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July 2015 Budget: key pensions announcements
Practical Law UK Legal Update 8-617-1954 (Approx. 8 pages)
July 2015 Budget: key pensions announcements
| Published on 08 Jul 2015 • United Kingdom |
On 8 July 2015, the Chancellor of the Exchequer delivered his summer budget. This update summarises the key pensions-related implications.
Speedread
On 8 July 2015, the Chancellor delivered his seventh Budget speech in the House of Commons. The main pensions-related announcements were as follows:
- As anticipated, from 6 April 2016 the annual allowance for pension saving will be tapered for individuals with incomes of £150,000 or more (including pension contributions). The maximum reduction will be £30,000, meaning that the annual allowance will be capped at £10,000 for those with incomes of £210,000 or more. An income floor will mean individuals earning £110,000 or less (excluding pension contributions) are not affected by the taper. Alongside the taper, the government will legislate to align pension input periods (PIPs) with the tax year from 2016/17. Pending the alignment, all PIPs currently open on Budget day have closed with immediate effect. Transitional relief will apply for the remainder of the 2015/16 tax year.
- Lump-sum death benefits payable on an individual's death over age 75 will in most cases be taxed from 6 April 2016 at the recipient's marginal rate rather than under the 45% special lump-sum death benefits charge.
- The government will proceed with its plan announced at the March 2015 Budget to establish a framework for a secondary annuities market. The market is intended for those who cannot take advantage of the new DC flexible access options because they have already annuitised. However, implementation is being postponed from 2016 to 2017. Further details will be published in the autumn.
- The government will consult on tackling the use of unfunded employer-financed retirement benefit schemes as an avoidance measure.
- As previously announced, the lifetime allowance will be reduced to £1 million from 2016/17, with protection enacted for individuals adversely affected.
- The Treasury is consulting on whether to make fundamental reforms to the system of pensions tax relief, perhaps even moving from the current "EET" system, whereby contributions and investment income receive tax relief but pensions are taxed, to a "TEE" system (with a government top-up) where pension payments are tax-free. No decisions have been taken on any specific policy measures and the government seeks proposals that accord with a range of principles, including that any alternative must be simple and transparent and sustainable for the public purse in the long run.
Legislation to enact many of the measures in the Budget will be contained in the summer Finance Bill 2015, while others will be contained in Finance Bill 2016.
Key pensions-related measures
The main pensions-related measures in the July 2015 Budget are summarised below. Except where otherwise indicated, references in italics and brackets are to the main Budget report (see HM Treasury: Summer Budget 2015).
Tapered annual allowance
From the start of the 2016/17 tax year, the government will restrict pensions tax relief by tapering the annual allowance available for pension saving for high-income individuals (Summer Budget 2015, paragraph 2.83). A tax information and impact note (TIIN) published by HMRC contains the following details about how the taper will work:
- Scope of the taper. The taper will apply to an individual with annual "adjusted income" of over £150,000. A member's adjusted income includes the value of pension contributions made by him and on his behalf. The use of this adjusted income measure will prevent individuals avoiding the taper by sacrificing salary in return for higher employer pension contributions.The value of employer contributions in respect of an arrangement for a tax year will be the pension input amount for the arrangement for annual allowance purposes, less the total of any member contributions. For members of DC arrangements, this will be the actual value of any employer contributions paid in the tax year for that arrangement. For members of defined benefit (DB) or cash balance schemes, the value of employer contributions will be calculated on the basis of the pension input amount under the normal annual allowance rules, less the amount of any contributions made by the individual during the tax year.
- Threshold income. An income floor will mean the taper will not apply unless the individual's income excluding pension contributions exceeds £110,000 (referred to as his "threshold income"). This measure is intended to ensure lower paid individuals are not affected by the taper purely through high pension contributions. However, as an anti-avoidance measure any employment income given up in exchange for pension provision under a salary sacrifice arrangement entered into on or after 9 July 2015 will be added back into an individual's threshold income.
- Operation of the taper. The taper will reduce an individual's annual allowance by £1 for every £2 that his adjusted income exceeds £150,000, up to a maximum reduction of £30,000. In other words, an individual with an adjusted income of £210,000 or more will have an annual allowance of £10,000. Where an individual is subject to the money purchase annual allowance through having flexibly accessed his pension rights, the alternative annual allowance (which applies to non-money purchase pension saving and is currently limited to £30,000) will be reduced by £1 for every £2 by which his income exceeds £150,000, subject to a maximum reduction of £30,000. Hence an individual with adjusted income of £210,000 or more who has triggered the money purchase annual allowance will have zero alternative annual allowance available.An individual affected by the taper will still be entitled to carry forward unused annual allowance on the existing basis, although the amount carried forward will be limited to the unused tapered annual allowance.
- Aligning PIPs. To facilitate the taper, legislation will be introduced to align pension input periods (PIPs) with the tax year with immediate effect from 8 July 2015. As a result, a PIP that was open on 8 July 2015 closed on that date, and the next PIP runs from 9 July 2015 to 5 April 2016. All subsequent PIPs will match the tax year.Transitional measures will endeavour to protect savers who might otherwise be affected by the changes in the 2015/16 tax year. This will be achieved by giving individuals an £80,000 annual allowance for 2015/16, on the basis that for savings made between 9 July 2015 and 5 April 2016 the allowance is limited to £40,000. Overall, the 2015/16 tax year will be split into two mini tax years for this purpose (referred to as the "pre-alignment tax year" and the "post-alignment tax year"). Special rules will be introduced for applying this mechanism to DB and cash balance schemes.
Alongside the TIIN, HMRC has published draft guidance on the transitional regime for PIPs (HMRC: Pensions technical note: transitional provisions for aligning pension input periods (8 July 2015)). Among other things, this confirms that for any new arrangement starting after 8 July 2015, the member's first PIP will end on 5 April 2016 and thereafter be aligned with the tax year. The draft guidance makes clear that there will be no new reporting requirements on scheme administrators arising from the transitional year, so pension savings statements for 2015/16 will have to be provided to members by 6 October 2016 in the normal way, regardless of which mini tax year they relate to. The draft guidance also suggests HMRC will consider "at a later stage" whether the regime can be simplified by removing the concept of PIPs altogether.
The taper and associated legislative changes will be implemented in the summer Finance Bill 2015.
For background about the reductions in the annual allowance since 2010, see Practice note, Reducing the annual and lifetime allowances for pension saving.
DC pension flexibility
New flexible access options were introduced for individuals with DC pension savings on 6 April 2015. For more information about the reforms, see Practice note, DC pension flexibility: overview.
The government announced several measures relevant to the new flexibilities at the July 2015 Budget, as referred to below.
Taxation of lump-sum death benefits
Since 6 April 2015, there is generally speaking no tax charge on lump-sum death benefits paid from crystallised or uncrystallised funds in a registered pension scheme or non-UK scheme if an individual dies before reaching age 75 and (in most cases) the lump sum is paid within two years of the death (although in some circumstances a lifetime allowance charge may arise). However, if lump-sum death benefits are paid where a member dies after reaching age 75, the special lump-sum death benefits charge applies at a rate of 45% (see Practice note, DC pension flexibility: overview: Changes to tax treatment of death benefits).
The government had previously indicated that it will change this current tax treatment and, as promised, has now announced that legislation will be enacted in the summer Finance Bill 2015. From 6 April 2016, lump-sum death benefits payable from a registered pension scheme or non-UK scheme on the death of a member over age 75 will be taxed at the marginal rate of the recipient, where the benefits are paid to an individual who is the "ultimate beneficiary". According to a TIIN published by HMRC, if the recipient is a trust or company without a marginal tax rate, the 45% special lump-sum death benefits charge will continue to apply.
Secondary annuities market
At the March 2015 Budget, the government announced plans to allow individuals who have already bought annuities to assign the income stream to third-party buyers in exchange for a cash lump sum or alternative retirement product, provided the original annuity provider agrees (see Legal update, March 2015 Budget: key pensions announcements ). A call for evidence on the proposals closed on 18 June 2015.
The government has now said it will publish a formal response to the call for evidence "in the autumn". In the meantime, it has decided to delay implementation of the secondary annuities market to 2017 from the 2016 start-date originally proposed "in order to ensure there is a robust package to support consumers in making their decision". The necessary legislative changes will be enacted in Finance Bill 2016. (Summer Budget 2015, paragraph 2.81.)
Barriers to using flexible access options
As previously announced, the government will consult "before the summer" on whether action is needed to combat any barriers faced by individuals who want to take advantage of the new flexible access options, such as excessive exit penalties. The government says it wants to make transfers between pension schemes "quicker and smoother" and may consider a cap on exit charges (Summer Budget 2015, paragraph 1.228).
Access to Pension Wise
The government is extending the scope of those eligible to receive free guidance under the Pension Wise service to individuals aged 50 and over, as well as launching a further marketing campaign about the service. Until now, free guidance has only been available to those aged 55 and over (see Practice note, DC pension flexibility: overview: Guidance guarantee). (Summer Budget 2015, paragraph 2.85.)
Lifetime allowance
The government has confirmed that the reduction in the lifetime allowance to £1 million from the start of the 2016/17 tax year, announced at the March 2015 Budget, will go ahead as planned. Further forms of protection from the lifetime allowance charge will be introduced for those who have built up pension savings in the expectation the allowance would not be reduced. From 6 April 2018, the lifetime allowance will be indexed, rising each year in line with the annual increase in the consumer prices index. (Summer Budget 2015, paragraph 2.82.)
These changes will be enacted in Finance Bill 2016. For background, see Legal update, March 2015 Budget: key pensions announcements.
Reform of pensions tax relief
The Treasury has published a consultation paper exploring whether there is a case for reforming the current system of pensions tax relief in order to encourage pension saving and manage the overall cost to the Exchequer. The paper notes that increased longevity and the move from DB to DC provision has posed growing challenges, with the overall cost of pensions tax relief greatly increasing in recent years. While the tapered annual allowance will go some way to reducing this bill, the cost will remain substantial.
According to the consultation paper, the government is keen that any reform should:
- Be simple and transparent.
- Encourage personal responsibility on the part of workers for ensuring they have adequate savings in retirement.
- Build on the success of auto-enrolment in encouraging more workers to save.
- Be sustainable for the public finances in the long term.
In considering the options, the paper notes that the government will also have to consider factors such as the macroeconomic consequences of any reform (for example, in relation to the gilts market), the treatment of DB and DC pensions, the wider personal tax context and the timing and implementation costs.
While the paper does not put forward a "menu" of specific policy choices, it floats the possibility of moving from the current "EET" (exempt, exempt, taxed) system to a TEE (taxed, exempt, exempt) system (albeit with contributions still attracting a government top-up). The following questions are asked among others:
- Does the complexity of the current system of pensions tax relief undermine the incentive to save?
- Would an alternative system result in greater engagement with pension saving?
- Should different treatment be afforded to DB and DC pensions respectively?
- What administrative barriers exist to reform, particularly in the context of auto-enrolment?
- How should employer pension contributions be treated?
- How can the government ensure the system is sustainable in the long term?
The consultation period runs until 30 September 2015.
Other points to note
Further pensions-related items in the July 2015 Budget are as follows:
- The government plans to consult on restricting the use of unfunded employer-financed retirement benefit schemes for avoidance purposes (Summer Budget 2015, paragraph 2.80).
- The government will bring forward proposals to require administering authorities under the Local Government Pension Scheme to pool their investments in order to reduce costs. A consultation exercise will be undertaken later in 2015 that will set out the detailed criteria for the measures, which the government says should "significantly reduce costs, while maintaining overall investment performance". Local authorities will be encouraged to develop their own proposals to avoid being compelled to pool their investments. (Summer Budget 2015, paragraph 2.19.)
- The Equitable Life Payment Scheme will close to new claims on 31 December 2015. A further payment will be made to certain policyholders who receive pension credit benefit. (Summer Budget 2015, paragraphs 2.86-2.87.)
- The government will "actively monitor the growth of salary sacrifice schemes that reduce employment taxes and their effect on tax receipts" (Summer Budget 2015, paragraph 2.66).