Before this year’s budget I was asked if anything relating to pensions would surprise me. My answer was that no surprise would be a surprise. On previous form the Chancellor has been known to pull a rabbit out of the hat. Remember in 2014 when, two weeks before the budget, the then Chief Secretary to the Treasury, Danny Alexander, suggested that there would be no tampering with pensions. What happened? Pension Reforms.
So even with the pre-budget announcement that fundamental tax reforms were off the table (for the moment) there was a lot of industry speculation on what the Chancellor might do. Would there be a change to Salary Sacrifice? More tinkering with the Annual and Lifetime Allowance limits? Could we see Tax reform light? Perhaps the demise of the Money Advice Service (MAS)? OK the last one was not fair as that was pre-announced the day before the budget. Well we certainly got our surprise. Let’s see not just what he said but what was contained in the detail of the HMT papers released after the speech.
Well the headline grabber is LISA or to remove the acronym the Lifetime Individual Savings Account. Available from April 2017 and aimed at 18 – 40 year olds who can pay in up to £4,000 each year (which counts towards the (new) overall £20,000 ISA limit). The Government will add a bonus of 25% of what is contributed up to a maximum of £1,000 a year (this bonus stops at age 50). So what can you do with this new ISA. Well firstly, it sits beside the right to buy ISA and can be used towards a first house purchase (this is a pensions article so I won’t dwell on the technicalities of this). Alternatively, you can take it from age 60 and all the money will be tax free. You can still take money before age 60 but you will lose the Government bonus, the interest and growth on that bonus and incur a 5% charge.
So is this not just a Pensions ISA (PISA)? Well, yes and no. At this stage it’s PISA light. It is TEE (or EEE if you are a basic rate taxpayer or are below the lower tax threshold) but it is restricted in who can take it out. It is perhaps best looked at as the start of the soft closure of the personal pension as a retirement savings vehicle and the first steps towards the Chancellors goal of the true PISA tax model. It does not appear to be a good fit with personal pensions, for example with personal pensions you can take benefits at age 55 and with LISA at age 60 (without reductions). It is also not clear what the impact will be on auto-enrolment and opt out rates for those eligible for a LISA. There is also the lack of a facility for employer contributions to LISA. Notwithstanding this I am sure that there will be an evolution toward the LISA/PISA model as a workplace savings vehicle, possibly within the Auto-enrolment framework, when the time is right.
So was that it? Not quite. A few other items got put into the devil of the detail.
We knew about the demise of MAS (which has also taken with it Pension Wise and the Pensions Advisory Service). This will lead to the creation of two new bodies responsible for pensions and money support, respectively. The pensions body will combine The Pensions Advisory Service, Pension Wise and parts of the MAS service in a single “one stop” guidance service.
Salary Sacrifice lives to be beloved by HR and payroll departments (and of course employees) for a bit longer. It is in the Governments crosshairs though and another consultation will look at its continued existence. Trustees should keep an eye on this and start early discussions with employers should the Government head towards changes which would affect their schemes.
On the back of recommendations in the Financial Advice Market review from April 2017 the amount that companies can pay towards the cost of an employees pension advice before they are subject to a benefit-in-kind tax charge will increase from £150 to £500. Yet another consultation will be held about allowing DC members to withdraw up to £500 tax free against the cost of advice.
The recommendation in FAMR for a Pensions Dashboard was endorsed with a target date in 2019. A challenging timescale for the industry.
There have been the following technical changes to support DC flexibilities under Pensions Freedom which will be introduced in the Finance Bill 2016. They will have effect from the day after the Finance Bill 2016 receives Royal Assent.
- For flexi-access drawdown, nominees no longer having to take remaining funds as a lump sum with an accompanying 45 per cent tax charge.
- Legislation will align the tax treatment of serious ill-health lump sums with lump sum death benefits and allow individuals who meet the criteria for a serious ill-health lump sum but who have already accessed their pension to take the remaining funds as a serious ill-health lump sum.
- A serious ill-health lump sum paid to an individual who has reached age 75 will be taxable at his or her marginal rate rather than the current 45% rate.
- A trivial commutation lump sum will be permitted to be paid out of a money purchase scheme pension that is already in payment.
- Where a member of a cash balance arrangement dies and the scheme must top-up the remaining funds to meet the entitlement of the member’s beneficiaries to an uncrystallised funds lump sum death benefit due under the scheme rules, the full amount of the lump sum death benefit will be an authorised payment.
When we look back we cannot say that the budget was quiet on pensions. What a surprise.