Budget 2015

Introduction

George Osborne, the Chancellor of the Exchequer, used the last Budget of this Parliament to extend the new DC retirement freedoms to around 5 million people who have already bought an annuity.  The other pensions headline is that, from 6 April 2016, the long-suffering LTA will once again be reduced.

In this Alert

• Key points
• Lifetime Allowance
• Reduction in the LTA
• Creating a secondary annuity market
• Next steps

Key points

• With effect from 6 April 2016, the LTA will be reduced from £1.25 million to £1 million.
• From 6 April 2018, the LTA will be indexed to increase annually by CPI.
• The new and reformed public service pension schemes, which will be introduced on 1 April 2015, will allow widows, widowers and civil partners across the public sector workforces to retain survivor benefits if they remarry, cohabit or form a civil partnership.
• The Government intends to legislate from 6 April 2016 to allow people who are already receiving an income from an annuity to agree with their annuity provider to assign their annuity income to a third party in exchange for a lump sum or an alternative retirement product.
• Additional funding of £19.5 million will be provided to support the new pension freedoms and the new pensions guidance service, Pension Wise.

Lifetime Allowance

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

Reduction in the LTA

Income tax relief for pension savings cost the Government around £34.3 billion in 2013/14, with around two-thirds of this relief going to higher or additional rate taxpayers.  “To protect the public finances from this growing cost”, the Government has decided to reduce the LTA from £1.25 million to £1 million, with effect from 6 April 2016.  Transitional protection for pension rights already over £1 million will be introduced alongside the reduction to ensure the change is not retrospective.  Details of these protections have yet to be released.

The LTA will be indexed annually in line with CPI with effect from 6 April 2018.

Creating a secondary annuity market

On 6 April 2015, the Government’s 2014 Budget reforms (see our Alert) will come into force.  These will radically increase the choice and flexibility available to individuals with DC pension savings.

The Government wants to extend this flexibility to current pension annuity holders.  It therefore proposes to:

• change the tax treatment in relation to annuity holders wishing to realise the value of their annuities. This will include the removal of the “unauthorised payment” tax charge of 55% (or more) that deters annuity holders from assigning their annuity
• work with the FCA to ensure appropriate consumer protection is in place for annuity holders as they consider their options. This may include the provision of guidance to annuity holders or the requirement to seek advice so they are in a position to consider fully the impact of their decision and ensure they are receiving a competitive price

Under the Government’s proposals, from April 2016, individuals would, upon agreement with their annuity provider, have the opportunity to assign their annuity to a willing third party buyer in return for a capital lump sum.  The provider would then continue to hold the underlying assets and pay the annuity income to the third party for the lifetime of the annuity holder.

The individual could take the capital lump sum as cash, or transfer it to an alternative retirement income product (flexi-access drawdown fund or a flexible annuity, ie. one which may increase or decrease) to allow the individual to draw income over a number of years.  In each case, payments will be subject to taxation at the individual’s marginal rate.

A consultation on how best to remove the barriers to the creation of a secondary market in annuities was published alongside the Budget.  This document sets out the Government’s proposed approach to ensuring people obtain the right support and guidance to make decisions that best suit their personal circumstances.  It also provides a high level overview of how the market may develop when the legislative barriers are removed and appropriate consumer protection is in place.

The consultation closes on 18 June 2015.

Next steps

We anticipate that information on the new transitional tax protections will be published shortly.  In the meantime, preparations for 6 April 2015 should continue!