And so, in my journey through the sometimes arid landscape of the draft clauses for the Finance Bill 2016 most relevant to financial planners, we arrive at the oasis of pensions. As in my previous articles in this series, I will break my consideration down into the headings used in the HM Revenue & Customs overview of the draft legislation for consultation.
As announced and confirmed in last year’s Budgets, legislation will be introduced in the Finance Bill 2016 to reduce the standard lifetime allowance to £1m for the 2016/2017 tax year onwards and provide that it will be increased annually in line with the consumer price index from 2018/2019 onwards.
Transitional protection (Fixed Protection 2016 and Individual Protection 2016) will be introduced to provide individuals with pension savings of up to £1.25m protection from retrospective taxation, subject to certain conditions. Changes are also being made to the Finance Act 2004 to ensure individuals who have primary or enhanced protection with no lump sum protection receive the pension commencement lump sum intended by the legislation.
Advisers must engage with all clients likely to be affected to consider what, if any, action to take when the time is right.
Pension tax relief consultation
At last year’s summer Budget, the Government launched a consultation on the system of pension tax relief to gather evidence and views on whether the current regime incentivises pension saving. It received several hundred responses to that consultation and is considering the options for reform carefully. It will publish its response at March’s Budget.
This is perhaps the biggest potential story of them all. The £30bn-plus net cost of pension tax relief, and the fact the main beneficiaries of it are higher and additional rate taxpayers, means most believe that some (probably fundamental) change is inevitable. The Centre for Policy Studies favours a difficult transition to a taxed-exempt-exempt based regime, essentially founded on “special purpose” Isas. A stronger candidate may be a move to a form of flat rate relief, which would mean more incentive for basic rate taxpayers and less for higher and additional rate taxpayers.
All very well but, with the increasing numbers of basic rate taxpayers contributing to pensions through automatic enrolment, a flat rate relief higher than the current basic rate will no doubt be factored into any decision-making.
Given the very public nature of this most important of likely future pension changes, advisers can very legitimately contact their higher and additional rate tax paying clients to review what, if any, action should be taken in this tax year.
This discussion will no doubt also take account of any action that might need to be taken in the light of the tapering annual allowance from 6 April and this year’s transitional pension input period alignment. Plenty of pensions planning thinking required for Q1, then.
Pensions tax: Bridging pensions
Following the introduction of a single tier pension from 6 April, legislation will be introduced in the Finance Bill 2016 to allow the pension tax rules on bridging pensions to be aligned with Department for Work and Pensions legislation.
Dependants scheme pensions
Also announced at Autumn Statement, legislation will be introduced in the Finance Bill 2016 to reduce significantly the number of calculations that need to take place to determine whether a dependants’ scheme pension exceeds the authorised limit. The changes will take effect from 6 April.
Isas: tax advantages following the death of an account holder
Legislation will be introduced in the Finance Bill 2016 to provide for changes to the Isa regulations that will allow the Isa savings of a deceased investor to continue to benefit from tax advantages during the administration of their estate. Draft regulations will be published this year following technical consultation with Isa providers.
Pensions: Secondary annuities market
Legislation is to be introduced in the Finance Bill 2017 to remove the current pensions tax restrictions on individuals seeking to sell their right to future annuity income. This will be another area where advisers will need to be informed – and cautious. No doubt the FCA will have a very strong point of view on how this market should operate.
Reform to tax treatment of non-domiciled individuals
The Government will publish its response to the consultation on this subject early this year together with drafts of any necessary amendments to legislation (including transitional provisions).
Any advisers with non-domiciled clients need to be continually vigilant for changes to the relevant taxation rules and ensure they factor them into their planning, securing specialist advice where appropriate.
I will continue my look at the draft clauses relevant for advisers next week.
Tony Wickenden is joint managing director at Technical Connection