The Chancellor presented his budget on 16 March 2016. In comparison to some of his recent budgets, no major changes to pensions were announced.
A few weeks before the budget, it became apparent that the Chancellor had rejected some sweeping changes to the pensions tax regime (including the ‘pensions ISA’). These changes had been widely reported in the press. However, the Chancellor did announce a new Lifetime Individual Savings Account (or Lifetime ISA) for those under the age of 40. This will come into effect from 6 April 2017 and will allow people to save in a more flexible way than a pension, to provide retirement benefits or to buy a home. The government will add a bonus of 25% to contributions into the Lifetime ISA, with a maximum annual contribution of £4,000. Contributions can continue up to age 50. Lifetime ISA savings count towards the overall ISA limit, which is being increased to £20,000 from 6 April 2017.
When the Lifetime ISA is used to provide retirement benefits, withdrawals can be made tax-free from age 60. If money is withdrawn earlier (other than for a house purchase) the bonuses from the government will be lost and a 5% penalty imposed. In the event of serious ill-health, it will be possible to withdraw funds in full before age 60.
A number of parallels can be drawn between the Lifetime ISA and pension schemes. Indeed, the Chancellor even likened the Lifetime ISA to a pension scheme (for a basic-rate taxpayer), with advantage of all withdrawals being tax-free. The bonus operates like tax-relief on pension contributions and there are restrictions on when money can be withdrawn (60 for the Lifetime ISA, but 55 currently, for pensions). The Lifetime ISA can run alongside pension saving, but some people might think of it as an alternative. Indeed, the government might be hoping that it is more attractive than pension saving to some people, thereby offering an alternative incentive to save for retirement. (For that reason, the Chancellor also announced a ‘help to save’ scheme for those on low incomes, which offers a more generous bonus of 50%.) This is against the backdrop of automatic enrolment which applies to the majority of people who are employed. By the beginning of 2018, eligible employees will be put into a pension scheme with contributions of at least 2% of their band earnings, increasing to a minimum of 8% (including tax relief). State Pension aside, it is clear that the government is set on a path towards making retirement provision the individual’s responsibility.
The Lifetime ISA might also be the first steps towards moving to a different form of pensions tax relief. If a pensions ISA is announced at some point, is the Lifetime ISA the model for it?
The budget did not make any changes to the availability of salary sacrifice for pension schemes. The government is concerned about the increase in the number of salary sacrifice arrangements, which, of course, affects tax revenue, so allowing some benefits to be provided by salary sacrifice might cease to be possible at some point in future. However, it appears that, for the moment, pension provision is not one of the benefits affected (along with childcare and health-related arrangements like cycle to work).
People increasingly have many jobs and accordingly many pension schemes with different providers, sometimes with different types of benefits. To help people know what they have built up – and to allow them to assess whether they are on target to have enough money in retirement – a system to summarise all pension savings in one place has been put forward by the Chancellor. This is known as a pensions dashboard. Variations of the dashboard already exist in Sweden, Denmark and the Netherlands. For the UK, the government wants to launch this by 2019.
The Money Advice Service
It will no longer be possible to ‘Ask Ma’, as the Chancellor has announced that the Money Advice Service will disappear. In fact, three bodies, Pension Wise, the Pension Advisory Service and the Money Advice Service will be replaced by a new body, providing a “more independent and impartial service”. The Treasury has admitted that the Money Advice Service branding is misleading because regulated advice – in the sense of a personal recommendation – is not provided. Pension Wise, the Pension Advisory Service and the Money Advice Service will all continue to exist for at least two more years.
The Financial Advice Market Review
Two days before the budget, the report on the Financial Advice Market Review was released. This included 28 recommendations, many of which were to hold further consultations. One such recommendation, which was referred to in the budget, was for people under age 55 to be able to withdraw up £500 tax-free from their defined contribution pension savings, to pay for financial advice. The consultation on this will consider the earliest age from people will be able to do this.
A further recommendation from the Financial Advice Market Review which was confirmed in the budget, is to increase the current level of relief for employed arranged pension advice from £150 to £500, probably from April 2017.
Insurance Premium Tax
From 1 October 2015, Insurance Premium Tax (IPT) increased from 6% to 9.5%. This applies to general insurance policies such as group private medical insurance, but not to group life assurance or group income protection. In the budget, the Chancellor announced a further increase in IPT to 10%, with effect from 1 October 2016. This means that a £10,000 premium (including IPT) in 2014, increased to £10,330 in 2015 and will become £10,377 later this year.
As ever, there were many other changes, often quite technical, buried in the details of the budget. Many of these changes relate to drawdown, dependants’ pensions and bridging pensions. One particularly welcome change is to simplify the tests that need to be carried out when a dependant’s scheme pension becomes payable, as the current rules were too complex.
No immediate action is required as a result of this budget. The Lifetime ISA will be a retail product, not affecting employers, while the other changes are subject to consultation or are to be introduced in some way into the future. There are, in any case, a number of important changes coming into effect from 6 April 2016 (such as the reduction in the Lifetime Allowance, the introduction of the tapered Annual Allowance for high-earners and the new single-tier State Pension) which should be occupying Trustees and governance committees at the moment.