantly reduce costs, while maintaining overall investment performance. A consultation to be published later this year will set out criteria for delivering savings as well as backstop legislation which will ensure that those administering authorities that do not come forward with sufficiently ambitious proposals are required to pool investments. Public sector pay-rises are to be held at 1% for 4 years from 2016/17 onwards.
- Pension guidance: access to Pension Wise (the free and impartial service introduced to give those nearing retirement guidance on their options) is to be extended to those aged 50 and above, and the government will launch a national campaign to raise awareness of the service.
- Lifetime Allowance (LTA) for pension contributions: the government will reduce the LTA for pension contributions from £1.25 million to £1 million from 6 April 2016. Transitional protection for pension rights already over £1 million will be introduced alongside this reduction to ensure the change is not retrospective. The LTA will be indexed annually in line with CPI from 6 April 2018.
- Taxation of pensions at death: as announced in the Autumn Statement 2014, the government will reduce the 45% tax rate that applies on lump sums paid from the pension of someone who dies aged 75 and over to the marginal rate of the recipient from 2016-17.
- EFRBS: the government will consult on tackling the use of unfunded employer financed retirement benefit schemes (EFRBS) to obtain a tax advantage in relation to remuneration.