2016 Budget: key pensions announcements

Practical Law UK Legal Update 9-624-0301 (Approx. 9 pages)

2016 Budget: key pensions announcements

Key pensions-related measures

The main pensions-related measures in the March 2016 Budget are summarised below. Except where otherwise indicated, references in italics and brackets are to the main Budget report (see HM Treasury: Budget 2016).

Reform of pensions tax relief

The outcome of HM Treasury's consultation, Strengthening the incentive to save: a consultation on pensions tax relief, has been awaited with much debate about the appropriate way to meet the stated policy goals of reforming the current system of pensions tax relief to encourage pension saving and manage the overall cost to the Exchequer (see Hot topics: news and analysis: Taxation of pensions reform).

The consultation on strengthening the incentive to save

The consultation paper issued with the July 2015 Budget did not put forward a "menu" of specific policy choices but floated 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 consultation set out four principles that any reform should meet. It should be: simple and transparent, encourage personal responsibility for savings, build on the success of auto-enrolment and be sustainable for the public finances in the long term. The consultation period closed on 30 September 2015. See Legal update, July 2015 Budget: key pensions announcements.

Response

HM Treasury has published a summary of responses to the consultation, which mentions the above four principles and adds certain key themes that featured in those responses, namely the widespread desire for: stability, communication and education, a consistent outcome for all individuals, up-front incentives to save and the importance of getting implementation right (Summary of responses, paragraph 1.8).

HM Treasury's own response has been put forward by the Chancellor in his main Budget speech. He stated that after consulting widely (there were 450 responses) it was "clear there was no consensus" on the issue of pension tax relief. Instead therefore, to meet the particular concern that young people were not saving enough and the aim of giving people more freedom and more choice, he was "providing a different answer to the same problem". This will take the form of changes to the ISA framework from 6 April 2017 as follows:

For everyone, by increasing the annual ISA subscription limit, from just over £15,000 to £20,000 a year.
For those under 40, "many of whom haven't had such a good deal from the pension system, [by] introducing a completely new flexible way for the next generation to save" in the form of the "Lifetime ISA".

The Chancellor notes in his speech that ISA savings use the TEE system of tax relief. There is no indication of the direction of long-term policy on pensions tax relief.

For more information about these proposals, see below.

New alternative to pension saving: Lifetime ISA

The Budget announces that from 6 April 2017 the government will introduce a new Lifetime ISA to allow individuals to save for a first home or retirement or both. Final details of the Lifetime ISA will be set out later this year, but a technical note published by HM Treasury sets out the key features of the Lifetime ISA, which include:

From April 2017, individuals under the age of 40 will be able to open a Lifetime ISA and contribute up to £4,000 in each tax year.
The government will add a 25% bonus on the individual's contributions at the end of each tax year. This bonus will only be available on savings paid into the Lifetime ISA before the individual's 50th birthday. Additional contributions can be made without attracting a bonus (subject to the overall annual subscription limit).
Funds can be withdrawn after the ISA has been open for at least a year. The funds (including the bonus), can be drawn tax-free:
- to purchase the ISA holder's first home worth up to £450,000; or
- when the holder has reached age 60. Full or partial withdrawals can be made (interest and investment growth on funds that remain invested will be tax-free); or
- at any age where the holder has been diagnosed with terminal ill health.
If funds are withdrawn in any other circumstances, the ISA holder will lose the government bonus (and any interest growth on this) and will have to pay a 5% charge. However, the government will consider whether to allow withdrawals including the bonus for other specific life events and whether to allow borrowing against the Lifetime ISA without a charge if the borrowed funds are fully repaid (along the lines of some "section 401(k)" US retirement plans).
A Lifetime ISA will be subject to inheritance tax on the holder's death and a surviving spouse or civil partner's Lifetime ISA allowance will be increased by the amount of the deceased holder's ISA at death.
Qualifying investments for Lifetime ISAs will be the same as for a cash or stocks and shares ISA. The new overall ISA contribution limit of £20,000 from April 2017 will apply to an individual's total contributions to cash ISAs, stocks and shares ISAs, Lifetime ISAs and Innovative Finance ISAs.

The government will bring forward legislation to implement the Lifetime ISA in autumn 2016 after discussions with industry to finalise the parameters of the scheme. Final details will be issued later in 2016.

Salary sacrifice

Concerned by the growth of salary sacrifice schemes, the Chancellor announced that the government is considering limiting the range of benefits that attract income tax and National Insurance contributions (NICs) advantages when provided as part of a salary sacrifice scheme.

However, the government's intention is that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from relief on income tax and NICs when provided through salary sacrifice arrangements (paragraphs 1.147 and 2.35).

Technical amendments to support DC pension flexibility

New flexible access options were introduced on 6 April 2015 for individuals with defined contribution (DC) pension savings. For more information about the reforms, see Practice note, DC pension flexibility: overview.

At the July 2015 Budget, the government announced several measures relevant to the new flexibilities (see Legal update, July 2015 Budget: key pensions announcements). Further measures have now been announced at the March 2016 Budget (paragraph 2.53), and will be introduced in the Finance Bill 2016. They will have effect from the day after the Finance Bill 2016 receives Royal Assent. The measures include the following.

Taxation of serious ill-health lump sums

Currently serious ill-health lump sums can only be paid out of funds that have not come into payment. The government will legislate to re-align the tax treatment of serious ill-health lump sums with lump sum death benefits to allow individuals who meet the requirements for a serious ill-health lump sum but who have already accessed their pension to take the remaining funds that have not been accessed as a serious ill-health lump sum.

In addition, a serious ill-health lump sum paid to an individual who has reached age 75 will be taxable at that individual's marginal rate rather than the current 45% rate.

Dependant's drawdown and flexi-access drawdown

A child of a deceased member who is under the age of 23 and has a dependant's drawdown pension fund or dependant's flexi-access drawdown fund will be able to continue to receive drawdown pension or flexi-access drawdown pension as authorised payments after reaching age 23. The government will legislate to convert dependents' flexi-access drawdown accounts to nominees' accounts when dependants turn 23, so they do not have to take their funds as a lump sum taxed at 45%.

Trivial commutation lump sum

The government will legislate to allow a trivial commutation lump sum to be paid out of a money purchase scheme pension that is already in payment.

Cash balance death benefits

Where a member of a cash balance arrangement dies and the scheme must top-up the remaining funds to meet the entitlement of the member's beneficiaries to an uncrystallised funds lump sum death benefit due under the scheme rules, the full amount of the lump sum death benefit will be an authorised payment.

Pensions advice

Following the Financial Advice Market Review (FAMR), the government intends to:

Increase the tax and NICs relief available for employer-arranged pensions advice from £150 to £500 from April 2017.
Consult on introducing a Pensions Advice Allowance over summer 2016 to allow people to withdraw £500 tax free from their DC pension before the age of 55 to redeem against the cost of financial advice. The exact age at which individuals will be able to do this will be determined by consultation.
Consult on introducing a single definition of regulated advice in the existing Regulated Activities Order.

(Paragraph 2.227.)

Dependants' scheme pensions

Currently a limit applies on the amount of a dependant's scheme pension that may be provided where the scheme member died after 5 April 2006 and had reached age 75, and at the time of death the member was actually receiving one or more scheme pensions under the scheme, or was prospectively entitled to receive them. The dependant's scheme pension cannot exceed the amount of the member's scheme pension and remain an authorised member payment. For more information, see Practice note, Pensions tax: authorised pension payments: Dependants' scheme pension.

As announced in the 2015 Autumn Statement and Spending Review, the Finance Bill 2016 will contain provisions amending the Finance Act 2004 to reduce the number of calculations that need to take place to determine whether a dependant's scheme pension exceeds the authorised limit (see Legal update, Draft Finance Bill 2016 legislation: key pensions measures: Dependants' scheme pensions).

The March 2016 Budget notes that "following consultation there are further reductions to the number of calculations that need to be carried out". These changes will take effect from 6 April 2016 (Finance Bill 2016) (paragraph 2.59).

Bridging pensions

The pensions tax rules on bridging pensions will be aligned with DWP legislation following the introduction of the single-tier pension from 6 April 2016 (paragraph 2.60).

These changes will be enacted in the Finance Bill 2016. For background see Legal update, Draft Finance Bill 2016 legislation: key pensions measures: Bridging pensions.

Undrawn funds in drawdown pensions

The government announced at the 2015 Autumn Statement and Spending Review that it would legislate to prevent a charge to inheritance tax arising when a pension scheme member died leaving funds designated for flexi-access drawdown that had not been withdrawn (see Legal update, 2015 Autumn Statement and Spending Review: key pensions announcements, Inheritance tax and undrawn drawdown funds).

HMRC originally stated that this would be done through guidance, but the March 2016 Budget confirms that it will be contained in the Finance Bill 2016 and backdated to apply to deaths on or after 6 April 2011 (paragraph 2.63).

Public-sector pensions: employer contributions

At the 2011 Budget, the government announced that following a full public consultation, the discount rate used to set public-service pension scheme contributions would be based on the long-term expectations of Gross Domestic Product (GDP) growth. A discount rate of 3% per year above CPI inflation was adopted for calculating unfunded public-sector pensions contributions in actuarial valuations and the government committed to review the rate every five years (see Legal update, Public sector pension schemes: government conclusions on appropriate discount rate published).

The March 2016 Budget confirms that HM Treasury has now completed its first five yearly review of the discount rate and decided that it should be revised to 2.8% above CPI inflation (in line with the Office for Budget Responsibility's latest long term expectations of GDP growth). This will result in an increase in employer contributions to unfunded public sector schemes from 2019-20 onwards (paragraphs 1.58 and 2.13).

HM Treasury has published guidance on calculating CETVs payable from public service pension schemes, which replaces previous guidance published in October 2011.

LGPS fund pooling

In the 2015 Autumn Statement and Spending Review, the government invited Local Government Pension Scheme (LGPS) administering authorities to produce proposals for new pooled structures in line with the existing broad guidance to significantly reduce costs while maintaining overall investment performance (see Legal update, 2015 Autumn Statement and Spending Review: key pensions announcements: LGPS fund pooling).

Administering authorities have submitted proposals to establish a small number of British Wealth Funds by combining their assets into larger investment pools by 2018. The government will support both these proposals and establish a national Local Government infrastructure investment platform (paragraphs 4.284 and 2.14).

Other points to note

Further pensions-related items in the March 2016 Budget are as follows:

Public Financial Guidance Review. The government will restructure the statutory guidance providers: the Money Advice Service (MAS), The Pensions Advisory Service (TPAS) and Pension Wise. The new delivery model will focus on the areas of greatest consumer need and will consolidate the current guidance structure into two new guidance bodies, funded by levies on the financial services and pensions sectors. These are:
- a new pensions guidance body to ensure that consumers get all their pensions questions answered in one place. This will incorporate the functions currently provided by TPAS and Pension Wise, and some pensions guidance provided by MAS; and
- a new "slimmed down" money guidance body providing debt advice and money guidance.
(Paragraph 2.228.)
The government published a consultation paper seeking views on how to set up and evaluate the services provided by the new guidance bodies. The consultation closes on 8 June 2016 and a final response will be published in autumn 2016. The transition to the new delivery model will require primary legislation and the earliest date the new model would take effect is April 2018.
Pensions dashboard. The government will ensure the industry designs, funds and launches a "pensions dashboard" by 2019 to allow individuals to view all their retirement savings in one place (paragraphs 1.114 and 2.61).
Employer-financed retirement benefit schemes. Following the informal consultation on unfunded employer-financed retirement benefit schemes announced at the Autumn Statement and Spending Review 2015, the government will keep this issue under review (paragraph 2.54).

Sources

HM Treasury: Budget 2016 (16 March 2016).

HM Treasury: Strengthening the incentive to save: summary of responses to the consultation on pensions tax relief (March 2016).

HM Treasury: Lifetime ISA factsheet (March 2016).

HM Treasury: Design of the lifetime allowance: technical note (March 2016).

HM Treasury: Basis for setting the discount rates for calculating cash equivalent transfer values payable by public service pension scheme (March 2016).

HM Treasury: Pension flexibility 2016 (March 2016).

HM Treasury: Public financial guidance review: proposal for consultation (March 2016).

HM Treasury: Overview of Tax Legislation and Rates (March 2016).

HM Treasury: Notes on Finance Bill 2016 Resolutions (March 2016).

2016 Budget: key pensions announcements | Practical Law