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2013 Autumn Statement: pensions implications
Practical Law UK Legal Update 2-551-0566 (Approx. 6 pages)
2013 Autumn Statement: pensions implications
| Published on 05 Dec 2013 • England, Scotland, Wales |
On 5 December 2013, the Chancellor delivered his Autumn Statement. This update summarises the key pensions-related announcements.
Speedread
From a pensions perspective, the 2013 Autumn Statement contained no surprises. As expected, the government confirmed individual protection 2014 will be introduced in the Finance Bill 2014, providing an additional form of transitional protection for those adversely affected by the reduction in the lifetime allowance from 2014/15. Capped drawdown pension rates will remain unchanged following a GAD review that shows they are a reasonable match for market annuity rates.
The Chancellor also announced the policy framework that will underpin the DWP's periodic reviews of state pension age (SPA). Under the Pensions Bill currently before Parliament, the first such review must take place by May 2017. The core principle for this and future reviews will be that a person should expect to spend, on average, up to a third of their adult life receiving the state pension. Subject to life expectancy projections and other factors, this approach is likely to mean further increases in SPA beyond those already enacted, meaning SPA could rise to age 68 by the mid-2030s and 69 by the late 2040s.
2013 Autumn Statement: pensions
On 5 December 2013, the Chancellor of the Exchequer delivered his Autumn Statement. The key pensions-related points are summarised below. (References in brackets are to the main Autumn Statement document.)
Lifetime allowance: individual protection 2014
As expected, the government confirmed that individual protection 2014 (IP 2014) will be introduced in the Finance Bill 2014, offering an additional form of transitional protection for those adversely affected by the reduction in the lifetime allowance to £1.25 million from 2014/15 (paragraph 2.53).
Draft clauses for the Bill were published in June 2013 by HM Treasury and HMRC. They provide that individuals with IP 2014 will have a personalised lifetime allowance equal to the value of their pension savings on 5 April 2014, subject to an overall maximum lifetime allowance of £1.5 million. This personalised allowance will remain at the same level unless the standard allowance rises above it, in which case the personalised allowance would revert to the standard lifetime allowance. If the value of benefits crystallised exceeds the individual's personalised allowance, the excess will be subject to the lifetime allowance charge.
A claim for IP 2014 must be made by 5 April 2017, and an individual who has claimed IP 2014 will not be subject to restrictions on further contributions or accruals. IP 2014 can be claimed in addition to either fixed protection or fixed protection 2014.
For more about the consultation paper and draft clauses, see Legal update, Pensions tax: government publishes details of individual protection regime.
For a comparison between the various forms of protection from a lifetime allowance charge currently available, see Practice note, Protection from the lifetime allowance charge: a comparison.
Drawdown pensions: no change in rates
In the March 2013 Budget, the government announced that the Government Actuary's Department (GAD) had been commissioned to review the capped drawdown tables and the underlying assumptions used to provide pension drawdown rates to make sure they continue to reflect the annuity market (see Legal update, 2013 Budget: pensions implications).
Following this review, GAD has confirmed that current rates are a reasonable match to market annuity rates, and so the government has decided not to make any changes to the drawdown tables (paragraph 2.57).
Increases to state pension age: guiding principle
The government has announced further details of its approach to increasing state pension age (SPA) to reflect rising life expectancy (paragraph 2.72).
Currently, SPA is due to rise to age 66 for both sexes between March 2019 and September 2020 under changes made by the Pensions Act 2011. Provisions in the Pensions Bill 2013 will see further increases, with SPA due to rise to age 67 between April 2026 and April 2028 (see Practice note, Pensions Bill 2013: a guide: State pension age).
The Pensions Bill 2013 will also require the government to carry out periodic reviews of SPA to take into account changes in life expectancy and such other factors as the Secretary of State considers relevant. The first review is due by May 2017. The government has now decided that the core principle underpinning the reviews will be that people should expect to spend, on average, up to a third of their adult life in receipt of the state pension.
In anticipation of the first review, the DWP has released a background note setting out the broad approach it will use to implement the new guiding principle. Among other things, for the purpose of calculating the proportion of a person's adult life in which he receives the state pension, the DWP will assume a person's adult life starts at age 20. Life expectancy will be measured using the principal projections of UK cohort life expectancy, published by the Office for National Statistics every two years. Projections will be averaged between the sexes.
Applying this approach to current data indicates that the increase in SPA to 68 currently scheduled for 2046 could be brought forward to the mid-2030s, and SPA could rise to 69 by the late 2040s. But final figures will depend on life expectancy projections published in 2015, as well as other factors taken into account in the DWP's review.
Additional state pension: NICs top-up
In advance of the introduction of a single-tier state pension in April 2016, the government announced it will create a new category of voluntary National Insurance contributions (NICs) (to be known as class 3A) which will be available for certain pensioners who want to top up their NIC record and secure higher additional state pension before its abolition (paragraph 2.56).
According to a DWP guidance note, in order to be eligible to pay class 3A NICs, an individual must reach SPA before 6 April 2016. The new system will be introduced in October 2015 and further details will be announced in due course.
For background about the single-tier pension, see Practice note, Pensions Bill 2013: a guide: Single-tier state pension.
Basic state pension: annual increase
Under the government's so-called "triple lock" formula, the basic state pension will rise by 2.7% from April 2014, matching the increase in the Consumer Prices Index for the year to 30 September 2012. This will mean a weekly increase of £2.95 for an individual entitled to receive a full basic state pension (paragraph 2.73).