Coalition Budget 2010: Final economic remedies from Gladstone’s Bag

Introduction

In the Coalition Government’s first Budget, the Chancellor George Osborne declared Britain “open for business”. However, billed by the Treasury as a Budget to tackle the deficit and restore confidence in the economy, yesterday’s “unavoidable” and “progressive” Budget also saw tax rises, including an increase in VAT to 20% from 4 January 2011. But what did it say about pensions?

Key points

Proposals to restrict pensions tax relief for high earners will be reviewed. Current anti-forestalling measures will therefore remain in place for the time being.
The planned rise in State Pension Age to 66 will be accelerated.
As announced in the May 2010 Coalition Agreement, the link between basic state pension and earnings will be restored from April 2011, with a “triple guarantee” that pensions will rise by the higher of earnings, prices or 2.5%.

Pensions tax relief for high earners

Plans to raise revenues by restricting tax relief on pension savings for high earners will go ahead. However, believing that the method put forward for doing so in the Finance Act 2010 “could have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness”, the Coalition Government is seeking an alternative approach.

One suggested alternative is a significant reduction in the annual allowance from the current £255,000 to an amount in the region of £30,000-£45,000. It remains to be seen how many pension savers will ultimately be affected by a revised approach along these lines. However, the Coalition Government is clearly keen to balance the Treasury’s books by ensuring that any new approach will yield just as much revenue as the more complex system which it is looking to scrap.

The Coalition Government plans to introduce legislation before the summer recess to repeal the legislation on restricting tax relief for high earners passed in the Finance Act 2010 and will consult on its replacement. For the time being, the anti-forestalling measures1 which were introduced by the Labour Government will remain in place.

Public Sector Pensions

As previously announced, an independent commission chaired by John Hutton (a former Secretary of State for Work and Pensions under Labour) will review public service pension provision. An interim report is anticipated in September 2010 with the Commission’s final report, comprising a fundamental structural review, due in time for the 2011 Budget.

In a shift away from the current system, in line with other welfare benefits (including tax credits but excluding the State Pension), public service pensions will increase in line with CPI (rather than RPI).

Coming soon?

The Coalition Government has already announced that it will be conducting a review of auto-enrolment and the delivery of NEST over the summer (with a view to publishing its findings after the Parliamentary summer recess).
The planned rise in the State Pension Age to 66 by 2026 will be accelerated. A “call for evidence” is due to be launched later this week.
The Government will consult “shortly” on how quickly it will phase out the default retirement age of 65 set out under age discrimination legislation. The review will consider future increases to the State Pension Age, as well as “how best to manage the ongoing challenges posed by increasing longevity”.
Existing rules on compulsory annuity purchase by age 75 are also set to disappear in April 2011, and a consultation on the detail of this change is expected soon. Transitional arrangements will be included in the Finance Bill to cater for those individuals who have yet to receive an income, but who will reach 75 in the interim.

And finally…

Given its advanced state of disrepair, the iconic red Budget box, first used by William Gladstone 150 years ago, officially retired after yesterday’s Budget. It has been used by every Chancellor since Gladstone, with the exception of James Callaghan and Gordon Brown. It will be kept on display at the Cabinet War Rooms in Whitehall.

1 For more information, see our Alert: Finance Act 2009 – This time its personal