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March 2010 Budget: pensions
Practical Law UK Legal Update 1-501-7943 (Approx. 7 pages)
March 2010 Budget: pensions
by PLC Pensions
| Published on 24 Mar 2010 • England, Scotland, Wales |
A summary of the main pensions-related points in the 2010 Budget.
Speedread
On 24 March 2010, the Chancellor delivered his 2010 Budget speech. The main pensions-related announcements concerned the restriction of pensions tax relief for high-income individuals from 6 April 2011. The government has confirmed that it will proceed with its policy to restrict pensions tax relief for high earners and rejected alternative means, such as reducing the annual or lifetime allowance, which it says could potentially apply to members with much lower incomes.
Further details of how the government's policy will be implemented are set out in its response to the consultation document, Implementing the restriction of pensions tax relief, published alongside the 2010 Budget Report. In particular, the rate of relief available on incomes between £150,000 and £180,000 will be subject to a stepped tapered reduction of 1% of relief for every £1,000 of gross income. For the purposes of determining whether an individual's "gross income" exceeds the £150,000 threshold, deemed contributions to DB schemes will be valued by reference to two-way age-related factors, which will vary both by age and normal pension age.
The government also announced that it intends to introduce legislation allowing the National Employment Savings Trust (NEST) to register with HMRC and to operate as an occupational pension scheme for tax purposes. As a result, members of NEST and contributing employers will benefit from the same tax reliefs available to registered pension schemes. A number of other changes to pensions taxation are planned ahead of the introduction of automatic enrolment and NEST in 2012.
Regulations have been introduced implementing the Chancellor's announcement in his 2008 Pre-Budget report that the annual and lifetime allowances will be frozen at their 2010/11 levels for five years. For the 2011/12 to 2015/16 tax years, the lifetime allowance will remain frozen at £1.8 million and the annual allowance will remain frozen at £255,000.
March 2010 Budget
On 24 March 2010, the Chancellor of the Exchequer delivered his 2010 Budget speech. This update summarises the key pensions-related aspects. For a detailed look at the wider measures announced in the Budget, see Legal update, March 2010 Budget: key business tax announcements.
Implementing the restriction of pensions tax relief
The government remains of the view that the restriction of pensions tax relief for high earners is proportionate and necessary. Alternative methods suggested by respondents have been rejected, in particular, a reduction in the annual or lifetime allowances. The government commented that such methods could potentially apply to members with much lower incomes and confirmed that it does not propose any changes to the annual or lifetime allowances at this stage.
Further details of how the restriction will operate are contained in the response to the 2009 consultation document, Implementing the restriction of pensions tax relief, which has been published alongside the 2010 Budget. (For further details on the 2009 consultation document, see Practice note, Restricting pensions tax relief: implementing the restriction, which shall be updated shortly in the light of this 2010 Budget.)
The key points of the consultation response are set out below.
Tapering the available relief
A tapering arrangement will apply to gradually reduce the rate of relief available from 50% to 20% on incomes between £150,000 and £180,000. The government has concluded that the most appropriate way to taper the rate of relief available is through a stepped tapered reduction of 1% of relief for every £1,000 of gross income (paragraph 3.6, Consultation response).
Applying the restriction of relief and exemptions
The government has confirmed a number aspects of how the restriction will work. In particular:
- The government intends to apply the restriction of tax relief for higher earners to individuals who are members of overseas schemes and benefit from UK tax relief, but recognises that such individuals may have difficulties in meeting the self assessment deadlines. The government will look at how these difficulties can be managed (paragraph 3.8, Consultation response).
- The government does not at this stage intend to extend its current policy to exempt the first £30,000 of a redundancy payment from the income definition, but will consider the options raised by respondents and introduce regulations if it considers that this would balance the interests of fairness without creating avoidance opportunities (paragraph 3.14, Consultation response).
- The restriction of pensions tax relief will not apply in cases of death or serious ill health (paragraph 3.16, Consultation response). However, the government does not believe that it is possible to exempt wider ill-health early retirement without opening up unacceptable scope for avoidance, but is open to proposals from stakeholders (paragraph 3.17, Consultation response). Additionally, for schemes that began (or will begin) to wind up before April 2011, enhancements (such as the distribution of surplus funds) will be treated as accruing to members at the start of the wind-up and will therefore fall outside the scope of the restriction (paragraph 3.19, Consultation response).
- The government is minded not to compel the alignment of "pension input periods" with the tax year for the purposes of determining whether an individual has exceeded his or her annual allowance (paragraph 3.7, Consultation response).
Valuing further accruals in defined benefit schemes
For the purposes of valuing an employer's pension contributions when determining whether an individual's "gross income" exceeds £150,000, further accruals in defined benefit (DB) schemes will be valued by reference to two-way age-related factors. This was the government's preferred option highlighted in the consultation paper.
The factors will be set having regard to assumptions about investment growth and revaluation and will vary according to an individual's age and normal pension age (NPA). There will be no separate provision in the scale for gender differences or insolvency risk. Where an individual has more than one NPA, the appropriate factor will be applied to each tranche of their pension rights to calculate the deemed contribution. Schemes will be required to calculate the deemed contribution and provide details to the member within three months of a request.
The factors will be reviewed by HM Treasury every five years, or more frequently if required. HM Treasury will seek the advice of the Government Actuary's Department (GAD) in setting and reviewing the age-related factors. GAD will conduct a public consultation on the actuarial assumptions underlying the age-related factor values and submit a report to HM Treasury outlining its conclusions. The government will then issue regulations setting out the age-related factors and other technical details about their operation.
(Paragraphs 4.6 to 4.13, Consultation response.)
Collecting excess relief
"Scheme pays" (under which the member can opt for the recovery charge to be paid by the scheme and recouped from his benefits) will be available to members of both DB and defined contribution schemes where the recovery charge exceeds £15,000. The government will also consider whether it is necessary to issue guidance to ensure that the offsetting reduction to the member's benefits in DB schemes is calculated in a fair and reasonable way.
The government acknowledges that scheme pays may not be appropriate for some schemes, for instance, in the case of a heavily underfunded scheme where payment might favour the individual incurring the charge at the expense of the membership as a whole, and will consider whether there should be an opt-out for such schemes (paragraphs 5.15 to 5.23, Consultation response).
An individual who incurs a recovery charge in excess of £15,000 where his scheme is not able to pay the charge on his behalf may opt to spread payment of the recovery charge over three years, with interest charged on the deferred element (paragraph 5.27, Consultation response).
Timetable for legislation
The government intends to legislate for the core aspects of its policy in the Finance Bill 2010. This will include provisions relating to the income definitions and thresholds, how the taper will operate to determine the rate of an individual's tax relief and the age-related factors method to value the deemed employer contribution to a DB scheme.
Details of the scheme pays system and how the restriction of relief will operate will be set out in the Finance Bill 2011.
Regulations introduced freezing annual and lifetime allowances until 2015/16
Regulations have been made implementing the Chancellor's announcement in his 2008 Pre-Budget report that the annual allowance and lifetime allowance would be frozen at their 2010/11 levels for five years (see Legal update, 2008 Pre-Budget report: pensions). For the 2011/12 to 2015/16 tax years, the lifetime allowance will remain frozen at £1.8 million. Likewise, the annual allowance will remain frozen at £255,000 up to and including the 2015/16 tax year.
Changes to pensions taxation in relation to NEST and automatic enrolment
The Chancellor has announced that it will introduce legislation implementing a number of changes to pensions taxation in advance of the introduction of the National Employment Savings Trust (NEST) and automatic enrolment in 2012 (for background about the reforms, see Practice note, Automatic enrolment and new employer duties: overview). The legislation will include measures to:
- Allow NEST to register with HMRC and to operate as an occupational pension scheme for tax purposes. As a result, members of NEST and contributing employers will benefit from the same tax reliefs available to registered pension schemes.
- Remove the tax liability on any interest charges on late pension contributions paid by an employer to a jobholder's pension account of a qualifying scheme. The Pensions Regulator may require an employer to pay interest to the jobholder's pension account where contributions are late (see Practice note, Auto-enrolment and new employer duties: enforcing employer compliance: late payment of contributions).
- Introduce a regulation-making power to deal with any unintended tax consequences that arise as a result of the implementation of NEST and the employer duties. Regulations made under this power may take effect retrospectively but only in so far as they do not increase any person's liability to tax.
- Remove the tax charge on borrowing repaid out of the assets of registered pension schemes if it relates to the cost of establishing and operating a registered pension scheme, subject to conditions. Currently, such borrowing will incur a tax charge if it exceeds half the value of the fund.
The government intends to include these measures in a Finance Bill to be introduced as soon as possible in the next Parliament.
Trivial commutation rules
The government has announced that it remains open to further simplification of the rules relating to commutation of small pension pots provided that the simplification would not increase Exchequer costs, add significant costs for HMRC or be open to manipulation. Two specific proposals are mentioned: extending rights to commute personal pension funds worth up to £2,000, and allowing couples to pool small pension pots to allow them to buy a joint annuity and so achieve better value.
Tackling tax avoidance using employee benefit trusts
The government also announced that it will be taking action to prevent attempts to avoid tax and national insurance contributions through the use of employee benefit trusts and other arrangements. The government will consider options to tackle arrangements to reward employees which have the purpose of "avoiding, deferring or reducing liabilities to income tax and national insurance contributions or avoiding restrictions on pensions tax relief" with a view to introducing legislation to take effect from April 2011. The government notes that there has been an active marketing of avoidance schemes to high-income individuals in response to the new additional rate of income tax and the restriction of relief for pensions contributions.
Risk sharing
The government states that it remains committed to supporting the "innovation in the development of risk sharing arrangements between employers and employees" and will shortly publish an information note to help employers understand the available risk sharing options. The government will also continue to explore "further facilitation" of risk sharing in both DB and defined contribution pension schemes.