As heralded widely in the run-up to the General Election, in the Summer Budget, delivered on 8 July, George Osborne confirmed the introduction of a transferable £175,000 Inheritance Tax allowance for a family home, on top of the existing threshold. This is to be paid for by further restrictions on tax-relieved pensions saving.
Annual allowance changes
Individuals whose earned income, including employee and employer pension contributions, exceeds £150,000 per annum will have their Annual Allowance (“AA”) reduced below £40,000 with effect from 6 April 2016. For each £2 of earnings above the £150,000 threshold, the AA will be reduced by £1, down to a minimum AA of £10,000 for those earning more than £210,000 pa. However, the restriction will not apply to individuals whose earnings excluding pension contributions do not exceed £110,000.
At present, contributions (or defined benefit accrual) are measured during a Pension Input Period (“PIP”) which is specific to each pension scheme. The contributions paid during any PIP ending in a particular tax year are assessed against the AA in relation to that tax year. To simplify the introduction of this new restriction, all open PIPs were closed on 8 July and every pension arrangement will now have a “mini-PIP” running from 9 July until 5 April 2016. Thereafter all PIPs will coincide with the tax year.
To ensure that savers are not disadvantaged by this unexpected change in their PIP, for the 2015-16 tax year most people will have an AA of £80,000 plus any carry-forward that is available. The exceptions are those who have accessed their DC funds flexibly from 6 April 2015 and so had their DC AA reduced to £10,000.
Pensions taxation
Lest you think that the “simplified” pensions tax regime introduced in 2006 might be getting just a touch complicated, the Government has also issued a Green Paper on pensions taxation, consulting on wholesale reform of the existing system. Its major proposal is that pensions be taxed in the same way as ISAs (ie no tax relief on contributions but tax-free accumulation and no tax payable on benefits in payment). Quite why anybody would choose a pension scheme, locking his money away until age 55, rather than an ISA with immediate access, escapes us for the moment.