The Budget is less than three weeks away and is set to provide another shake-up to the pensions world. Or so we have been led to believe. Here is a round-up of the key events we anticipate.
Changes to tax relief on contributions
The biggest question mark hangs over the issue of pensions tax relief. The consultation launched at the last Budget – Strengthening The Incentive To Save: A Consultation on Pensions Tax Relief – has long since closed and the Government has been busy working on a response to what we can only assume was a barrage of information and comments from interested parties.
The 2015 Autumn Statement stated the response should be expected in this upcoming Budget but there may well be another consultation on the implementation of the proposals. It is unlikely to come in with immediate effect, assuming there is a change.
The most recent information leads us to believe marginal rate relief will be scrapped in favour of a flat rate arrangement. This would mean higher and additional rate taxpayers will receive less tax relief and basic rate taxpayers will receive additional tax relief on their contributions. If this is the case, it is likely there will be a consultation on issues such as salary sacrifice, net pay arrangements and how to ensure employer contributions and changes to contracts are not used to bypass the new restrictions for high earners.
If flat rate pension tax relief is brought in, then salary sacrifice will need to be curtailed or scrapped entirely, or else it could possibly just add to the complexities.
What happens will depend upon how employer pension contributions will be treated going forward. If they have a tax charge applied to them dependent on the level of tax the individual pays, then there will be a knock-on effect on the schemes that operate this as a default option.
By paying contributions in this way, the employer will have been saving National Insurance contributions, so may want that to continue. However, the added complexity this will bring could mean they will revert back to normal personal and employer contributions.
It may just be easier to remove the option of salary sacrifice entirely, which may impact on other benefits currently funded this way. It would also mean more NICs will be paid by both the employer and employee, without any real tangible benefit in exchange.
The lifetime allowance is already due to fall from £1.25m to £1m on 6 April, so you would hope there would be no additional changes announced in the Budget. However, it has been reported there is a possibility of a further drop.
The figure being suggested is £750,000, which equates to a pension of only £37,500 from a defined benefit scheme without commutation and a fund of only £562,500 after the pension commencement lump sum. I feel this is unlikely because the previous drop has not even come into force yet.
On the other side of the fence, some have suggested the lifetime allowance could actually go altogether if we see the flat rate pension tax relief brought in. I agree this would be preferable but it does not seem likely in the current climate as the removal of the lifetime allowance would mean a significant amount of lost tax revenue.
We are bracing ourselves for the taper of the annual allowance but this may not be the worst thing to come. If flat rate relief is brought in, the level at which the taper is applied could be reduced to catch those paying higher rate tax and not just those paying additional rate tax, which is where it is currently aimed. We saw something similar with anti-forestalling back in 2009, when the level dropped to catch more people.
If this level is reduced significantly to stop those who will lose relief following the introduction of the flat rate, it would make sense to just scrap the whole thing and drop the annual allowance for everyone. This would be preferable for most because it would bring some sort of certainty to the levels they can contribute at the beginning of the tax year. The current taper rules mean it is very difficult for those caught to be sure of their annual allowance until the end of the tax year when their overall income can be confirmed, everything can be counted and the allowance accurately calculated.
Secondary annuity market
The secondary annuity market is planned to be launched in April 2017 (the full details of which should be in the Finance Bill 2016) but there are still so many areas to be ironed out to ensure it will work as intended. We are due further consultation on the tax framework, as well as amendments to allow the assignment of annuities, which is key to the proposals. There is also the need for additional consultation on the advice requirement for the sale of an existing annuity. Many of these issues may be addressed in the Budget 2016 documents.
There is also scope for some anomalies that crept in during previous Finance Acts to be rectified. One that has been around for many years is the lack of options for those who may want to take their pension commencement lump sum from their existing scheme then transfer to another scheme to take drawdown.
This is currently only possible if the ceding scheme can facilitate drawdown in the first place. It is not possible to do an open market option to drawdown the way it is for an annuity. This type of change could have a greater impact on the pension freedoms options available to those in schemes that cannot or will not change their rules.
Claire Trott is head of pensions technical at Talbot and Muir