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24 March 2010

Restriction on pensions' tax relief for high earners

The Budget confirms the intention announced in last year's Budget to restrict tax relief on pension contributions for high earners.

Individuals with income above a floor of £130,000 pa are potentially affected, for which purpose income includes their own pension contributions and charitable donations but excludes employer pension contributions.  Of these, those with "gross" income (as above but including "employer contributions") in excess of £150,000 pa will suffer a reduction in tax relief on both their own and their employer's contributions.

From 6 April 2011, tax relief will be tapered down from the top marginal rate of 50% for those with gross incomes of £150,000 pa to the basic rate (currently 20%) for those with gross incomes of £180,000 pa or more.  The taper will apply in discrete steps of 1% per £1,000 of income.

"Employer contributions" to DB schemes will be assessed having regard to the year-on-year increase in the value of each active member's pension using actuarial factors that vary by both age and normal pension age, but not sex.  These factors will be adjusted where the scheme in question provides post-retirement pension increases that are particularly more generous than average.  The factors will be set by HM Treasury, based on advice from the Government Actuary's Department, and will be reviewed at least every five years.  The same factors will apply to both private and public sector schemes.

The restriction on tax relief will be assessed through individuals' self-assessment tax returns and dealt with by a recovery charge.  Members of either a DC or DB scheme who have to pay a recovery charge of more than £15,000 will be entitled to ask their scheme to pay the charge on their behalf in return for the scheme reducing their pension pot or deducting an actuarially appropriate amount from their accrued pension.

Lifetime and annual allowances frozen

The Lifetime Allowance is to be frozen at its 2010/11 level of £1.8m and the Annual Allowance at £255,000.  Both will remain at these levels until at least the 2015/16 tax year. 

Trivial pensions

Consideration will be given to further simplifying the rules on commuting trivial pensions, such as by extending rights to commute personal pension funds worth up to £2,000 or by allowing couples to combine their pension pots in order to achieve better value by buying a joint-life annuity.

Issuance of gilts and index-linked gilts

The Debt Management Office has been given a remit to issue £38.0 billion of index-linked gilts in 2010/11, up from £29.3 billion in 2009/10.  However, it will issue only £45.3 billion of long-dated gilts in 2010/11, down from £51.6 billion in 2009/10.  (To put these figures into context, the liabilities of private sector DB schemes amount to something like £1,000 billion.)

Default retirement age

The default retirement age at which employers have a legal right to require individuals to retire, currently 65, is to be reviewed.  The Government intends shortly to launch a formal consultation, but no changes will be made before April 2011.

Risk sharing

The Government will continue to work with industry to explore how risk sharing between employers and employees can be facilitated to a greater extent in both DB and DC pension schemes.

Comments

There is a definite theme of attacking high earners, both by the immediate restriction of tax relief and by reducing the real value of the Lifetime and Annual Allowances over time.  At the other end of the scale, there are some token noises about making it easier to deal with trivial pensions.

The Government's intentions on risk sharing do not go nearly far enough in our view in that true risk sharing requires the constraints of the current DB and DC concepts to be broken down.

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