Consulting Actuaries

A sigh of (tax) relief

Royal London Consulting Actuaries

18 March 2016

There are no new proposals in the Budget which significantly impact the DB pension world.

In particular, the Chancellor has backed down from making radical changes to the pension tax system. However, the introduction of the Lifetime ISA (LISA) is potentially the first step on the road to change. This new initiative is a direct rival to DC pensions and could undermine the huge progress just made through Auto Enrolment in ensuring young workers have savings for retirement.

Lifetime ISA

From April 2017, those aged between 18 and 40 will be able to open a LISA and pay in up to £4,000 each tax year. Contributions will be made from the individual’s own cash after tax and NICs. The Government will add a 25% bonus. This additional bonus will be payable each year between the ages of 18 and 50, so the maximum bonus is £32,000. The LISA will sit within the overall ISA limit (£20,000 for the tax year 2017/18).

This new savings vehicle is intended to "help young people to save flexibly for the long-term throughout their lives”.

People will be able to withdraw the money, including the Government bonus, tax free and use it to:

  • purchase their first home, or
  • supplement their retirement income from age 60 (or on diagnosis of terminal ill-health).

The Chancellor indicated that people will be able to withdraw money before age 60 for other purposes, however the Government bonus will be lost, including any interest or growth on the bonus. In addition there will be a 5% charge.  It appears that the Government has designed an age discriminatory product with a 24% exit charge!

The LISA will sit outside the Lifetime Allowance for pensions. Consequently, this could spell the end of Additional Voluntary Contributions and SIPPs for basic rate tax payers under age 40.

There is also a risk of confusion; will people use the LISA rather than pensions to save for retirement? How will they know which is right for them? People who opt out of pensions in favour of a LISA will lose the contribution from their employer and the chance to build, from tax free earnings, a tax free lump sum.

The final details of the LISA will be published later in the year.

Financial advice

The Government intends to consult on a “Pensions Advice Allowance”. This will allow individuals under 55 to withdraw up to £500 tax free from their DC pension to help with the cost of financial advice. Many people will have both DC and DB pension entitlements and presumably the advice will take all pension entitlements into account. This will make advice more affordable and we welcome this proposal. However, what about individuals with only DB pension provision?

We also welcome the proposal to increase the tax and National Insurance relief from £150 to £500 for each employee where the employer pays for the financial advice.

Salary sacrifice

Salary sacrifice appears to have survived.   Whilst the Government is considering what benefits it can be used for, the intention is that pension saving should continue to benefit from tax and National Insurance relief when provided through salary sacrifice.

Income tax

The personal allowance will increase to £11,500 from 6 April 2017, with the point at which the higher rate applies increasing to £45,000 at the same time. This is good news for most individuals. However the Scottish Government has not decided if the increase to the higher rate will apply to those resident in Scotland.

Lifetime and Annual Allowances

The previously announced changes to the lifetime and annual allowances are going ahead as planned.

  • The lifetime allowance will reduce from £1.25m to £1m from 6 April 2016.
  • The annual allowance will remain at £40,000 for the 2016/17 tax year, but with the ludicrous tapered annual allowance coming in for high earners. Individuals benefiting from continuing DB accrual may be affected by this complicated taper.

If you have any questions on these issues please contact us.