Well only if you had ignored the news reports, online news, newspapers, turned off all social media and headed off for an isolated retreat to chant and discover your inner peace could you have missed the trail of stories about what the Chancellor was going to announce on tax reforms in the Budget and then … he wasn’t.
The fun and games over the weekend with the Chancellors volte face on pension tax reforms makes the Budget slightly less interesting for pensions. Whilst the pensions tax reform news is headline grabbing as far as the budget goes, 6 April 2016 is still a significant date for pensions changes with other major changes coming into force.
What we do know will happen is a reduction in the Lifetime Allowance from £1.25m to £1m. Consideration needs to be given to whether members should apply for the appropriate new protection from this change. The Annual Allowance will also be changed from 6 April for high earners i.e. those with income above £150,000. Tapering of the Annual Allowance will kick in, which will mean it will be reduced by £1 for every £2 of excess income. Doing the math this means that anyone with income of at least £210,000 will have an Annual Allowance of £10,000, a reduction of £30,000.
April 2016 will deliver a clearer State Pension for future pensioners. The current basic State Pension and State second pension (S2P) will be abolished and replaced by a single-tier, flat-rate State Pension of £155- a week paid to everyone who has paid 35 years of National Insurance contributions (NICs). This change has caused some controversy with focus on the communication of the change (or lack of it) meaning that those affected are unprepared and in particular women born in the 1950s who, it is argued, should be given money equivalent to the amount they would have received if they’d have qualified for their state pension at the age of 60. Whilst the change will happen the debate will continue.
Contracting-out of the second state pension will be abolished from 6 April 2016, to coincide with the introduction of the new state pension. This will increase the national insurance contributions (NIC) required from employers currently offering a contracted-out scheme, as well increasing the contributions required from employees. Employers will see an increase in contributions of 3.4% of band earnings (earnings between £5,824 and £43,004 for the 2016/17 tax year) on their pensionable payroll and employees an increase of 1.4% of band earnings. Even with the small number of Final Salary Schemes open to active members that adds up to a lot of extra contributions and tax to the Treasury. There are ways for Schemes to be amended to balance the increased NI costs. We expect employers to be talking to their advisors about this. The end of contracting out doesn’t mean that trustees can just forget about it. They will still have a chunk of contracted out rights in their schemes. New secondary legislation just published covering the post, as some are calling it, “C Day” world including giving trustees options on how they should revalue these rights. A bit of thinking has still to be done around the Trustee table.
And whilst the main event of tax reforms might not happen there is still a lingering suspicion that there may be a bit of a sting in the tail and the Chancellor may announce something from left field. Could salary sacrifice go? Maybe but without the tax reforms I’m not sure I see the need to tinker unless NI contributions changes are now in the sights. What about a little change to the Annual Allowance proposals to lower the high earner threshold? I have seen some commentators suggest that might be on the cards. Our old friend and industry commentator Henry Tapper kindly gave me a name check in one of his blogs this week so I’ll return the favour. Henry points out that 2 weeks before the 2014 budget the then Chief Secretary to the Treasury, Danny Alexander, suggested that there would be no tampering with pensions. What happened? Pension Reforms. George has a bit of form when it comes to the unexpected. I will not be surprised by a surprise!