Budget 2012: the pensions story

Introduction

After much speculation that pensions tax relief would again be hit, the 2012 Budget may come as some relief to the industry.

In this Alert:

• Key points
• State Pension
• Investment
• Taxation of pensions

Key points

• SPA will be increased in future to take into account improvements in longevity.
• The state pension will become a single tier pension for future pensioners.
• Further changes have been announced to the previously published legislation on employer asset-backed pension contributions.
• In the Finance Bill 2013, the tax rules on the payment of bridging pensions will be aligned with forthcoming changes in SPA.

State Pension

In April 2011, the DWP set out proposals for overhauling the state pension and sought views on introducing a “more automatic mechanism” for implementing future changes to SPA.1

In his Budget speech, George Osborne announced that the Government has chosen to create a single tier pension (initially of approximately £140 per week) and intends to introduce the new system early in the next Parliament. In addition, future increases in SPA will take into account improvements in longevity.

A White Paper on the state pension reforms will be published in the spring, with proposals on increasing SPA likely to follow in the summer.

Investment

The Government is supporting the establishment of a new Pension Infrastructure Platform owned and run by UK pension funds, which is due to make the first wave of its initial £2 billion investment in UK infrastructure by early 2013.

Taxation of pensions

Unfunded workplace pension arrangements

In a bid to prevent tax avoidance, the Finance Act 2011 introduced legislation aimed at tackling “arrangements involving trusts and other vehicles to avoid, reduce, or defer liabilities to income tax on rewards of an employment or to avoid restrictions on pensions tax relief”, known as “disguised remuneration”. While no changes are currently proposed, the Government will continue to monitor the use of these arrangements and may take further action.

Annual allowance

The Finance Act 2011 reduced the AA from £255,000 to £50,000. Where an individual’s pension savings exceed the AA, a tax liability falls due. Individuals can meet the charge independently or elect for their scheme to pay the charge before their benefits crystallise (subject to an eligibility threshold of £2,000), known as “scheme pays”.

The Government intends to make technical amendments to the legislation on scheme pays to ensure the rules in relation to deferred members work as intended.

Asset-backed pension contributions

The draft Finance Bill includes provisions designed to ensure that the value of tax relief given to employers accurately reflects, but does not exceed, the amount of the payments received by schemes under asset backed contributions (“ABCs”), while preserving flexibility for employers to continue using ABCs to manage pension deficits. Following announcements on 29 November 2011 and 22 February 2012, further changes to the proposed ABC legislation were announced in the Budget.

Finance Bill 2013

Provisions in the Finance Bill 2013 will:

• ensure the rules surrounding fixed protection2 work as intended;
• amend tax legislation to address the abolition of DC contracting-out from 6 April 20123;
• ensure that arrangements where an employer pays a contribution to a registered pension scheme for an employee’s spouse or family member (as part of their employee’s flexible remuneration package) cannot be used to obtain tax and national insurance advantages for the employee or the employer;
• align the tax rules on payment of bridging pensions with forthcoming changes to SPA; and
• strengthen reporting requirements and powers of exclusion relating to Qualifying Recognised Overseas Pension Schemes (QROPS). Broadly, schemes which permit tax advantages that are not intended to be available under the QROPS rules shall be excluded from being a QROPS.

1 Please see our Alert: “A State Pension for the 21st century?” dated 6 April 2011
2 Please see our Alert: “Fixed Protection: the deadline approaches” dated 27 February 2012
3 Please see our Alert: “Abolition of DC Contracting-Out: The Final Countdown” dated 23 February 2012