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June 2010 Budget: pensions
Practical Law UK Legal Update 2-502-5810 (Approx. 6 pages)
June 2010 Budget: pensions
by PLC Pensions
| Published on 22 Jun 2010 • England, Scotland, Wales |
A summary of the pensions-related points arising from the Budget speech delivered on 22 June 2010.
Speedread
On 22 June 2010, the Chancellor of the Exchequer delivered his first Budget. For pensions practitioners, the key development was the decision to overhaul the previous government's plans for restricting tax relief for high earners from April 2011. Tax relief will still be restricted in some form, but it will most likely be achieved through a much reduced annual allowance set somewhere between £30,000 and £45,000. A consultation exercise will be conducted, with the government's main goal being to ensure the alternative approach raises equivalent revenues to those that would have been collected under the planned high income excess relief charge.
Other announcements include plans to abolish from 2011/12 the requirement for individuals to buy annuities by age 75. In the interim, for individuals reaching age 75 on or after Budget day the deadline for annuitisation has been extended to age 77. And as expected a commission has been set up to devise proposals for a root and branch reform of public-sector pensions. One reform has already been implemented, with the Chancellor announcing that from 2011 annual increases to public-sector pensions in payment will be calculated with reference to the consumer prices index rather than the retail prices index.
Restricting pensions tax relief: back to the drawing board
Following intense lobbying from employer organisations and the pensions industry, the government has resolved to overhaul the previous government's plans for restricting pensions tax relief for high earners, which were due to be implemented from 6 April 2011 (paragraph 1.118, Budget report).
Rejecting the previous government's approach as too complex, the government will investigate whether equivalent revenue (estimated at £3 billion in 2011/12) can be raised through the alternative means of significantly reducing the annual allowance, which is set at £255,000 in 2010/11. Preliminary analysis apparently suggests that an annual allowance in the region of £30,000 to £45,000 may achieve this aim.
The government recognises that a number of technical points will need to be reflected in the design of any alternative method. Particular areas that the government will consider in consultation with interested parties are:
- How defined benefit accruals should be valued.
- How to ensure the restriction is limited to individuals who are higher or additional rate tax payers (and how to avoid inadvertent one-off charges for basic rate tax payers).
- The extent to which there should be flexibility for individuals paying any charge due under the measures.
- How any charge due under the measures should operate in practice and compliance monitored.
The measures enacted in the Finance Act 2010 putting in place the framework for the high income excess relief charge will be repealed in regulations enacted under the forthcoming Finance Bill. The repeal will only take effect once the government has decided on a replacement approach. For background about the previous government's plans, see Practice note, Restricting pensions tax relief: implementing the restriction.
In the meantime, there will be no changes to the anti-forestalling regime, though the government says it will continue to monitor the regime and take action to protect revenues if necessary.
Legislation will be enacted, however, following the previous government's promise at the March 2010 Budget to tackle tax avoidance by limiting the use of trusts to avoid restrictions on pensions tax relief. The Budget confirms that employer-financed retirement benefit schemes will fall within the scope of this legislation, which will come into effect in April 2011 (paragraph 2.167, Budget report).
For the details of the anti-forestalling regime, see Practice note, Restricting pensions tax relief: anti-forestalling measures.
Requirement to annuitise at age 75 to be deferred to age 77 pending consultation
In line with the coalition agreement published on 20 May 2010, the existing annuitisation rules, effectively requiring members of registered pension schemes to buy an annuity by age 75 will be abolished from 2011/12 (paragraph 1.117, Budget report).
In the meantime, the requirement will be deferred for any members who reach age 75 on or after 22 June 2010. In their case, they will not have to buy an annuity until they reach age 77. The Finance Bill will contain measures amending the tax rules contained in the Finance Act 2004 and the related inheritance tax rules will also be modified.
A full consultation on the government's proposals for 2011/12 onwards will follow in due course.
NEST to be registered pension scheme
In a technical measure already announced in the March 2010 Budget (see Legal update, March 2010 Budget: pensions), the government confirmed that provisions will be included in the Finance Bill providing for NEST to be treated as an occupational pension scheme for the purposes of Part 4 of the Finance Act 2004 and therefore be registered with HMRC. As a result, contributions to and benefits from NEST will receive the same tax treatment as those applying to any other registered pension scheme.
Beyond this measure, no announcement was made about the government's long-term plans for NEST and auto-enrolment generally.
Public-sector pensions: commission to consider root and branch reform
As already announced, an independent commission chaired by former Secretary of State for Work and Pensions John Hutton will undertake a fundamental structural review of public-sector pensions (paragraph 2.20, Budget report).
The commission will deliver its report in advance of the 2011 Budget, although it will also make a submission to the spending review due to be published on 20 October 2010 if it identifies short-term savings. One cost-saving measure has already been announced by the Chancellor: from April 2011, annual increases in public service pensions will be calculated by reference to the consumer prices index (CPI) instead of the retail prices index (RPI) as at present (paragraph 1.106, Budget report).
State pensions changes
Further detail has been announced concerning several further measures foreshadowed in the coalition agreement:
- The government will review the date from which the planned increase in state pension age (SPA) to 66 will take effect. The review will also consider future increases to SPA (paragraph 1.109, Budget report).
- A consultation exercise will be conducted on how the government can "quickly phase out the default retirement age" of 65 from April 2011 (paragraph 1.109, Budget report).
- From 2011/12, annual increases in the basic state pension (BSP) will be calculated under what the government refers to as a "triple guarantee". According to this mechanism, the BSP will rise by a minimum of the lower of 2.5%, the increase in earnings or the increase in prices (under the CPI). For 2010/11, the BSP will increase in line with the increase in the RPI. (Paragraph 1.107, Budget report.)