2012 Budget: key pensions issues

A summary of the pensions-related points arising from the Budget speech delivered on 21 March 2012. (Free access.)

PLC Pensions


The majority of the announcements in the 2012 Budget have already been the subject of discussions in the pensions press in the past few weeks ...show full speedread

The majority of the announcements in the 2012 Budget have already been the subject of discussions in the pensions press in the past few weeks. Although a few changes were unexpected, in general the Budget did not contain any significant surprises for pensions professionals. The key points of interest are that:

  • There will be no change to the annual allowance. This came after several weeks of speculation that either the annual allowance or higher rate tax relief would be cut.

  • A new single tier state pension, combining the basic and second state pensions will be provided for future pensioners. A white paper on this issue will be published in the spring. Also, the state pension age will rise automatically to reflect changes in longevity.

  • The pensions infrastructure platform will go ahead with the first tranche of investment to be received early in 2013.

  • The government will consult on the introduction of gilts that mature over a longer period, as well as the introduction of perpetual bonds.

  • Further changes to the treatment of asset-backed pension contributions will come into effect immediately, the third set of changes to this tax regime within six months.

  • Several previously announced changes to the pensions tax regime will go ahead, and be reflected in the Finance Bill 2013.

Close speedread

State pension

The Budget confirmed two previously announced changes to the state pension.

Single tier state pension

The government will combine the basic state pension ( www.practicallaw.com/4-375-9148) and the state second pension ( www.practicallaw.com/1-200-3464) into a single tier pension for future pensioners, set at a level of £140 per week. This will not change the current cost of state pension provision. The new system will be introduced early in the next Parliament (in May 2015). A white paper containing more detail will be published in the spring, with final decisions on the detailed implementation of the policy being taken at the next spending review (paragraph 1.212, Budget report).

This was originally announced by the Chancellor in the 2011 Budget. Although the responses on the consultation that followed were published in July 2011, there had been no further comment on this issue from the DWP, see Legal update, State pension reform: changes to DB schemes likely if contracting-out abolished ( www.practicallaw.com/4-507-0707) .

State pension age

The state pension age ( www.practicallaw.com/2-200-3500) will be reviewed automatically to take account of increases in longevity, as previously announced in the 2011 Budget, see Legal update, Budget 2011: key pensions issues: State pension age ( www.practicallaw.com/6-505-3783) . Proposals will be published at the same time as time as the Office for Budget Responsibility's 2012 Fiscal sustainability report. The 2011 report was published in July 2011. (Paragraph 2.11, Budget report).


Changes to allowances for the over 65s

At present, individuals qualify for higher personal allowances when they reach 65, but the additional allowances are withdrawn at the rate of £1 for every £2 of income above the income limit (£25,400 for 2012-13) until the allowance equals that of a person under 65. With effect from 6 April 2013, individuals born after 6 April 1948 will not qualify for higher personal allowances when they reach 65 and individuals born after 6 April 1938 will not qualify for a higher age-related allowance at 75. Those who do qualify for the age-related allowances in 2012-13 (£10, 500 for those aged 65 to 74 at the end of the tax year and £10,660 for those aged 75 and over) will continue to receive the allowance, frozen at its 2012-13 level, until such time as the personal allowance for under 65s (£9,205 for 2013-14) equals or exceeds that amount (paragraphs 1.199 and 1.1200, Budget report).


Automatic enrolment

Given the proximity to the introduction of auto-enrolment on 1 October 2012, no major changes were expected to be announced in the Budget. The most noteworthy changes relate to other areas of the Budget, policy costings and the increase to the personal allowance.

Staging dates

The Budget report confirmed that the timetable for auto-enrolment will be adjusted so that staging dates for businesses with fewer than 50 employees to begin automatically enrolling their staff will be put back until the end of this Parliament, see Legal update, Auto-enrolment delay for small businesses ( www.practicallaw.com/8-514-6791) (paragraph 2.12, Budget report).

HM Treasury have confirmed that this will save the government £340 million, although they also state that "there is uncertainty around the number of individuals from whom additional contributions will be due under the workplace pension reforms." (page 53, Budget 2012 policy costings).

Personal allowance change

The Budget confirmed a rise in the personal income tax threshold from £7,475 to £8,105 with effect from 6 April 2012. This will rise again to £9,205 in the 2013-14 tax year (paragraph 1.72, Budget report).

Although the rise in personal allowance may encourage more people to contribute to a pension, if the auto-enrolment earnings trigger also rises to the same level it could see a fall in the number of people who would otherwise be enrolled. The government have accepted that the automatic enrolment of employees should be linked to the point they reach the income tax threshold. The DWP is currently consulting on setting the earnings trigger to decide whether the trigger should remain aligned with the PAYE tax threshold for the coming year or be set at a different rate, see Legal update, Auto-enrolment: DWP consults on updating earnings trigger and qualifying earnings band ( www.practicallaw.com/7-516-8967) .



The Budget confirmed the new infrastructure proposal and announced the possibility of new, longer-dated gilts.

Pension infrastructure platform

In the 2011 Autumn Statement the government announced that it had signed a memorandum of understanding to promote significant additional investment in UK infrastructure. The Budget report confirmed the government's support for the establishment of a new pension infrastructure platform owned and run by UK pension funds. The first tranche of the initial £2 billion investment is expected early in 2013. A separate group of pension fund investors has also presented proposals to the Treasury for increasing pension plan investment in infrastructure in the construction phase (paragraph 1.225, Budget report).


The UK Debt Management Office 2012–13 will consult on whether gilts in excess of 50 years and/or perpetual gilts, should be issued. Perpetual, or undated, gilts have no maturity date, and are paid back at a date of the government's choosing (paragraph 1.60, Budget report).

The possibility of a 100-year gilt had been discussed in the pensions press as a possible inclusion in the Budget and was met with criticism from the pensions industry, see News round-up for the week to 15 March 2012: Proposals for 100-year gilt rejected ( www.practicallaw.com/8-518-4679) .


Asset-backed pension contributions

The previous changes to the tax treatment of employer asset-backed pension contributions (ABC) were published as recently as 22 February 2012, and followed the new tax regime for these structures announced in November 2011, see Legal update, Asset-backed pension contributions: HMRC makes further changes to tax treatment ( www.practicallaw.com/0-518-1745) .

As well as proposing to clarify the legislation published in February, the Budget confirmed that further amendments to the ABC tax regime will be published on 29 March 2012, as part of the draft Finance Bill 2012 and will be effective from 21 March 2012. They will make consequential changes to the legislation governing structured finance arrangements, a key part of a tax-effective "acceptable SFA" under the ABC regime. In addition, anti-avoidance provisions will be introduced aimed at recovering relief for contributions in situations where employers cease to be chargeable to tax, to ensure no person is placed in a more advantageous position as a result of the February legislation, or where contributions no longer fall within the SFA legislation, (paragraph 2.66, Budget report).



The Finance Bill 2013 will include amendments to primary legislation granting HMRC stronger powers to police overseas transfers, as part of changes to the qualifying recognised overseas pension scheme (QROPS) regime. This follows the announcement of draft legislation that was the subject of a consultation exercise starting on 6 December 2011, see Legal update, New QROPS information and reporting requirements ( www.practicallaw.com/9-515-3470) .

The new powers will allow HMRC to exclude pension schemes from being QROPS where the country or territory in which a QROPS is established makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended or available under the QROPS rules. In addition, (paragraph 2.69, Budget report).


Pensions Tax

Several changes which were previously announced were confirmed in the Budget. The following are planned for the Finance Bill 2013:

  • Annual allowance. Despite several weeks of speculation over whether the Chancellor would either reduce the annual allowance ( www.practicallaw.com/6-201-6478) , or abolish higher rate tax relief altogether, he confirmed that there would be no change to the annual allowance, stating "I don’t intend to make any significant changes to pensions relief in this Budget." (Budget 2012 statement).

  • Lifetime allowance. A regulation-making power will be introduced allowing new regulations to be made to ensure the rules surrounding fixed protection work as intended (paragraph 2.63 Budget report). This was referred to in HMRC Bulletin 52 recently, see Legal update, Pension schemes newsletter 52: guidance on PIEs/BCEs and fixed protection ( www.practicallaw.com/2-518-3734) .

  • Scheme pays. Technical changes will be made to the Finance Act 2011 to ensure provisions relating to the operation of "scheme pays", and in respect of deferred members work as intended (paragraph 2.64, Budget report).

  • Employer contributions to spouses. Contributions paid by an employer to a registered pension scheme, in the name of an employee's spouse or family member's name as part of the employee’s flexible benefits package, will no longer attract tax relief for either the employee or the employer (paragraph 2.67, Budget report).

  • Personal pension pot commutation. From 6 April 2012 individuals aged 60 or over will be allowed to commute funds of £2,000 or less held in personal pensions into a lump sum regardless of their other pension savings, subject to a maximum of two such commutations in a lifetime (paragraph 2.61, Budget report).

  • Bridging pensions. Legislation will be introduced to change the tax treatment of bridging pensions ( www.practicallaw.com/9-376-0210) to reflect the changes in state pension age. A new power will also be created to allow regulations to be made which allow the tax rules on bridging pensions to adapt to any future changes to state pension rules (paragraph 2.68, Budget report).

  • Contracting out. Pensions tax legislation will be amended to remove references to tax relief on employee contracted-out contributions to defined contribution pension schemes as this will be abolished from 6 April 2012 (paragraph 2.65, Budget report).



In the main, the Budget confirms what had already been promised. However, the changes to the asset-backed pension contributions regime are likely to be frustrating to those planning or administering an ABC structure, given that this is HMRC's third bite at the cherry. Other than this, the remainder of the Budget will not give practitioners undue concern and the absence of a change to pensions tax relief, given the intense speculation in recent weeks, may well be a pleasant surprise. The optimistic among the pensions community may hope that this is a sign of some legislative stability in pensions law.



HM Treasury: Budget 2012, Budget 2012 policy costings, Budget 2012 statement by the Chancellor of the Exchequer (21 March 2012) and HMRC, Employer Asset-backed Pension Contributions, Technical Note, (21 March 2012).

{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1247607941644", "objName" : "2012 Budget key pensions issues", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/1-518-5564?source=relatedcontent", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "25e8a493e:15afa15e479:-6770", "analyticsSessionCookie" : "25e8a493e:15afa15e479:-676f", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }