Pensions Bulletin 2014/12 - Budget Special

This Budget special summarises and comments on new announcements made in yesterday’s Budget which are of potential relevance to pension schemes and their members.

George Osborne brings in a pensions revolution

The Government is intending to bring in a radical liberalisation of the rules that govern how those with retirement savings in defined contribution schemes can access them at retirement. This is intended to take effect from April 2015 with some immediate easements in the current regime that will come into force on 27 March 2014.

Stronger powers to be taken to tackle pension liberation schemes

Legislation will be introduced in the Finance Bill 2014 that provides greater powers to help HMRC detect and prevent pension liberation schemes. The legislation is also intended to prevent pension scheme surpluses being artificially created (then liberated to the employer) and ensuring that charges apply fairly in liberation cases.

The changes that take effect from 20 March 2014 include:

• A new requirement that the main purpose of a pension scheme must be to provide authorised benefits
• New powers for HMRC to require information from scheme administrators and to enter business premises to help them ascertain whether or not to register a pension scheme
• A surrender of pension rights to fund an authorised surplus payment to the employer will be an unauthorised payment; and
• A surrender of rights in favour of dependants will be treated as an unauthorised payment unless the dependants’ newly acquired rights are kept within the scheme

Additional changes that take effect from 1 September 2014 include:

• The scheme administrator of a pension scheme must be a fit and proper person to be the scheme administrator
• New powers for HMRC to require information from scheme administrators and enter business premises to help them ascertain whether or not that person is fit and proper
• HMRC will be able to refuse to register a pension scheme where it believes that the scheme administrator is not a fit and proper person
• Scheme administrators appointed during an intervention by the Pensions Regulator will not be liable to certain tax charges incurred before they were appointed; and
• Where the Pensions Regulator or a court requires repayments into a registered pension scheme, the member and scheme administrator will be able to reclaim tax on an earlier unauthorised payment, but the member won’t be entitled to further tax relief on this payment into the scheme

Further details are set out in a guidance document on which comments are requested in relation to the fit and proper rules by 27 June 2014.

Comment

It has been clear for some while that HMRC needed to take further powers in order to tackle the pension liberators at source. But a multi-agency approach remains needed and there is as yet nothing new to assist trustees who are being asked to process a transfer request on which they have serious concerns. The documents released with the Budget are also silent on the necessary additional resource required for HMRC to apply these new powers effectively.

Simplification of the dependant’s scheme pension rules

The Government is to consult on options to simplify the dependant’s scheme pension rules to ensure that they apply fairly and to reduce administrative burdens. Any legislative changes will be in a future Finance Bill.

Comment

This is a welcome announcement. These complex rules (applying to members who start to draw DB pension after 5 April 2006, and biting only if they die on or after age 75) are aimed at preventing Lifetime Allowance abuse by setting up survivor pensions disproportionately high to the member’s – with a test and penalty tax applying when the survivor pension comes into payment. However, as delivered the test is onerous, and the penalties will be triggered inappropriately, potentially impacting all levels of pension income.

Abolition of the age 75 rule on pension contributions tax relief to be examined

The Government is to explore with interested parties whether the tax rules that prevent individuals aged 75 and over from claiming tax relief on pension contributions made by them from this age should be amended or abolished.

Comment

It is right to revisit this rule which was set in another age and does look arbitrary as we move to a system of increased freedom for defined contribution pensions.

£10,500 tax allowance to take more low earners out of auto-enrolment?

As widely trailed, the income tax personal allowance is to increase from £10,000 in 2014/15 to £10,500 in 2015/16 and the basic rate limit will be reduced to £31,785. This means that the level of income after which taxpayers begin to pay the 40% higher rate of tax will increase from £41,865 in 2014/15 to £42,285 in 2015/16.

Comment

Whilst there is no automatic link, this could mean that next year the “earnings trigger” for the employer duty to auto-enrol certain jobholders into workplace pension schemes will similarly rise so that more low-paid employees will be taken out of the scope of auto-enrolment.

Further details on Class 3A National Insurance Contributions promised

The Pensions Bill introduces a new class of voluntary national insurance contributions which will enable those who reach State Pension Age before 6 April 2016 to top up their Additional State Pension record.

At the Budget it has been confirmed that the scheme will be open for 18 months (from October 2015). It has also been reconfirmed that the pricing will be set at an actuarially fair rate and the maximum additional amount available will be £25 a week. The Department for Work and Pensions will set out full details shortly.

New pensioner savings bonds to be launched

New pensioner savings bonds are to be launched by National Savings and Investments from January 2015, available to people aged 65 or over. It is expected that the bonds will be priced to draw £10 billion of inflows, and each bond will have an investment limit of £10,000. The current forecasted rate of return is 2.8% gross/annual equivalent rate (AER) on a one year bond and 4.0% on a three year bond – tax will be charged at the individual’s marginal tax rate. Final details are to be confirmed at the Autumn Statement later this year.

Comment

This new investment vehicle might just sit comfortably with the flexibility newly made available to those with defined contribution pension savings and could provide certainty and a good return for those who have saved all their lives and now rely on their savings for income.

ISAs to be reformed

From 1 July 2014 ISAs will be reformed into a simpler product, the “New ISA” (NISA), with an overall limit of £15,000 per year. The Government is also abolishing the rules that say only half can be saved in cash and transfers cannot be made from stocks and shares ISAs to cash.

The aim is to give savers complete flexibility to save or invest how they wish and to benefit those previously constrained by the cash and or stocks and shares limits. The Government will also raise the limits for Junior ISAs and Child Trust Funds from £3,720 to £4,000.

Comment

Savers will welcome the increased limits and the greater flexibility seems sensible. But for savers nearing retirement, the draw of saving from their pre-tax income into a newly flexible defined contribution scheme might outweigh the access advantages a NISA provides.

Abolition of the 10% rate of tax on savings income

The Government has announced that it will abolish the 10% rate of tax on savings income and replace it with a new 0% rate. It will also increase the amount of savings income that can benefit from the new rate, from £2,880 to £5,000 in April 2015.

The aim of this measure is to ensure that lower earners don’t pay tax on their savings income.