Coming on the back of the most radical reform to pension savings for 100 years, the Summer Budget announced on 8 July has introduced changes to the pensions industry and indicated a potential for further reform in the coming months and years. Some of the changes announced will take effect next year and those in the pensions industry should be taking steps now to ensure that appropriate arrangements are in place. Other announcements relate to long-term reform and the position should be monitored over the coming months as the Government’s further-thinking evolves with the Green Paper to follow.
The annual allowance will be tapered with effect from the start of the 2016/2017 tax year. The annual allowance is the limit on the amount of savings an individual can make in a registered pension scheme which will receive tax relief. The annual allowance is currently £40,000 but, from April 2016, the annual allowance will be tapered for those with an adjusted income over £150,000. The adjusted income will consist of both the person’s salary and any pension contributions made by the individual or on behalf of the individual. This will mean that the taper cannot be avoided by individuals choosing to sacrifice parts of their salary in return for higher pension contributions.
An income threshold of £110,000 excluding pension contributions will apply, meaning that a person who is in excess of the limit only as a result of high pension contributions will not be affected. As an anti-avoidance measure, any income which is given up as part of a salary sacrifice arrangement after 9 July 2015 will not be included for this purpose.
How Does the Taper Work?
The taper will reduce the individual’s annual allowance by £1 for every £2 that the adjusted income is over the £150,000 threshold. A limit of £30,000 will apply to any reductions, which means that the annual allowance cannot be reduced below £10,000. In effect, those earning £210,000 or more with their adjusted income will still retain an annual allowance of £10,000.
Where the money purchase annual allowance of £30,000 applies, this will be reduced by £1 for every £2 of his adjusted income which exceeds £150,000 with a maximum reduction of £30,000. An individual with an adjusted income of £210,000 or more and who has triggered the money purchase annual allowance will therefore have zero annual allowance available.
These changes will not impact an individual’s ability to carry forward unused annual allowance but that amount will be limited to the unused tapered annual allowance.
The lifetime allowance, which is the maximum amount of pension savings an individual can hold in a pension scheme receiving favourable tax treatment, has been reduced from £1.25 million to £1 million from the start of the 2016/2017 tax year. In order to protect those affected by these changes, protections will be introduced for those who have saved with the expectation that there would be no reduction in the lifetime allowance.
From 2018 the lifetime allowance will be indexed to the Consumer Prices Index and rise in line with increases in CPI.
Monitoring of Salary Sacrifice Arrangements
It was widely trailed before the Summer Budget that the Government was considering reforms to salary sacrifice. It has been announced that the Government will now be monitoring salary sacrifice arrangements. In particular, the Government will be monitoring the effect that these arrangements have on tax receipts and it remains to be seen whether any action will be taken as a result of the Government’s monitoring.
Secondary Annuities Market
It was announced earlier this year that the Government was considering the creation of a secondary annuities market which would allow individuals who have already purchased an annuity to make use of the new pension flexibilities. This proposal has been delayed from April 2016 to 2017 in order to allow more consultation on the issue and to ensure that there is adequate support to individuals when making decisions.
Taxation of Lump-Sum Death Benefits
Changes are to be made to the taxation of lump-sum death benefits where a person dies after the age of 75. Previously, if a member died after reaching that age the special lump-sum death benefits charge applied at a rate of 45%. From April 2016 those members will be taxed at the marginal rate of the recipient, where the ultimate beneficiary is an individual. If the recipient is a company or trust without a marginal tax rate the 45% rate will apply.
Possible Reform of Pensions Tax Relief
A consultation paper will be published to explore if there should be reform to the current pension tax relief system. This is partly to encourage pension saving for the future but equally to manage Government costs in light of longer life expectancy and widespread moves from DB to DC schemes. The consultation paper, available here, has been published and the consultation period will run until the 30th of September 2015.
The changes announced in the Summer Budget usher in yet further changes to the pensions tax regime alongside a possible review of (increasingly popular) salary sacrifice arrangements. Those involved in the pensions industry should therefore maintain a watching brief over the coming weeks and months for further announcements as well as await the Green Paper to see how the Government’s thinking evolves.