Scant relief for pensions in Darling’s pre-election Budget

Introduction

In his last Budget before the General Election, the Chancellor, Alistair Darling, confirmed the Government’s intention to implement the restrictions on pensions tax relief first announced in the 2009 Budget

In this Alert:

• Key points
• The 2011 measures
• Finance Bill 2010
• Current restrictions
• Other pensions news
• What next?

Key points

• From April 2011, tax relief on pension contributions will be restricted for individuals earning £150,000 and over (including employer pension contributions), subject to a pre-tax income floor of £130,000.
• Relief will be tapered away so that for those earning £180,000 and over it will be worth 20% (equivalent to basic rate tax).
• Alongside the Budget, the Government published its response to consultation on implementing this proposal, setting out how the restriction will operate.

The 2011 measures

Following a consultation on the 2011 measures, the Government’s response was published in conjunction with the Budget, just three weeks after the consultation closed. The response document sets out how the Government intends to apply and deliver the restriction.

There are a number of headline issues emerging from the consultation response for schemes and affected members.

• The restriction of tax relief applies to all pension contributions (both an individual’s own contributions as well as those made on their behalf by their employer) during the tax year.
• In assessing the value of a member’s and employer’s contributions to a DB scheme, “deemed contributions” will be calculated using age-related factors (ARFs), on a two-way scale which varies both with age and normal pension age. The core ARF methodology will be included in the Finance Bill 2010, but the detail will be set out in regulations ahead of implementation in 2011.
• The scheme, rather than the individual, will be responsible for calculating the deemed contribution and for providing details to the member.
• Where an individual has received too much tax relief, a recovery charge will apply. If this exceeds £15,000, the individual will be able to request that it is paid from their pension scheme, which will only be able to turn down such a request in limited circumstances (for example, in a heavily under-funded DB scheme where payment might favour the individual incurring the charge at the expense of the membership as a whole).
• For individuals with income between £150,000 – £180,000, the reduction of tax relief will be phased in by means of a stepped taper, with relief reducing by 1% for every £1,000 of gross income.
• While the Government has indicated that it will give further thought to the impact of redundancy payments, for now, only the first £30,000 will be ignored for the purpose of calculating an individual’s income.
• The restriction of relief will not apply in cases of serious ill-health or death.

Finance Bill 2010

The consultation response notes that general provision will be made for the majority of these measures in the Finance Bill 2010, although much of the detail is intended to appear later in regulations, and some possibly not until the Finance Bill 2011.

Given the proximity of the Budget to the General Election (commonly anticipated to take place on 6 May 2010) it is likely that special measures will be invoked to allow the Bill to become law before Parliament is dissolved for the Election.

Current restrictions

As outlined in an earlier Alert,1 transitional “anti-forestalling” measures currently apply, to prevent those potentially affected by the 2011 restrictions from making significant additional pension contributions in the interim.

Broadly, the anti-forestalling measures apply where individuals whose income is £130,000 or more change the pattern of their normal, regular, ongoing pension savings. Where this is the case and pension savings exceed a special annual allowance of £20,000 (or up to £30,000 where a member pays infrequent DC contributions) a tax charge will apply. (The tax charge is currently 20% but, from 6 April 2010, will rise to 30% in certain circumstances to reflect the introduction of the new 50% tax rate for those earning over £150,000.)

Other pensions news

• The Government “remains open to proposals for further simplification” and, subject to additional review, may extend trivial commutation provisions to allow couples to pool small pension pots in order to achieve better value by purchasing a joint life annuity.
• The Government has also indicated its intention “to explore further facilitation of risk sharing between employers and employees, in both defined benefit and defined contribution pension schemes”.
• The Government’s commitment to provide sustainable DB pensions in the public sector is renewed, although the Chancellor promised to “implement reforms to ensure public pensions are affordable”.

What next?

Although a number of respondents to the consultation advocated a simpler approach for restricting high earner tax relief, for example, by reducing the annual and lifetime allowances, the Government’s view is that such alternatives “could not be implemented fairly without making significant adjustments to the pensions tax system that would also add their own complexity”.

While it is helpful to all concerned that the Government’s response has been published so swiftly after the consultation closed, it remains to be seen what, if any, impact the Election will have on the restriction of pensions tax relief. So watch this space for further developments.

1 “Finance Act 2009 – This time it’s personal” dated 24 July 2009, available on the Sackers Extra pages of our website