Summer Budget 2015 – pensions changes

Ron Burgess

The government today followed up its previous round of pensions reforms by developing the framework within which savers can draw their pension benefits flexibly as well as making further changes to the pensions tax rules.

The government has estimated that higher-rate tax relief on pension contributions in 2013-14 cost the Treasury in the region of £34.3 billion, and, inevitably, this disproportionately favoured high earners. In an effort to balance the books, the government has therefore announced that from April 2016, people earning over £150,000 will have the amount they can pay into a pension tax-free reduced. From April 2016, therefore, the annual allowance applicable to individuals with income above £150,000 (including in respect of any pension contributions made by or on behalf of them) will be adjusted so that for every £2 of income above £150,000, the limit on the amount of tax relieved pensions savings they can make will be tapered by £1, down to a minimum of £10,000 a year. To ensure that this change only relates to the higher rate tax payers who currently benefit most from the annual allowance, individuals with income (excluding pension contributions) below £110,000 will not be subject to the new reduced annual allowance.

The government will also reduce the lifetime allowance (LTA) for pension contributions from £1.25 million to £1 million from 6 April 2016. It will then be indexed to inflation from 2018 onwards. In addition, transitional protections will be introduced for individuals with pensions savings in excess of £1 million. The exact form of this is to be determined, but we would imagine it will be similar to the fixed/enhanced protections introduced following previous reductions made to the LTA. Alongside this, the government is also launching a consultation on reforming pensions tax relief to further encourage people to save, with options including a tax exempt system similar to ISAs and further alterations to the existing allowances.

As regards pensions flexibility, the government has also ring fenced a further £19.5 million to support its new advisory service, Pensions Wise, for individuals who look to draw down their pension benefits flexibly with access to the service extended to those age 50 and above. To help people access the new flexibilities easily, the government will consult on simplifying the pensions transfer rules (in particular so as to minimise charges and exit penalties) and will also formalise plans for a secondary annuities market in the autumn. From April 2016, provided the annuity provider agrees, people receiving income from an annuity may sell that income to a third party – the monies can then be taken directly or drawn down over time, with income tax payable at the marginal rate. The view from the government seems to be that for most people, holding their annuity would be the right decision – the changes will, however, allow people greater flexibility over how to access their DC pension pots.

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