Despite a great deal of concern among industry experts that the Chancellor was preparing to announce widespread reform to pensions, the 2016 Budget provided for relatively modest changes to pensions rules with a few innovations in order to encourage more people to save for their retirement.
Pension tax relief
Among the many changes rumoured to be announced in this year’s Budget, alterations to pension tax relief was arguably the most popular. However the Chancellor decided against making any fundamental changes to the current regime of pension tax relief, citing that there was a lack of consensus on how best to approach the matter. While it remains open to the Government to revisit the matter in the future, UK pension savers will continue to benefit from tax-relieved pension contributions, subject to the Annual Allowance.
The Lifetime ISA
The new ‘Lifetime ISA’ (LISA) is set to become available as of 6 April 2017 for use by adults aged 40 or under, and is a new mechanism to encourage people to save for the future. The LISA will allow individuals to contribute a maximum of £4,000 per year, and receive an additional 25% bonus payment from the government. One of the main attractions of the new ISA lies in the fact that any monies withdrawn would be tax-free. This is an interesting development from the point of view of saving for retirement. However, there are certain limitations:
- The government bonus to the LISA will be paid up until an individual turns 50; and
- If an individual is hoping to use the funds in their retirement, they will need to wait until they turn 60. Any attempt to use the funds saved in the ISA before the age of 60, other than for the purchase of an individual’s first property or where they are eligible for an ill health pension, would result in the government bonus being withdrawn, along with any associated interest or growth. Further, the remaining funds would be subject to a 5% charge.
The Chancellor announced that the next step for the government will be to investigate avenues for individuals to borrow money against the funds contained in the LISA, without the need to incur a charge where the borrowed funds are fully repaid. Any such arrangement would likely mirror the option of some retirement schemes in the US that provide a similar facility.
The mechanics of the LISA are different from those associated with most pension schemes. The monies paid out from a pension scheme are subject to income tax, but are tax-free on their investment in the scheme. Under the new framework for a LISA, contributions would be invested with tax already having been paid. The funds ultimately withdrawn would be tax-free. Another important distinction between both schemes is that, with a LISA savers will not benefit from employer contributions or the opportunity to withdraw 25% of their pension pot tax-free on retirement. Ultimately the attractiveness of a traditional pension and LISA will depend on an individual’s own circumstances, their tax position and their preferences for access to their savings in retirement.
Streamlined guidance on Pensions
Following a consultation on Public Financial Guidance, the Chancellor announced that the government will make changes on the current advice services for pensions in the UK. The Pension Advisory Service (TPAS) and Pension Wise are to be merged into a new pension’s guidance service, and will operate alongside a refined money guidance organisation. The intention behind this change is understood to be a hope that consumers are better informed on the decisions they need to make in order to prepare for their retirement. These organisations are intended to be funded through a levy on both the financial services and pensions sectors, the detail of which is to be outlined in due course.
Allied to a more streamlined service for pensions and financial advice is the Chancellor’s announcement that a Pensions Dashboard is to be created. This is intended to allow individuals to access information on all of their retirement savings in one place, in order to keep track of their savings.
Refining Pension Freedoms
In light of the Pension Freedom and Choice Reforms that were introduced in 2015, the Chancellor announced a number of technical changes. These include the following:
- Adjusting the taxation of serious ill-health lump sums to align it with lump sum death benefits, so that they may be paid tax-free (if the provider agrees to do so) when an individual aged under 75 has less than a year to live but has already accessed their pension;
- Serious ill-health lump sum payments will be taxed at an individual’s marginal rate, where they are paid in respect of an individual that is aged 75 or over;
- Repositioning top ups to fund dependants’ death benefits, making them authorised payments; and
- Creating legislation that will convert dependants’ flexi-access drawdown accounts to nominees’ accounts when dependants turn 23, so that they are not forced to take their funds as a lump sum to be taxed at 45%.
The Chancellor hopes that these changes will ensure that the reforms made to pension access last year operated as they were originally intended to.
The changes announced by the Chancellor, while modest in some respects, will be important for many operating in the pensions sphere and for those looking to manage their savings for retirement.
This Bulletin is for general information only and should not be relied upon as advice on your specific circumstances. If you wish to discuss any issues highlighted in this bulletin, please contact Andrew Holehouse, Louisa Knox or Edwin Mustard on +44 (0) 131 473 5385.