Autumn Statement 2012

Introduction

The Chancellor, George Osborne, delivered his Autumn Statement on 5 December 2012. While the Government takes comfort from the latest economic and fiscal outlook,1 believing that it is “on course” to meet its target of balancing the budget over a five year period, pensions tax relief is once again a target for raising revenues.

Key points

In a bid to ensure that “those who earn the most contribute their fair share”, for the tax year 2014/15 onwards:

the AA for tax relief on pension savings will be reduced from £50,000 to £40,000;
the standard LTA will be reduced from £1.5 million to £1.25 million; and
a transitional “fixed protection” regime will be introduced for those affected by the reduction in the LTA.

The Government is also proposing two measures to help ease DB scheme funding.

Changes to pensions tax relief

The changes to pensions tax relief2 were widely predicted in the run-up to the Autumn Statement, with the Pensions Minister, Steve Webb, acknowledging the need to overcome the current “extraordinary fiscal backdrop”.3

Annual Allowance

The AA limits the amount of tax relief available on pension savings paid by or in respect of an individual to a registered pension scheme. Where pension savings exceed the AA, an AA charge applies.

From 6 April 2014, the AA will be £40,000, representing a further £10,000 reduction on an allowance that was £255,000 as recently as April 2011. The position is further exacerbated as the DB conversion factor was changed from April 2011 from 10:1 to 16:1.

Where an individual’s total pension savings in a particular tax year are more than the AA, they may be able to carry forward any unused allowance from the previous three years to the current tax year. The amount of any unused allowances arising from the tax years 2011/12 to 2013/14, which is available for carry forward to 2014/15 and subsequent years, will still be based on the current £50,000 limit. However, from the tax year 2014/15 onwards, the carry forward will be assessed by reference to £40,000.

Lifetime Allowance

The LTA is the total amount of tax relieved pension savings that an individual can build up over their lifetime without incurring an additional tax charge. For this purpose, DC benefits are assessed by reference to the individual’s pot. For DB savings, it is the capital value of the pension, using a factor of 20.

From the tax year 2014/15, the LTA will be reduced to £1.25 million. Members with a protected LTA (under either enhanced or fixed protection) will be unaffected by this change.

Fixed Protection 2014

Transitional protection will be available in the form of “fixed protection 2014”, based on the fixed protection regime introduced from April 2012 when the LTA was reduced to £1.5 million.4

Fixed protection 2014 will allow an individual to maintain an LTA of the greater of £1.5 million and the standard LTA. Like the current fixed protection regime, this new protection will be lost:

in a DC arrangement, if contributions are paid to the scheme by the member or someone else on their behalf, or employer contributions are paid;
in a DB arrangement, if the pension and lump sum rights of a member increase by more than the “relevant percentage”5 at any time during a tax year. The test for benefit accrual can occur at any time up to the point when benefits are actually taken;
if a new arrangement is established in respect of the individual; and
on a transfer, subject to certain limited exceptions.

Individuals will be able to apply for fixed protection 2014 after the new legislation comes into force (expected to be in summer 2013). A signed application form will need to be received by HMRC by 5 April 2014.

In other pensions news

As well as cuts to the AA and LTA, the Autumn Statement heralded some additional pensions developments.

Defined benefit funding 6

In the wake of lobbying from the NAPF and others, the DWP has agreed to consult on whether to allow companies undergoing valuations in 2013 to use smoothed discount rates,7 in recognition of the fact that “volatility in measures of pension scheme deficits can make it hard for companies to manage their investment plans and attract external funding.”

The Government has also announced that it will consult on providing TPR with a new statutory objective, to consider the long-term affordability of deficit recovery plans to sponsoring employers, with a view to ensuring that DB regulation does not inhibit investment and growth. In its response to the Chancellor’s comments, TPR has confirmed that it remains “business as usual” until the new objective is in place (unlikely to be before 2014 as it requires a change to primary legislation).

Pensions drawdown

Since 6 April 2011, individuals with DC funds have not been compelled to buy an annuity by age 75, but instead may choose to take advantage of “capped” or “flexible” drawdown. With capped drawdown, an individual can withdraw an amount from their funds each year, up to the cap. Originally set at 100% of the value of a comparable annuity, this is now set to increase to 120%.8

State pensions

Although the Chancellor has reaffirmed the Government’s commitment to introduce a single tier, universal state pension, the DWP’s white paper on implementing these reforms is still awaited.

In the meantime, the Basic State Pension is to increase by 2.5%, in line with the Government’s “triple lock”, which guarantees the highest increase of earnings, prices and 2.5%. In 2013, this will mean a cash increase of £2.70 a week, to £110.15.

National Infrastructure Plan

The Autumn Statement also reports on progress towards the National Infrastructure Plan 2011, in particular, the establishment of the Pensions Infrastructure Platform (PIP). The PIP is a new platform to support pension funds investing in infrastructure projects, which will be owned and run by UK pension funds. The Government, the NAPF and the PPF signed a memorandum of understanding in 2011 to create the PIP, to which seven major UK pension funds have now signed up as Founding Investors. The PIP is expected to launch in early 2013.

Next steps

Legislation to introduce the changes to the AA and LTA will be introduced in the Finance Bill 2013 and supporting regulations. The Bill is due to be published in draft on 11 December 2012 and is expected to come into force in summer 2013.

According to the Government, these measures will reduce the available pensions tax relief for “the top 2 per cent of individuals”.9 But the reduction of additional rate tax to 45% (from 50%)10 will affect pension savers from as early as April 2013.

1 Published by the Office for Budget Responsibility on 5 December 2012
2 HMRC has published an Overview Note of the proposed changes (5 December 2012)
3 Steve Webb, NAPF Trustee conference (4 December 2012)
4 Please see our Alert: “Fixed Protection: the deadline approaches” (27 February 2012)
5 The relevant percentage is the rate specified in the scheme rules on 9 December 2010 by which a member’s rights are increased annually or, where there is no such rate, the annual rate of increase in the Consumer Prices Index (CPI) for the year ending with the previous September’s CPI figure
6 Autumn Statement at paragraph 1.137
7 The rate used to discount future liabilities of a DB pension scheme in order to calculate the present value of the liabilities
8 Please see our News: “DC Quarter: Annuitisation – All Change!” (July 2011)
9 Autumn Statement at paragraph 1.142
10 Announced in the 2012 Budget