Our Research | Other
See Contents page for an introduction to News plus details of how to register to receive e-alerts to future editions of News and our other publications.
23 June 2010
Emergency Budget SpecialAn Emergency Budget was presented yesterday (22 June 2010) by the new Coalition Government. The theme as far as pensions are concerned was one of consultation and review mixed with just one or two policy decisions.
Restriction on pensions' tax relief for high earners
The Government intends to repeal the restrictions on tax relief for high earners that were legislated for by the previous government in the Finance Act 2010, which it believes could have unwelcome consequences for pension saving, bring significant complexity to the tax system and damage UK business and competitiveness. However, the Government is committed to protecting the public finances and introducing reforms that raise no less revenue.
The Government believes its objectives might be met better by an alternative approach involving reform of existing allowances, principally by reducing the annual allowance for pension saving. Provisional analysis suggests the annual allowance would have to be reduced from its current level of £255,000 to somewhere in the range £30,000 to £45,000.
However, before making any firm decisions, the Government wishes to consult with the pensions industry to determine the best design for the new regime.
Compulsory annuitisation
To enable individuals to make more flexible use of their pension savings, the Government will remove the requirement to purchase an annuity by age 75 from April 2011.
In the meantime provisions will be included in the Finance Bill to raise the compulsory annuitisation age to 77 as a transitional measure (to the benefit of anyone who reaches age 75 in the next few months) and the Government will consult on the detail of the change.
Employer Funded Retirement Benefit Schemes (EFRBSs)
As widely feared, it has been confirmed that EFRBSs fall within the scope of the anti-avoidance measures that were announced in March's Budget. These measures tackle the use of trusts and other vehicles to reward employees in ways that avoid, defer or delay the payment of income tax and National Insurance Contributions by employees and directors or to avoid restrictions on pensions tax relief.
State pension
In future the basic state pension is to be subject to a "triple guarantee" and increase:
- in line with prices,
- in line with average earnings or
- by 2.5% each year,
whichever is the higher.
However, future price indexation is to be relative to the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI), although the increase granted in April 2011 will be no less than if it were linked to the RPI. CPI increases tend to be smaller than RPI increases (by roughly 0.5% pa on average).
State pension age and the default retirement age
The Government will review how quickly state pension age can be raised to 66. It will also consider future increases and how best to deal with the costs associated with increasing longevity.
The Government will also consult shortly on how quickly to phase out the default retirement age (currently 65) from April 2011.
Auto-enrolment
The Government confirmed it is supportive of auto-enrolment, but is committed to reviewing the previous government's private pension reforms. It will announce details of a review shortly.
National Employment Savings Trust (NEST)
The Finance Bill will include a provision that will enable NEST to be registered with HMRC for tax purposes (just like any other occupational pension scheme), suggesting reports about the death of NEST following the change of government were greatly exaggerated.
Comments
We are delighted the Government intends to scrap the idea of restricting the rate at which high earners obtain tax relief on their (and their employer's) pension contributions; the system that was due to come into force in April 2011 broke the concept of not being taxed on the same income twice and would not have provided high earners (particularly those with incomes in excess of £180,000 pa) with any incentive to use pension schemes as a vehicle for saving for their retirement. Even a much reduced annual allowance would encourage all tax-paying earners to make at least some pension provision and keep pension schemes in favour in company boardrooms.
It may be disappointing not to have had more firm policy decisions. However, it was not long ago that we (the pensions industry) were collectively bemoaning the previous Government for springing tax relief restrictions on us without proper thought or consultation. We should be grateful for small mercies and welcome the opportunity to be consulted on a range of important issues!
For further information:
Gary TansleyTel: 01737 841 732
Email: enquiries@hamishwilson.com
