George Osborne has delivered the first Conservative budget since Kenneth Clarke declared a ‘Rolls Royce recovery’ which was ‘built to last’ in November 1996 and increased the tax on alcopops by around 40%.

1996 was a very different time in the pensions industry. Although the provisions of the Pensions Act 1995 were starting to come into force, DB schemes were typically experiencing funding surpluses and there was generally much less public interest than exists today. The only issue of any real relevance in respect of pensions in Mr Clarke’s final budget was that the ‘earnings cap’ (i.e. the maximum level of earnings for which pension provision could be made with tax relief) was increased to £84,000.

Fast forward to 2015 and pensions is a much hotter topic.

Changes to the annual allowance for higher earners

In today’s Budget, Mr Osborne has announced that the Government plans to reduce the ‘annual allowance’ (i.e. the annual limit on the amount of pension savings which an individual can make in a registered pension scheme) from £40,000 to £10,000 for certain higher earners. The Budget confirms that this change is being made, in part, to fund reforms to the inheritance tax regime.

The mechanism by which this change will be implemented will be announced in due course in a Finance Bill. The Budget explains that the Government’s intention is to taper the annual allowance for those with adjusted incomes (i.e. taxable earnings and pension contributions, excluding charitable contributions) over £150,000. For every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.

The Government anticipates that only 1% of taxpayers are caught by the earnings threshold that will apply and that even fewer will actually be affected by the measure. Supporting documents released with the Budget state that the Government believes the change will raise over £1.2billion by 2020/21. However, in its analysis, the Office for Budget Responsibility states that “this costing receives a ‘very high’ uncertainty rating”.

Consultation on reform of pensions tax relief

Of potentially wider significance, a consultation has also been launched to examine whether pensions tax relief could be simplified and reformed to encourage more people to save for their retirement.

The consultation states that the Government believes any reform should meet some key principles. It should:

  • be simple and transparent;
  • allow individuals to take personal responsibility for their retirement savings;
  • build on the early success of automatic enrolment; and
  • be sustainable.

The consultation sets out a series of questions which the Government hopes will elicit suggestions for changes to the system. No specific changes are proposed but a range of suggestions are made such as moving to a tax relief system more like that which applies to ISAs.

Pension flexibilities

The Government has also looked to build on the pension flexibilities which were announced in last year’s Budget. A nationwide marketing campaign for Pension Wise will be launched and the service will be extended so that it provides guidance to those aged 50 and over.

A further consultation will be issued by the Government before the summer which will look at making the process for transferring between schemes quicker and smoother and will discuss whether it is appropriate to impose a legislative cap on early exit penalties for over 55s.

Another aspect of the new flexibilities was that pensioners would be able to cash in their annuities. These changes will now be delayed until 2017 and plans for a secondary annuity market will be announced by the Government in the autumn.

The Budget also includes a reminder of the announcement made in the Autumn Statement 2014 that the rate of tax which applies on lump sums paid by a pension scheme following the death of someone over 75 will be reduced from 45% to the recipient’s marginal rate with effect from April 2016.

This post was edited by Stephen Maynard. For more information, email

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.