George Osborne delivered his Autumn Statement on 5 December and made further changes to the pensions tax régime – with effect from 6 April 2014:
- the Lifetime Allowance (LTA) (the amount of tax-advantaged savings that one may accumulate in total in pension arrangements) will be reduced from £1.5 million to £1.25 million – lower than when it was first introduced in 2006 – and
- the Annual Allowance (AA) (the value of pension savings that may be made during a year without incurring a punitive tax charge) will be reduced from £50,000 to £40,000.
Effect of the change in AA
While an annual contribution of £40,000 might seem beyond the expectations of most people, it will actually bite for a number of long-serving members of final salary schemes. For instance, an individual in a scheme with an accrual rate of 1/60th, 30 years’ service and a salary of £45,000 pa will find himself with an unexpected tax charge if his salary rises the following year to more than £49,258 (assuming Consumer Price inflation of 2%). Mid-ranking civil servants, beware!
Protection
The number of protection régimes continues to increase. Individuals affected by the original LTA, in 2006, were able to apply for Primary Protection or Enhanced Protection. Those affected by the reduction from £1.8 million to £1.5 million last year had the option of Fixed Protection. All have different rules attaching to them. Fixed Protection will continue to be available but the Government is now considering also a Personalised Protection régime and will be consulting on this.
Offsetting the effects of low Gilt yields
It seems likely that the Government will bow to pressure from business to modify the funding régime that applies to defined benefit pension schemes. Measures under consideration are:
- allowing schemes to smooth asset and liability values in actuarial valuations, so that the deficits are reduced at times of very low Gilt yields and
- requiring the Pensions Regulator to take account of the long-term affordability of deficit recovery plans.
It remains to be seen whether such measures will be of practical benefit. If a scheme has a large deficit and a recovery plan of several years, the Pensions Act 2004 still requires that that deficit be eliminated as quickly as possible. That implies that recovery plans will have to be shortened rather than contributions being reduced.
The other measure announced to address the effect of low yields applies to those individuals who are drawing a pension from their (defined contribution) fund by means of capped drawdown. Currently the amount that can be drawn down in any year is limited to 100% of the amount that would be available from an annuity. The Chancellor announced that this limit will be increased to 120%, meaning that such individuals will be able to take a higher income (although they will be depleting their remaining funds faster).
In summary then, the pensions measures announced in the Autumn Statement would seem to contain more negatives than real positives, in that the positives may look more inviting than they taste.