Budget June 2010 commentaries - Pensions & Investment

"The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."

The ending of annuity purchase by age 75

As promised in the Conservative election manifesto, the Coalition Government has announced its intention to end the effective requirement to use a pension fund to buy an annuity by age 75.

This new measure will be introduced as of 2011/2012 and in the interim those reaching 75 on or after the 22 June will be allowed some breathing space enabling them to take advantage of the new legislation when it is introduced next year. 

By way of background under current rules, on reaching 75, individuals must either purchase an annuity with their pension fund or enter into an alternatively secured pension arrangement which has strict minimum and maximum income limits which are reviewed annually. 

Furthermore, on death post the age of 75 it is only possible to pass on the remaining fund to dependents in very specific circumstances and tax of up to 82% of the fund would become payable unless it was transferred to a charity.

Between now and 2011/2012, those individuals reaching 75 on or after 22 June will be able to release their tax-free cash and withdraw an income from the balance of their pension funds. 

Should they then die before they reach 77 they will be able to leave a lump sum on which tax charges will be limited to 35%.

This will enable individuals to defer decisions on annuity purchase and other retirement options until after the new rules are finalised.

Comment

Following the introduction of pensions simplification in April 2006 there was a brief period where it was possible for those reaching 75 to pass on their residual pension funds to other members of the same scheme without the imposition of taxes. 

However, the rules were changed in December 2006 as the then Government did not want pension schemes to be used as inheritance tax planning vehicles. 

The announcement that the rules will be amended as of 2011/2012 is welcomed and it is hoped that this will allow pension schemes to be cascaded down the generations. 

It should be borne in mind that we already have a lifetime allowance to control the amount that an individual can accumulate within pension schemes which acts as a tax valve ensuring that pension funds do not grow excessively. 

Restricting Pensions Tax Relief

Complex rules were introduced in the Finance Act 2009 to restrict tax relief on pension contributions for those earning more than £150,000, as of 2011/2012. 

When the final provisions were announced it was quite clear that they were likely to confuse members of pension schemes, their advisers, and pension scheme administrators alike.

It is not therefore surprising that the Government has announced its intention to abolish the rules before they are enacted, replacing them with simpler measures which will still enable them to restrict the tax relief given on pension contributions by £3.5 billion per annum. 

The most likely way that the Government will do this is by reducing the annual allowance, i.e. the maximum tax-free amount that individuals can pay into a pension, from £255,000 per annum to somewhere in the region of £30,000 to £45,000 per annum.

It seems that this measure will be accompanied by a reduction in the level of the lifetime allowance, i.e. the amount that individuals can accumulate within their pension funds during their lifetime, from £1.8m.

The Government proposes consulting with employers pension schemes, experts and other interested parties to determine how best to design a set of rules which enables them to achieve their objectives and address:

• valuing pension accrual in defined benefit (DB) schemes;
• ensuring basic rate taxpayers are not subject to any restrictions;
• support those with one-off spikes in pension accrual;
• simple compliance.

Comment

High earners benefitted from very generous tax allowances on pension contributions between 2006 and 2009 and it was quite clear that this had become an expensive relief for the last Government.

The complex new rules which would have applied from 2011/2012 looked unmanageable and we welcome any change which simplifies the system. 

However, these new proposals will spread the £3.5bn reduction in tax relief given on pension contributions over a lot more people.

Finally, the original proposals introduced restrictions, ‘anti-forestalling’ on tax relief on pension contributions in advance of the proposed changes which affected the last and current tax year. These will remain in force.