Last week saw Chancellor Philip Hammond deliver his first (and last) Autumn Statement. I liked his delivery style – and his asides. Understandably, there was a strong focus on growth, debt, infrastructure and post-Brexit uncertainty. Hammond, with reference to the Office for Budget Responsibility input, was preparing us for potentially tough times ahead.
There was also a reaffirmation of this Government’s commitment to being one “for all and not the few”. So the fundamental assumptions of increasing debt, economic uncertainty and lower growth, along with a commitment to help so-called JAMs (people “just about managing”), were the key influences. That said, some are already questioning the extent to which this last commitment is evidenced from the actions proposed in the statement.
Perhaps the most interesting announcement was the news that this was to be the last Autumn Statement. In future, Budgets will be held in the Autumn, allowing changes to be announced well in advance of the start of the tax year. As such, there will be two Budgets in 2017: the final Spring Budget and the first Autumn one. From 2018, there will be a shorter Spring Statement and an Autumn Budget.
Anyway, in this and next week’s article I want to take a look at the measures announced of greatest relevance to financial planners.
First up, pensions. Given the enormous cost of pension tax relief, the chance of some fundamental change (perhaps moving to a flat rate) was not being ruled out. Most, myself included, believe this is a case of when, not if.
However, in line with Hammond’s intention for the Autumn Statement not to be the place for large scale tax changes, pensions were only given marginal treatment. That said, the changes announced could be quite important to those affected. I am grateful to Sam Kaye and Claire Trott, who lead our pensions team, for the following thoughts on the key aspects of the proposed changes.
Money purchase annual allowance
The headline change is the reduction of the money purchase annual allowance from £10,000 to £4,000, with effect from 6 April. As a reminder, the MPAA is triggered by one of a list of events: for example, drawing income from flexi-access drawdown, taking an uncrystallised funds pension lump sum, estab-lishing a scheme pension from a SSAS or by purchasing a flexible annuity.
Why the reduction? If you cast your mind back to when the MPAA was introduced in 2015, the Government said at the time that if it felt the system was being abused it would be amended.
The abuse comes in the form of an individual investing £10,000, receiving tax relief on the full amount, withdrawing the £10,000 and only paying income tax on 75 per cent of that amount.
Whether or not there has been evidence of the abuse is speculative, but there is obviously enough of a concern at the Treasury to introduce the reduction. Consultation on the detail will take place.
Currently, the alternative annual allowance is £30,000 (the annual allowance less the MPAA of £10,000). It should follow that a reduction in the MPAA means the alternative annual allowance reduces to £36,000. We will have to wait for clarification as there is no mention of this in the consultation document.
The Government has said it will publish a consultation on options to tackle pension scams, including cold-calling. It will also give firms greater powers to block suspicious transfers. The issue of blocking transfers to suspicious schemes has resulted in many cases being referred to the Pensions Ombudsman, so clarity on what is permitted and guidance with a process will be most welcomed.
Changes were announced somewhat quietly to the tax treatment of foreign pensions. The fact the Government is starting to make changes to the tax treatment of monies that have benefited from UK tax relief and been transferred overseas, usually in the form of a transfer to a qualifying recognised overseas pension scheme, shows it is taking overseas transfers more seriously.
Indeed, HM Revenue & Customs will shortly be holding meetings with the pensions industry to look at Qrops and changes. Sounds potentially ominous. Watch this space.
The Autumn Statement confirms the tax treatment of foreign pensions will be more closely aligned with the UK’s domestic pension tax regime by bringing foreign pensions and lump sums fully into tax for UK residents in the same way UK pensions are taxed.
For those individuals that have emigrated and transferred their UK pension funds (which would have benefited from UK tax relief) to a Qrops, there will be an extension from five to 10 years of the taxing rights of any foreign lump sum payments. The latest amends to the Recognised Overseas Pension Schemes list, published by HMRC on 15 November, shows a significant cull in the number of overseas schemes meeting its criteria. It therefore comes as no surprise there is to be an update to the eligibility criteria for foreign schemes to qualify as overseas pension schemes for tax purposes.
Next week I will look at changes relating to savings and investments.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn