George Osborne's 2015 mini-budget made further changes to the pensions tax regime and the new DC flexibilities announced in the March 2014 Budget. The announcements were largely unsurprising and widely anticipated.
Reduced annual allowance for high earners
As expected, the Chancellor confirmed that from 6 April 2016, pensions tax relief will be restricted for high-income individuals. The measure will be effected by tapering the annual allowance of individuals earning £150,000 or more (including pension contributions). The taper works by reducing an individual's annual allowance by £1 for every £2 the individuals earns over £150,000, subject to a maximum reduction in the individual's annual allowance of £30,000. An income floor will operate so that individuals earning £110,000 or less (excluding pension contributions) will not be subject to the taper.
Individuals earning £210,000 and over will see their annual allowance reduced to just £10,000. In addition, individuals earning £210,000 and over who have flexibly accessed their pension rights and thereby triggered the money purchase annual allowance will not have any non- money purchase annual allowance: Their non- money purchase annual allowance will be limited to £30,000 which will have already been reduced to zero by the taper.
Treasury consultation on changes to pensions tax relief
The Treasury is consulting on possible changes to the existing pensions tax regime and considering whether to move away from the current "EET" (exempt, exempt, taxed) model of tax relief to a "TEE" model (taxed, exempt, exempt). The consultation stems from concerns over the increasing cost of pensions tax relief, the need to encourage pension saving, increasing longevity and the move towards defined contribution pension provision. The consultation is due to close at the end of September and is considered in greater detail in a separate article elsewhere in this Bulletin.
Additional clarity on DC pension flexibilities
As you will know, the Government's call for evidence on the proposed introduction of a secondary annuities market closed in June and the Government has indicated that it will issue its response in Autumn 2015. In the meantime, the timetable for implementing the initiative will be pushed back from 2016 to 2017 to allow sufficient time to develop appropriate consumer support and safeguards.
Elsewhere, the Government has indicated that access to the Pension Wise service will be extended from those currently aged 55 and over to those aged 50 and over. It is still unclear as to how many retirees are actually using the service but initial figures indicate that take-up has probably been lower than the Government originally anticipated.
The Government is also expected to consult on the issue of unfair exit penalties levied on individuals seeking to access the new DC flexibilities. The Government has indicated that it might seek to impose a cap on such exit charges in an effort to speed up and improve transfers between pension schemes.
Lifetime Allowance
The Government has confirmed that the lifetime allowance will be reduced to £1m from the current £1.25m level from 6 April 2015. As with previous reductions in the lifetime allowance, protections will be made available to those adversely affected by the change.
It is expected that the legislative changes will be implemented in the summer Finance Bill 2015. The Bill was introduced into Parliament on 14 July 2015 and it is expected that it will receive Royal Assent in September or October.
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