Technical Bulletin - July 2015
Technical Bulletin- 31 July 2015
In a world where change is the only constant, we help you keep on top of the developments in financial services regulation, legislation and environment.
Here are July’s developments:
1. The Summer Budget
George Osborne stood up in the House of Commons to deliver his first budget as a Chancellor of a purely Conservative party. Amongst his announcements with interest for financial services, there were some we knew of beforehand, some we suspected, and some were a complete surprise.
LTA cut to £1m from April 16 confirmed
There were some who hoped this LibDem policy might be removed – or indeed that the lifetime allowance itself would be withdrawn – but these hopes were dashed. Instead, the Treasury confirmed the lifetime allowance will be cut to £1 million from April next year.
Annual allowance to be cut for high earners
Again, this was a change we knew of before the Summer Budget. Those with an ‘adjusted income' of over £150,000 will have their annual allowance cut from the 2016/17 tax year, creating a ‘buy now while stocks last’ pension-funding window this tax year.
The standard £40,000 annual allowance will be cut by £1 for every £2 of ‘adjusted income' over £150,000 in a tax year. The maximum annual allowance reduction is £30,000, giving those with an income of £210,000 or above a £10,000 annual allowance. Carry forward of unused annual allowance will still be available, but only the balance of the reduced annual allowance can be carried forward from any year where a reduced annual allowance applied.
The definition of ‘adjusted income' complicates the test of whom this change affects. It is based on broadly the total of:
- the individual's income (without deducting their own pension contributions); plus
- the value of any employer pension contributions made for them.
The reduced annual allowance won't normally apply where an individual's net income for the tax year is £110,000 or less. However, anti-avoidance rules will apply so any salary sacrifice set up on or after 9 July 2015 will be included in the threshold definition.
So someone with £109,000 salary and receiving an employer pension contribution using carry forward of £41,000 (bringing the total income to £160,000) will retain the full annual allowance, but someone earning £120,000 with an employer contribution of £40,000 will not.
Aligning pension input periods with tax years
As a result of these new annual allowance rules, the Government has decided to align pension input periods (PIPs) with tax years. Although this is a welcome simplification it will remove scope for some tax planning. And like most changes, there are complicated transitional rules to understand.
The rules are:
- all open PIPs will end on 8 July 2015 and count against the 2015/16 annual allowance;
- a new (post-Summer Budget) 2015/16 PIP will run from 9 July 2015 to 5 April 2016; and
- all PIPs are now fixed and can no longer be amended.
This means some plans could have as many as three different PIPs in the 2015/16 tax year.
The transitional PIP rules prevent clients who were already saving against their 2016/17 annual allowance having two years' pension saving counted against a single year's annual allowance. This clearly would have been unfair. So there will be a special annual allowance of up to £80,000 for 2015/16 - potentially giving some clients an extra annual allowance of up to £40,000 to use before 6 April 2016.
Here's how the special 2015/16 transitional AA rules work:
- 'Pre-summer budget' PIPs, and other 2015/16 PIPs that ended before 9 July 2015, will have an annual allowance of £80,000
- 'Post-summer budget' PIPs will have any unused part of the 'pre-summer budget' £80,000 annual allowance - up to a maximum of £40,000
In addition there will still be the opportunity to pay more than the annual allowance by making use of carry forward from up to three earlier years.
Clients subject to the reduced £10,000 money purchase annual allowance, because they have flexibly accessed their pension savings, will also have a double allowance of £20,000 for 2015/16. Of course, these clients do not have carry forward on top.
Defined benefit schemes will have special rules to avoid having to get valuations done on 8 July 2015. The input amount for the pre and post-summer budget PIPs will be proportions of the total pension input amounts for all PIPs that end in 2015/16.
The Intelligent Pensions View
These changes give those clients who have already saved into their pension this year a second bite at the annual allowance this tax year.
For those with the earnings or a supportive employer - who are not concerned about the pending lifetime allowance reduction - it may be too good an opportunity to miss, particularly for high earning clients facing a reduced annual allowance (potentially as low as £10,000) from 2016/17.
Tax on lump sum death benefits
The Chancellor confirmed lump sum death benefits for clients who die after the age of 75 will be taxed at the beneficiary’s marginal rate of tax from 6 April 2016, rather than 45% (as currently happens). However other recipients, notably trusts, will receive lump sum death benefits subject to 45% tax.
If the death benefit is paid to the member’s nominated beneficiary or beneficiaries as regular income, it will be subject to income tax at the beneficiary’s marginal rate of tax, as is the case now.
The nil-rate band has been frozen at £325k for another five tax years to 2020/21. However, a property nil-rate band will be phased in over the same period and will apply to property left to children or grandchildren. This will first become available in 2017/18 at £100,000 and increase gradually to £175,000 in 2020/21. It will then increase in line with CPI. However the full amount will not be available to those with estates exceeding £2m.
Like the existing nil rate band the new property nil rate band can be transferred between spouses or civil partners. This means a married couple could pass £1m in 2020/21 to their children tax free on death provided the family home is worth at least £350,000, saving £140,000 in IHT. Because the property nil rate band will not apply to lifetime transfers this could lead some clients to reconsider how they use their pension funds for IHT planning.
Strengthening the incentive to save – a Treasury consultation on pensions tax relief
As part of the Summer Budget papers the Treasury launched a consultation on whether and how the pensions tax relief system could be redesigned. The Treasury claim nothing has been decided and all options are still on the table. But it did outline the costs involved in giving tax relief, and there is no doubt reducing its expenditure is the main force behind this consultation. One idea is to move to an ISA-style system (possibly with upfront incentives), but the concept of a straight 30% tax relief (alongside the removal of the lifetime allowance) is also being discussed.
The difficulty is fitting the defined benefit model in with any of the suggested changes, with the possibility that defined benefit schemes are left out of any reform.
2. Lasting Powers of Attorney - New forms
Parliament has recently made amendments to the forms used to create Lasting Powers of Attorney. The Lasting Powers of Attorney, Enduring Powers of Attorney and Public Guardian (Amendment) Regulations 2015 intend to simplifying the process of making and registering a Lasting Power of Attorney. A key element is the removal of the requirement for two certificate providers. Execution of existing forms must occur before 1 January 2016.
3. Consultation on exit penalties
The Treasury launched a consultation at the very tail-end of July on pension transfers and early exit penalties. It says wants to make sure people can access the new pension flexibilities easily, and at reasonable cost. The consultation is seeking responses on options to address possible barriers to people switching their pensions to access the new freedoms including –
- excessive early exit charges
- the process for transferring pensions from one scheme to another, and whether this process can be made quicker and smoother; and
- the circumstances in which someone should seek financial advice when making certain transfers.
4. New transitional protections
In its Pension Schemes Newsletter 70, HMRC confirmed two new transitional protections will be introduced alongside the reduction in the lifetime allowance to £1 million to make sure this change is not retrospective.
The two new protections regimes will have the same conditions as the previous fixed and individual protections. The key change is, though, individuals will not need to notify HMRC in advance where they want to rely on fixed protection or have three years to apply for individual protection. Instead, HMRC is considering options around removing the deadlines for applying for these protections. Details are expected later in the summer.
We hope you find the above information helpful and useful. If you have any questions or need further details just get in touch: