From 6 April 2016 the Annual Allowance for those with "adjusted incomes" over £150k will be reduced down to a minimum of £10k. "Adjusted income" includes taxable earnings and all pension contributions. For every £2 of adjusted income over £150k, the Annual Allowance will be reduced by £1. Those with income (excluding pension contributions) below £110k will not be subject to the Tapered Annual Allowance. The reduction in the annual allowance was widely predicted, given the Conservative party manifesto.
As a consequence of the new taper provisions, pension input periods (PIPs) are aligned to tax years. All PIPs open on 8 July 2015 close on that date, with the next (mini) PIP running from 9 July to 5 April 2016. All subsequent PIPs will then be concurrent with tax years 2016/17 onwards. To accommodate the changeover, tax year 2015/16 is split into two periods, firstly 6 April 2015 to 8 July 2015 and then 9 July 2015 to 5 April 2016. There is transitional protection for savers who might otherwise be affected by the alignment of their PIPs. Calculation of pension inputs across the two periods in tax year 2015/16 for cash balance and defined benefit arrangements will be modified, using an apportionment basis across both periods.
Taxation of lump sum death benefits
Following on from an announcement made last year, the Government confirmed that legislation to reduce the rate of tax on certain lump sum death benefits paid on or after 6 April 2016 (i.e. on the death of a member over age 75 from 45% to the recipient's marginal rate of income tax) will be introduced in the Summer Finance Bill 2015. This will apply where the lump sum is paid directly from the scheme to an individual who is the ultimate beneficiary (so the rate remains at 45% where the lump sum death benefit is paid to a trust or company).
Consultation on possible reform of pensions tax relief
The Government is consulting on various options for reform to encourage savings into pensions in the longer term, closing on 30 September 2015. Both fundamental and less radical changes are discussed, such as taxing pensions upfront, rather than when paid out (i.e. a taxed-exempt-exempt system like ISAs).
The free and impartial guidance service is to be extended to those aged 50 and above (down from 55). The government is also launching a marketing campaign to raise further awareness of the service.
To facilitate accessing pensions flexibly, a consultation in relation to making the process of transferring pensions from one scheme to another smoother, quicker and without excessive exit penalties is to be launched before the summer. A legislative cap on exit charges for those aged 55 and over may follow.
Annuity Transfer Market
Plans for a secondary annuities market remain (details will be issued in the autumn), but implementation will be delayed until 2017 (and not introduced earlier as originally envisaged).
Local Government Pension Scheme (LGPS)
The government is to work with LGPS administering authorities to ensure investments are pooled to significantly reduce costs, while maintaining overall investment performance. Local authorities are invited to make proposals to meet common criteria for delivering savings, with a consultation being published later this year and potentially also backstop legislation for a mandatory pooling of investments if sufficiently ambitious proposals are not forthcoming.
The use of salary sacrifice arrangements to reduce income tax and NI on remuneration is being monitored, so changes may follow.
Unfunded employer financed retirement benefit schemes (EFRBS)
The government is to consult on tackling the use of unfunded EFRBS to obtain a tax advantage in relation to remuneration, so again, changes may follow.
We will be monitoring developments, especially the provisions of the draft legislation.