To the Budget 2011… and beyond!

Introduction

Changes to pensions tax relief have been headline news since the former Labour Government first announced restrictions in April 2009. Since then, proposals for limiting relief have undergone significant changes, culminating in the Coalition Government’s proposals to reduce the AA to £50,000 from the tax year 2011/12.

With this and associated measures already affecting pension savers, it is a welcome relief that George Osborne’s latest Budget brings no immediate headaches for occupational pensions, giving the industry a short breathing space ahead of the publication of the Finance Bill on 31 March 2011.

Key points

Contracting-out is to be abolished for all schemes, although the cessation date has yet to be confirmed.
The Government will put in place measures for increasing SPA in line with improvements in life expectancy.
Keen to stamp out what it perceives as tax avoidance, the Government has confirmed its intention to make “disguised remuneration”1 (which will include benefits under EFRBS) subject to income tax.
The Government is to consult on limiting the amount of tax relief available to employers making asset-backed contributions to DB schemes so that tax relief “accurately reflects the increase in fair value of pension plan assets while maintaining flexibility for employers and schemes”.
Other than this, there is nothing new for occupational pension schemes, but we wait to see what the Finance Bill has in store.

Budget 2011 Announcements

State Pension Age

The Government is formalising its plans to raise SPA to 66 by 2020 via the Pensions Bill which is currently before Parliament.2 In a bid to adapt to continuing improvements in life expectancy (and to spread the resulting costs more fairly between generations), the Government has also announced its intention to introduce a certain measure of automation into the process, for example by using a regular independent review of longevity.

State Pensions and Contracting-out

The DWP will “shortly” publish for consultation a Green Paper on options for reform of the State Pension. The headline issue is the proposal for a flat rate pension for all, of around £140 per week. With DC contracting-out already set to go in April 2012, the Office of Tax Simplification3 has recommended the total abolition of contracting-out from the same date for all occupational pension schemes. However, given the ramifications of this proposal (for example, for DB schemes), the Government is likely to take its time introducing this, with George Osborne noting that “it will take years fully to come into effect”. The measure is not expected to apply to current pensioners.

Public Sector Pensions

Following the publication of Lord Hutton’s final report4, in which he sets out proposals for the reform of public service pension schemes, the Budget confirms the Government’s acceptance of Hutton’s recommendations “as a basis for consultation with public sector workers, unions and others”. The Chancellor indicated that increases to employee contributions in public sector pensions would be limited to a “3 percentage point average”. We can expect the Government’s proposals “in the autumn”, with a plea that “there should be no cherry-picking on either side”.

Restriction of pensions tax relief

The Coalition Government’s plans for restricting pensions tax relief were announced back in October 20105, introducing a reduced AA of £50,000 from the tax year 2011/12 and a reduced LTA of £1.5m from 6 April 2012. In conjunction with this, the factor used for calculating deemed contributions to DB schemes (for the purposes of testing against the AA), will increase from 10 to 16.6

The reduced AA will inevitably affect a greater number of pension savers than the previous AA of £255,000. However, the Government expects that most individuals and schemes will adapt their pension savings behaviour to avoid incurring a charge by exceeding the AA, and in certain circumstances, individuals will be able to meet AA charges from their pension benefits.7

Some tricky areas

Since the Government’s announcement, a number of draft provisions have been made available for public consultation, ahead of the formal publication of the full Finance Bill on 31 March 2011. This has brought to the fore the following features commonly found in pension schemes which, depending on a scheme’s rules, may place individuals at greater risk of falling into the AA charge danger zone:

accelerated and non-uniform accrual rates; and
the application of late retirement factors and bridging pensions (because going forwards pension savings will be tested against the AA in the year in which benefits come into payment).

And so the story continues…

Although this Budget contains no major surprises for pension schemes, we may see, when the full Finance Bill is published on 31 March 2011, the extent to which concerns relating to the implementation of the reduced AA have been addressed.

1 Described as “third party arrangements, commonly involving trusts and other vehicles, [used] to avoid, reduce, or defer liabilities to income tax on rewards of an employment or to avoid restrictions on pensions tax relief
2 Please see our Alert:”New Year, New Pensions Bill” dated 18 January 2011
3 In its Review of Tax Reliefs final report published on 3 March 2011
4 Please see our Alert: “Hutton recommends new career average scheme” dated 10 March 2011
5 Please see our Alert: “Restricting pensions tax relief: the verdict” dated 14 October 2010
6 In practice, this means that an annual increase in pension benefit of £1,000 would be deemed to be worth £16,000
7 Please see our Alert: “Annual Allowance charge payment option confirmed” dated 8 March 2011