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2014 Autumn Statement: pensions implications
Practical Law UK Legal Update 4-590-9145 (Approx. 5 pages)
2014 Autumn Statement: pensions implications
| Published on 03 Dec 2014 • England, Scotland, Wales |
On 3 December 2014, the Chancellor of the Exchequer delivered his Autumn Statement. This update considers the implications for occupational and personal pension schemes.
Speedread
There were no new major pensions-related announcements at the 2014 Autumn Statement. As expected, the Chancellor confirmed that the pensions flexibility measures unveiled at the 2014 Budget affecting those with DC pension savings will come into effect in April 2015. In addition, he said that the changes to the tax treatment of death benefits announced in September 2014 will be extended to include joint life and guaranteed period annuities. As a result, if an individual who is receiving payments from such an annuity policy dies before reaching the age of 75, his beneficiary will be able to receive future payments from the policy free of tax from next April. If the individual dies after age 75, the beneficiary will be taxed on withdrawals at his or her marginal rate (unless the benefits are paid in lump-sum form, in which case a 45% charge will be levied in 2015/16 and thereafter marginal-rate taxation will apply). Alongside this change, the tax rules will be updated to allow a joint life annuity to be paid to any beneficiary of a deceased policyholder, and not merely a "dependant".
The government also announced that following informal consultation with the pensions industry, it has decided not to extend the availability of pensions tax relief to those above age 75.
Announcements affecting occupational and personal pension schemes
There were no new major pensions-related announcements at the 2014 Autumn Statement. As expected, the Chancellor confirmed that the pensions flexibility measures announced at the 2014 Budget will go ahead next April. As already announced, the new regime will introduce a reduced £10,000 money purchase annual allowance for individuals who have flexibly accessed their DC pension savings, while members of private-sector DB schemes will be permitted to transfer to DC schemes to take advantage of the flexibilities, subject to certain safeguards (paragraphs 2.67 and 2.68, Autumn Statement). The legislative amendments required to implement these changes are currently before Parliament in the form of the Taxation of Pensions Bill and the Pension Schemes Bill (see Practice notes, DC pension flexibility: overview and Pension Schemes Bill 2014-15: overview). Beyond this, the main points to note from the Autumn Statement are summarised below.
Taxation of death benefits
The government will extend the previously announced new rules on the taxation of pension and lump-sum death benefits so that joint life and guaranteed period annuities are treated on the same basis as drawdown pensions and other benefits under a defined contribution (DC) scheme on a member's death (paragraphs 1.222 and 2.65, Autumn Statement).
The background to this move is that in September 2014 the government announced that from April 2015 the current 55% special lump-sum death benefits charge on benefit paid by a registered pension scheme on a member's death will be abolished. The new position will be as follows:
- If an individual dies before reaching age 75, there will be no tax charge on death benefits paid from crystallised or uncrystallised funds in lump-sum form (although a lifetime allowance charge may apply). Alternatively, a deceased member's beneficiary will be able to inherit the member's unused drawdown funds or uncrystallised funds through flexi-access drawdown (as a "pension beneficiary drawdown account"). No income tax will be payable on withdrawals from these accounts. According to the Autumn Statement document, this tax treatment will now include beneficiaries of policyholders who have taken out joint life or guaranteed term annuities, provided no payments have been made to the beneficiary before 6 April 2015.
- If an individual dies after reaching age 75, the recipient of death benefits from crystallised or uncrystallised funds (including joint life or guaranteed term annuities) will also be entitled to draw down on the benefits through a pension beneficiary drawdown account, but will be obliged to pay income tax at their marginal rate. Alternatively, the recipient will be able to make lump-sum withdrawals. For the 2015/16 year, lump-sum withdrawals will be subject to the special lump-sum death benefits charge at the rate of 45%. From 2016/17, however, the Treasury intends to apply marginal-rate tax to lump-sum payments in place of the 45% rate.
Measures to be enacted in the Finance Bill 2015 will amend the tax rules to allow joint life annuities to be paid to any beneficiary of the deceased policyholder. Currently, a joint life annuity can only be paid to the surviving "dependant" of the policyholder on his or her death (section 167, Finance Act 2004).
For more information about the changes to the tax treatment of death benefits, see Practice note, DC pension flexibility: overview: Tax treatment of death benefits.
No pensions tax relief after age 75
The government confirmed that following informal consultation with the pensions industry, they will not be extending the availability of tax relief on pension contributions to those made by individuals over the age of 75 (paragraph 2.71, Autumn Statement).
Some commentators had expressed the hope that with the introduction of flexi-access drawdown from next April, the government may be willing to widen the circumstances in which tax relief is available.
Update on the Pensions Infrastructure Platform
As part of its National Infrastructure Plan, the government is encouraging institutional investors to invest in UK infrastructure projects. The Pensions Infrastructure Platform (PIP) was announced in 2011 and HM Treasury signed a memorandum of understanding about the PIP's development with the NAPF and PPF (see Legal update, 2011 Autumn Statement: pensions implications).
The government has now published its National Infrastructure Plan 2014. This reports that in February 2014, the PPP Equity PIP LP fund was launched to invest in public-private partnership and PFI projects. While the PIP retains a £2 billion target for investment in UK infrastructure by UK pension schemes, the PPP Equity PIP LP Fund has commitments of only £348 million to date. A chief executive for the PIP was appointed in September 2014 to encourage further investment. (Paragraph 14.148, National Infrastructure Plan 2014.)
Comment
The extension of the favourable tax treatment for death benefits to include joint life and guaranteed period annuities had been widely predicted before the Autumn Statement. The upshot is that scheme pensions paid under DC schemes will in future be treated less favourably from a tax perspective than annuities or drawdown. If a member in receipt of a scheme pension dies before reaching age 75, the recipient of a dependant's pension from the scheme will pay tax at their marginal rate. However, if the same scheme bought annuities externally and the member died at the same age while in receipt of a joint life annuity, the change now announced means the member's beneficiary will be able to take the dependant's annuity free of tax. In practice, internally annuitised scheme pensions are rarely paid from DC schemes anyway given that they are treated as a DB benefit once in payment. This further tax change is likely to all but eliminate them.