This Budget special summarises and comments on new announcements made in yesterday’s Budget Speech and accompanying documents which are of potential relevance to pension schemes and their members.

The new Lifetime ISA – a stalking horse for pensions?

The big surprise in the Budget was the announcement that a new Lifetime ISA product would be introduced in pretty short order.  Available from April 2017 for the under 40s, it will be a separate product to the normal ISA, with the raised £20,000 contribution limit applying across both.

Under the Lifetime ISA individuals will be able to pay in up to £4,000 per tax year until they are 50 and at the end of the tax year get a 25% savers bonus from the Government (equivalent to current basic rate tax relief).  The money can be taken from 60 without penalties, but importantly it will also be available without penalty in the following situations:

• On purchasing a first home in the UK (with a purchase value up to £450,000); and
• On terminal ill health and possibly for other life events

And as with a normal ISA the money can be taken at any time for other purposes, but in this case the bonus will be lost and a 5% penalty levied.  However, the Government is to explore whether emergency in tax year access can also feature, with the bonus not being lost so long as the funds are replenished by the end of the tax year.

Qualifying investments in a Lifetime ISA will be the same as for a cash or stocks and shares ISA.  Many of the current rules applicable to normal ISAs will apply to Lifetime ISAs.

Comment

The Lifetime ISA has been introduced explicitly to compete with pension savings; the Chancellor’s rationale being that his pension reforms have always been about giving more freedom and choice and that many have not had a good deal from the pension system.

We think that the Lifetime ISA could be attractive to many self-employed people as an alternative to pension savings – as does the Government.  Furthermore, some employees under age 40, who are basic rate tax payers, might prefer cash in lieu of pension contributions from April 2017 so they can put the cash in a Lifetime ISA, and some employers may respond by offering payment of such cash into a Corporate Lifetime ISA via payroll.  However, (currently at least) care would be needed to ensure that the anti-inducement provisions of the Pensions Act 2008 are not invoked.

Having run up against significant obstacles in the pensions tax debate, the Chancellor appears to have gone ahead with a voluntary vehicle that is very akin to the Pensions ISA.  If the Lifetime ISA takes off he may well come back at future budgets to further refine it in order that it competes even more with pension products – particularly for those over 40.

Response to “Strengthening the incentive to save” consultation is published

The response to last summer’s “Strengthening the incentive to save” consultation (see Pensions Bulletin 2015/30) has been published.  However, it is no more than a quick summary of the views of those who responded with no hint as to what the Government’s view might be on any of the issues that it raised.  By contrast, the Red Book states that the consultation found that the pension system is “inflexible and poorly understood” – part of the Government’s rationale for introducing the Lifetime ISA.

Nearly a fortnight ago it was widely reported that Mr Osborne was not going to make dramatic changes to the taxation of pensions in this Budget.  In his Budget Speech he stated that the wide consultation showed that “there is no consensus” about whether compulsory changes should be made to the pension tax system.  However, many appealed for stability in the pensions tax regime.

Comment

So a sort of silence falls on pensions taxation after all the noise and fury surrounding this consultation.  And now that the Lifetime ISA has been introduced it could well be that the Chancellor puts his efforts into making this a success in order to achieve his Pensions ISA ambition by the backdoor.

No further immediate tinkering to current pensions tax system

We can breathe at least one sigh of relief since, in this Budget, the Chancellor has not made any further reductions or alterations to the Lifetime Allowance, Annual Allowance, Tapered Annual Allowance or £10K Money Purchase Annual Allowance beyond those already known about (such as the drop in the Lifetime Allowance to £1m from 6 April 2016 and the introduction of the Tapered Annual Allowance from the same date).  Mr Osborne also stated that he would not be abolishing the tax-free lump sum either.

Comment

It is possible that there may now be a period of some stability in relation to pensions tax, which although welcome from one point of view, leaves us with an unbelievably complex regime, by complete contrast to that of the Lifetime ISA.

Statutory financial guidance providers overhaul

The Government plans to restructure the statutory financial guidance providers (the Money Advice Service, the Pensions Advisory Service (tPAS) and Pension Wise) to ensure that consumers can access the help they need to make effective financial decisions.  The proposed new delivery model includes:

• A new pensions guidance body, replacing tPAS and Pension Wise, to make sure that consumers can get all their pensions questions answered in one place, at all stages of their lives; and
• A new, slimmed down money guidance body charged with identifying gaps in the financial guidance market and commissioning providers to fill these gaps to ensure that consumers can access the debt advice and money guidance they need

The pensions guidance body will be accountable to the DWP and funded by existing levies on the financial services industry and from pension schemes.

The consultation runs until 8 June 2016.  The Government’s response is expected this autumn, and the delivery date of this new model will be no earlier than April 2018.

Comment

The Money Advice Service has received severe criticism over the years and on the morning of the Budget reports were circulating that the Money Advice Service was to be abolished.  So this announcement is not a great surprise.

Government embraces FAMR recommendations

The Treasury has welcomed the recommendations of the Financial Advice Market Review (see Pensions Bulletin 2016/10) and committed to implementing all of those for which it is responsible.  In particular, it undertakes to:

• Consult on introducing a single clear definition of financial advice to remove regulatory uncertainty and ensure that firms can offer consumers the help they need
• Increase the existing income tax and national insurance relief for employer-arranged pension advice from £150 to £500 from April 2017. The Government states that this will ensure that the first £500 of any advice received is eligible for the relief.  It is unclear whether the “cliff-edge” problem with the current limit is being addressed
• Consult on introducing a “Pensions Advice Allowance” which would allow people before the age of 55 to withdraw up to £500 tax free from their defined contribution pension to redeem against the cost of financial advice. This would mean that a basic rate taxpayer could save £100 on the cost of financial advice
• Ensure the pensions industry designs, funds and launches a “pensions dashboard” - a digital interface enabling an individual to view all their retirement savings in one place - by 2019

Comment

The increase in the advice exemption and the prospect of a clear definition of financial advice are to be welcomed.  However, as we noted in our previous reporting of these recommendations, the proposed “Pensions Advice Allowance” is likely to introduce yet more complexity for occupational schemes.

There is still a long way to go in finalising the pensions dashboard but, in principle, a single portal that enables an individual to view all their retirement savings in one place must be a good thing.  We also have our answer on how the costs of developing and maintaining such a dashboard would be met!

Public service employers to pay higher pension contributions and higher transfer values

In 2011, the Government made a commitment to review the discount rate used to set employer contributions, to unfunded public service pension schemes, every five years by reference to the Office for Budget Responsibility’s latest  long term expectation of Gross Domestic Product growth.

At its first review, this discount rate is being reduced to 2.8% above CPI inflation (from the 3% set in 2011) and employers will pay higher contributions to the schemes from 2019/20 as a result.

As also agreed in 2011, HM Treasury has, in a related exercise, looked at the discount rates underlying the cash equivalent transfer values payable by public service pension schemes and has, as part of Budget 2016, published a technical note on a revised basis to be used with immediate effect.  Increasing benefits (other than GMP) will also be discounted at a rate of 2.8% above CPI inflation, with consistent rates applying for GMP and non-increasing benefits.

Comment

Outsourcing companies operating under Fair Deal provisions will need to pay increased employer contributions as a result of this change, and as such contracts are often on small profit margins, this may well have an effect.  However, the change in the discount rate is small and the increases to contributions are not coming into effect until April 2019, so such companies will have a relatively long time to prepare.  The impact on transfer payments will be more immediate with the revised basis looking likely to result in increases of between 3% and 5% in value.

Pooled investment funds for LGPS

The Government has confirmed its plan (see Pensions Bulletin 2015/50) to establish a small number of British Wealth Funds for Local Government Pension Scheme (LGPS) administering authorities by 2018 by combining LGPS assets into much larger investment pools.  These are expected to deliver annual savings of at least £200-300 million.  The Government will also work to establish a national local government infrastructure investment platform.

Comment

As well as the cost savings noted above, these British Wealth Funds could become important investors in large infrastructure projects in a similar way that some large overseas public sector pension schemes operate.  This has two political attractions:  firstly it is a source of infrastructure investment that does not have to be found (directly) from the Treasury’s pockets and secondly the investment would be British-based rather than foreign.

Pension saving through salary sacrifice to continue to enjoy favourable tax treatment

The Government states that clearance requests from employers to HMRC for salary sacrifice arrangements – which enable employees to give up salary in return for benefits-in-kind that are often subject to more favourable tax treatment than salary – have increased by over 30% since 2010.  The Government is therefore considering limiting the range of benefits that attract income tax and NIC advantages when they are provided as part of salary sacrifice schemes.

However, the Government’s stated intention is that pension saving should continue to benefit from NIC relief when provided through salary sacrifice arrangements (along with reliefs for childcare and health-related benefits such as Cycle to Work schemes)

Comment

We have known since the Chancellor’s Budget last July (see Pensions Bulletin 2015/30) that the Government was actively monitoring the growth of such salary sacrifice schemes and this was one of the areas being tipped for the axe in the days before the Budget.  As anticipated, the higher than expected cost to the Exchequer has led to proposals to restrict the scope of such arrangements, but the decision not to extend the restrictions to pension savings is welcome as large numbers of employees in workplace pensions currently benefit from such arrangements.

Disguised Remuneration and EFRBS

The Government is introducing a package of measures to ensure that those who have used disguised remuneration tax avoidance schemes pay their fair share of tax and national insurance contributions.  Schemes involving individuals being paid in loans through structures such as offshore Employee Benefit Trusts are specifically mentioned.

Legislation will be included in the Finance Bill which will insert an additional Targeted Anti-Avoidance Rule (TAAR) intended to prevent a relief in the existing legislation from applying where it is used as part of a tax avoidance scheme, with effect from 16 March 2016.  The Government will also hold a technical consultation on further changes to the legislation including a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5 April 2019.  HMRC has published a technical note explaining these changes as part of the Budget material.

The Government also reiterates that it will keep unfunded Employer-Financed Retirement Benefit Schemes under review following the informal consultation announced at the Autumn Statement.

Comment

Clampdowns on tax avoidance schemes have been a recurring feature of recent Budgets in this time of austerity.  However it seems that new schemes have emerged that attempt to sidestep these clampdowns.  We hope that there is nothing in these new measures to cause difficulties for “run of the mill” bona fide UK pension schemes.

Pension flexibility minor amendments

A number of minor changes are being made to ensure that the pensions tax rules operate as intended following the introduction of pension flexibility in April 2015.  The changes will:

• Re-align the tax treatment of serious ill-health lump sums with lump sum death benefits, so that they can be paid tax-free when someone aged under 75 has less than a year to live but has already accessed their pension
• Make serious ill-health lump sums taxable at an individual’s marginal rate when paid in respect of individuals aged 75 and over
• Convert dependants’ flexi-access drawdown accounts to nominees’ accounts when they turn 23, so they do not have to take their funds as a lump sum taxed at 45%
• Remove the rule on paying a charity lump sum death benefit out of drawdown pension funds and flexi-access drawdown funds where the member dies under the age of 75 because the equivalent tax-free payment may be made as another type of lump sum death benefit
• Enable money purchase pensions in payment to be paid as a trivial commutation lump sum where the pensioner’s total pension wealth does not exceed £30,000 (this has been an option only for defined benefit benefits to date)
• Enable the full amount of a dependant’s benefit in a cash balance arrangement to be paid as an authorised payment even where the scheme must top up the remaining funds on the member’s death to meet the entitlement; and
• Remove what the Government says is unnecessary legislation relating to charity lump sum death benefits

These measures will come into effect on the day after the date of Royal Assent to the Finance Bill.

Comment

Permitting small money purchase pensions in payment to be trivially commuted is the most eye-catching of these changes.  The other amendments are minor and largely housekeeping.  They are intended to remove inconsistencies and provide clarity, thus making the tax system fairer and ensuring that the new pension flexibilities are working as intended.

Welcome NI relief for the self-employed – but will they all still build up State Pension rights?

First announced in the March 2015 budget (see Pensions Bulletin 2015/12), the Government has now confirmed that Class 2 national insurance contributions will be abolished from April 2018.  This is expected to deliver an average annual saving of £134 for 3.4 million self-employed people.  The Government has also indicated its intention to reform Class 4 national insurance contributions so that the self-employed will continue to build entitlement to the State Pension and other contributory benefits.  Further detail is expected in its response to a recent consultation “in due course”.

Comment

Precisely how such entitlement will be retained will be of great interest to the self-employed on very low earnings who from this April will build entitlement to the £155.65 per week new State Pension on as little as £2.80 per week in NICs.

Increase in personal tax allowance and thresholds

The income tax personal allowance will be increased from £11,000 to £11,500 and the higher rate threshold will be increased from £43,000 to £45,000.  In both cases these increases are from 6 April 2017.  The Upper Earnings Limit used for national insurance contributions will also increase to remain aligned with the higher rate threshold.

Corporation tax and CGT to reduce

The main rate of corporation tax will be reduced to 17% for the Financial Year commencing 1 April 2020.  This compares with the current rate of 20%, which, following the Summer Budget 2015 announcement was expected to reduce to18% in 2020.

Furthermore, from 6 April 2016, the higher rate of Capital Gains Tax will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10%.  However, as an incentive to invest in companies over property, the 28% and 18% rates will be retained for chargeable gains on the disposal of residential property (that does not qualify for private residence relief).  These rates will also be retained for carried interest.

Commercial stamp duty system changes from “slab” to “slice”

Following on from the changes made to the residential stamp duty system in December 2014, the Budget introduces similar measures to reform stamp duty land tax (SDLT) on non-residential property transactions – moving from the potentially distortive slab system where one tax rate is due on the entire transaction value to a much simpler slice system where SDLT is payable at different rates on the portion of the transaction value which falls within each tax band.

The new rates - coming into effect from midnight Wednesday 16 March - are 0% for the portion of the transaction value between £0 and £150,000; 2% between £150,001 and £250,000; and 5% above £250,000.  This is anticipated to cut the tax for many small businesses purchasing property, with over 90% of non-residential transactions expected to be paying the same or less.  Previously, SDLT was charged at 1% on the whole of the premium up to £250,000, with a range of higher non-residential rates applying if the premium was more than £250,000.

Comment

The implications of this change on pension scheme investments remains to be seen – the new charging structure is very different to the old, and the impact on valuations will therefore vary depending on the value of the transaction.

NICs now payable on termination payments

Currently, certain forms of termination payments are exempt from employee and employer national insurance contributions and the first £30,000 is income tax free.  This will change from April 2018 so that employer national insurance contributions will become payable on those payments above £30,000 that are already subject to income tax.  The purpose of this is to dis-incentivise employers who might otherwise manipulate the exemption rules to minimise tax and national insurance due.

Comment

The Budget policy costings show the Government expects to gain from this change £45m in 2017/18 with further sharply increased gains of over £420m for 2018/19 onwards, totalling £1.4bn over the 5 year projection.  So the numbers obviously speak for themselves as to why the Government has taken action.