Summer Budget 2015

Introduction

In the first Conservative Budget since 1996, the Chancellor of the Exchequer has again turned his attention to pensions.

In this Alert

Key points
Reduction of the AA for high earners
Consultation on pensions tax relief
Pension and savings flexibilities
Salary sacrifice
Next steps

Key points

With effect from 6 April 2016, the Government will restrict pensions tax relief for individuals with incomes, including pension contributions, above £150,000 by tapering away their AA to a minimum of £10,000.
The Government has published a consultation to seek views on whether there is a case for reforming pensions tax relief to strengthen incentives to save.
It was confirmed that, with effect from 6 April 2016, the LTA will reduce from £1.25 million to £1 million. Transitional protection will be introduced, alongside this reduction, for those with pension rights already over £1 million.
With effect from 6 April 2018, the LTA will be indexed annually in line with CPI.
As announced in the Autumn Statement (see our Alert), the tax rate that applies on lump sums paid from the pension of individuals who die aged 75 and over will be reduced from 45% to the recipient’s marginal rate from the tax year 2016/17.
Plans for the secondary market for annuities will be announced in autumn 2015 with implementation delayed until 2017 “in order to ensure there is a robust package to support consumers in making their decision”.

Reduction of the AA for high earners

From the tax year 2016/17, the AA for tax relieved pension savings will be reduced for those with “adjusted incomes” (taxable earnings including pension but not charitable contributions) over £150,000. For every £2 of adjusted income over £150,000, an individual’s AA will be reduced by £1. The maximum reduction to the AA will be £30,000, so that anyone with adjusted income of or above £210,000 will have an AA of just £10,000.

To ensure this measure is focused on the higher and additional rate tax payers who are identified as currently gaining the most benefit from pensions tax relief, those with income, excluding pension contributions, below £110,000 will not be subject to the new taper.

As at present, any unused AA from the three previous tax years will be available to be carried forward and added to an individual’s AA.

Transitional measures

With effect from 8 July 2015 (Budget Day), transitional rules are being introduced which aim to:

align “pension input periods” (the period over which the amount of pension saving, or pension input, under an arrangement is measured in any given tax year, see our Alert for further details) with the tax year by April 2016 and
protect pension savings from retrospective tax charges, by providing generous transitional provisions under which individuals will generally have an AA of between £40,000 to £80,000 inclusive (depending upon the amount of pension savings made before today’s date) for the 2015/16 tax year only.

HMRC has published a technical note on the transitional measures which is based on the current draft legislation. Final updated guidance will be provided after the Finance Bill 2015 receives Royal Assent.

Money purchase AA

Individuals who flexibly access their pension savings become subject to a £10,000 AA for DC savings (“the money purchase AA”). If an individual exceeds the money purchase AA, they become subject to a reduced AA (of £30,000) for the remainder of their (DB) pension savings (known as the “Alternative AA”).

Where an individual is subject to the new taper and the money purchase AA rules, his or her Alternative AA will be reduced accordingly. This will mean that those with incomes of £210,000 or more will have an alternative AA in respect of DB pension savings of £0, plus any available carry forward.

There will also be transitional measures.

Consultation on pensions tax relief

The Government wants to make sure that the “right incentives are in place to encourage saving into pensions in the longer term”. It is therefore consulting on whether there is a case for reforming pensions tax relief or whether it would be best to keep the current system (tax exemptions for pension contributions, tax-free investment returns and taxed pensions income, or “exempt – exempt – taxed”).

The Government is interested in views on the various options for reform. These range from a fundamental change to the system (for example moving to a “taxed – exempt – exempt” system, like ISAs, and providing a government top-up on pension contributions) to less radical changes (such as retaining the current system and further altering the LTA and AAs), as well as options in between.

Any reforms would build on the 2015 Budget changes (see our Alert).

Responses to the consultation should be sent in before 30 September 2015.

Pension and savings flexibilities

The Government has announced that it will:

extend access to Pension Wise to those aged 50 and above and is launching a comprehensive nationwide marketing campaign to further raise awareness of the service
consult, before the summer, on options aimed at making process for transferring pensions from one scheme to another quicker and smoother, including in relation to any excessive early exit penalties.

Salary sacrifice

Rumours abounded that salary sacrifice arrangements (which allow some employees and employers to reduce the income tax and NI that they pay on remuneration) would be targeted in this Budget. While it was noted that these are becoming increasingly popular and the cost to the taxpayer is rising, the Government has opted to leave them alone, for now. It intends to “actively monitor” the growth of these schemes and their effect on tax receipts.

Next steps

The Finance Bill 2015, which will contain details of the new tapered AA and the accompanying transitional measures, is due to be published on 15 July 2015.