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2012 Autumn Statement: pensions implications
Practical Law UK Legal Update 9-522-8847 (Approx. 6 pages)
2012 Autumn Statement: pensions implications
by PLC Pensions
| Published on 06 Dec 2012 • United Kingdom |
On 5 December 2012, the Chancellor delivered his Autumn Statement. This legal update summarises the key pensions-related announcements. (free access)
Speedread
On 5 December 2012 the Chancellor, George Osborne, delivered his Autumn Statement. The key measures of interest to pensions practitioners are:
- A reduction in the annual allowance from £50,000 to £40,000 for the tax year 2014-15 onwards.
- A reduction in the lifetime allowance from £1.5 million to £1.25 million for the tax year 2014-15 onwards. Individuals will be able to apply for "fixed protection 2014", but only if they do not already have primary, enhanced or fixed protection. HMRC will also consider whether to introduce personalised protection.
- An increase in the capped drawdown limit for pensioners from 100% to 120% of the value of an equivalent annuity.
- A consultation on whether to allow companies undergoing valuation in 2013 or later to smooth asset and liability values.
- A consultation on whether to introduce a new statutory objective for the Pensions Regulator to "consider the long-term affordability of deficit recovery plans to sponsoring employers".
The measures relating to restriction of pensions tax relief will be included in the Finance Bill 2013, which is expected to be published in draft on 11 December 2012. The consultation on smoothing asset and liability values and the introduction of a new statutory objective for the Regulator is expected in the new year.
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2012 Autumn Statement
On 5 December 2012, the Chancellor made his Autumn Statement. This update summarises the most important announcements for pensions practitioners. For business tax announcements, see Legal update, 2012 Autumn Statement: business tax implications. For more coverage of the Autumn Statement on PLC, see PLC 2012 Autumn Statement.
Restriction of pensions tax relief
The Chancellor announced that the government will reduce the amount of tax relief available for pension-saving by cutting both the annual and lifetime allowances available for active members of registered pension schemes:
- Annual allowance. The annual allowance will be reduced from £50,000 to £40,000 for the tax year 2014-15 onwards.No changes have been proposed to the "scheme pays" facility or the annual allowance carry-forward rules. The amount of any unused allowances arising from the tax years 2011-12 to 2013-14 and available for carry forward to 2014-15 and subsequent years will continue to be based on the £50,000 limit. For 2015-16, individuals will be able to carry forward up to £50,000 unused allowances from 2012-13 and 2013-14 and £40,000 from 2014-15. For more on the carry-forward mechanism, see Practice note, Reducing the annual and lifetime allowances for pension saving: Carry-forward mechanism).The reduced annual allowance will apply to pension input periods (PIPs) that end in the 2014-15 tax year. Since PIPs do not have to match the tax year, the reduced annual allowance may affect pension savings made before 6 April 2014. For more on PIPs, see Practice note, Pensions tax: overview: More about pension input periods.
- Lifetime allowance. The lifetime allowance will be reduced from £1.5 million to £1.25 million for the tax year 2014-15 onwards.Individuals will be able to apply for "fixed protection 2014" which will work in the same way as the existing fixed protection regime, introduced when the lifetime allowance was reduced to £1.5 million in April 2012 (see Practice note, Reducing the annual and lifetime allowances for pension saving). Applications may be made after the Finance Bill 2013 comes into force (expected to be in summer 2013), but only if the individual does not already have primary, enhanced or fixed protection.HMRC will also consider in the next few months whether to introduce a personalised protection regime for individuals with pension pots in excess of £1.25 million on 5 April 2014. This would allow individuals to continue saving without losing protection. Their lifetime allowance would be the greater of the value of the member's pension rights on 5 April 2014 (up to a maximum of £1.5 million) and the standard lifetime allowance (£1.25 million from April 2014). Any savings in excess of the individual's lifetime allowance would be subject to a lifetime allowance charge when the benefits are taken. HMRC will consider whether individuals should be able to apply for both fixed protection 2014 and personalised protection.It is also proposed that if an individual dies before 6 April 2014, any death benefit lump sum paid on or after that date will be tested against the £1.5 million lifetime allowance, rather than the lifetime allowance when the lump sum is paid.
The measures will be included in the Finance Bill 2013, which will be published in draft on 11 December 2012.
HMRC estimates that 98% of individuals currently approaching retirement have a pension pot worth less than £1.25 million and that 99% of pension savers make annual contributions below £40,000, with the average person contributing around £6,000 a year. The Treasury has estimated that the measures will raise over £1 billion a year by 2017/18.
Pensions drawdown policy
The capped drawdown limit for pensioners will be increased from 100% to 120% of the value of an equivalent annuity. This returns the level of income drawdown available from money purchase arrangements to their pre-Finance Act 2011 level (see Practice note, Drawdown pension arrangements).
Scheme funding: smoothing asset and liability values
The Chancellor announced that the DWP will consult in the new year on whether to allow companies undergoing valuation in 2013 or later to smooth asset and liability values (paragraph 1.137, Autumn Statement 2012). The Treasury recognises that the volatility in measures of pension scheme deficits can make it hard for companies to manage their investment plans and attract external funding (see News round-up for week ending 23 August 2012: Regulator's statement on QE impact inadequate, say schemes).
The Regulator published a statement in response to the Autumn Statement confirming that it will continue to regulate according to the existing legislative framework and that until it is clear whether the regime will be amended, there will be no change in the responsibilities of trustees and sponsors. Trustees and sponsors should continue to develop their plans as set out in the Regulator's April 2012 statement (see Legal update, Annual scheme funding statement 2012: technical provisions should reflect low yield environment).
For more on actuarial valuations, see Practice note, Actuarial valuations: key points for pensions lawyers. For a discussion of the current issues arising in scheme funding, see Article, The scheme funding cycle: current issues in practice.
Pensions Regulator: new statutory objective
The DWP will consult on introducing a new statutory objective for the Pensions Regulator to "consider the long-term affordability of deficit recovery plans to sponsoring employers" (paragraph 1.137, Autumn Statement 2012).
For more on the Pensions Regulator, see Practice note, Pensions Regulator: overview.
Comment
The reduction in the annual allowance was widely expected but the reduction in the lifetime allowance may have taken some by surprise. The further restriction of pensions tax relief is likely to do little to improve confidence in pension saving and will create additional administrative complexity for schemes. In addition, many in the pensions industry have commented that the proposals are likely to affect not just wealthy individuals, but moderate earners in final salary schemes.
Employers will welcome the consultation on whether to allow companies undergoing valuations in 2013 or later to smooth asset and liability values, particularly in light of the current adverse economic environment. However, it will be interesting to see how the proposed new statutory objective for the Regulator will sit with its existing statutory remit.