It is perhaps unfortunate that this years Budget fell on the second day of the Cheltenham National Hunt festival. I am sure many honourable members were faced with a dilemma when wondering what the main event of the day was.
For the pensions industry there was a lot of betting going on but not on the gee-gees. With the pre-announcement that tax reforms were off the table (for the moment) there was a lot of speculation on what the Chancellor might do. Where was the smart money? A change to Salary Sacrifice? A change to the Lifetime Allowance limits? Tax reform light? The demise of the Money Advice Service (MAS)? OK the last one was not fair as that was pre-announced yesterday. So when the Chancellor stood up was he the bookies friend or foe? Well 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 up to £4,000 can be paid 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 too much 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. It’s PISA light. It is TEE (or EEE if you 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 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 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. A consultation will take place regarding a new body to take on its. Another body will be created to take on the money guidance remit.
Salary Sacrifice lives to be beloved by HR and payroll departments (and of course employees) for a bit longer. It is in the Governments cross-hairs though and another consultation will look at it.
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. A further 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.
Turning back to Cheltenham. It is perhaps unkind to think that the speech would be timed to allow attention to return to the 1:30 Neptune Investment Management Novices’ Hurdle but it was pretty close with the Chancellor sitting down at just after 1:30pm. Now if it wasn’t for all those pesky interruptions from back benchers.