Changes to the lifetime allowance and the widely trailed extension of the Budget 2014 pension flexibilities were the two main pension highlights to be announced in the Chancellor’s 2015 budget today.
Lifetime Allowance (LTA) reduction
What is the LTA?
Currently, members receive favourable tax treatment on pension savings within a registered pension scheme up to the LTA of £1.25 million. On savings in excess of that sum, members incur tax charges of up to 55%.
What has been announced?
With effect from April 2016, the LTA will be reduced to £1 million. There were a number of increases in the limit before 2010, but since then the value of the LTA has been gradually eroded from £1.8 million to today’s announced figure. However, there is some comfort for affected members: the Chancellor has pledged to ensure that the LTA is linked to inflation from 2018.
What will be the effect?
The latest reduction in the LTA is expected to save around £600 million a year for the Government, but is expected to affect fewer than 4% of pensioners.
In the past there have been a number of transitional measures and protections which HMRC have put in place to protect members whose pension pots would be caught by reductions in the LTA.
The aim of such protections has been to ensure that tax charges are not unfairly imposed on members impacted by LTA reductions. We would expect similar protections to be forthcoming to help members affected by the latest LTA reduction. Pension scheme members should note that the protection system in place is complex and the type of protection members can claim will differ according to an individual’s circumstances.
Extension of Budget 2014 flexibilities for existing annuitants
With the Government and trustees still grappling with the upcoming implementation of pension flexibilities announced in last year’s budget for members over 55 but not yet retired (see our previous blog posts), the widely trailed extension to these flexibilities to allow existing pensioners to release a cash value from their existing annuities was also formally announced today.
Who will the proposals affect?
The change is expected to affect up to 5 million pensioners.
How will it work?
The proposals are expected to work by allowing pensioners to sell the income they receive from their annuities to a buyer. Any income received by pensioners will be taxed at their marginal rate rather than the existing 55% rate.
However, there are a number of questions that are still to be answered: who will be eligible to buy these annuities? How will they be valued? A further Government consultation entitled ‘Creating a secondary annuity market’ has today been released alongside the Budget announcement to consider how this would work in practice, what consequential tax changes there would be and how consumers should be protected.
What advice will be given?
The Chancellor again made a promise to ensure those affected receive the correct guidance and advice and the Government is expected to work closely with the Financial Conduct Authority on this matter. It is likely that any proposed system will mirror certain elements of the guidance and advice regimes due to be used alongside the 2014 Budget changes, but we await further clarification from the Government.
Trustees will no doubt receive queries from pensioners who will have been following today’s developments closely. However, these proposals are very much in their infancy and care (and advice) should be taken before commenting further at this stage.
Members affected by the reduction to the LTA should await further guidance from HMRC about transitional protections.