Budget 2021: The pensions platform
Pensions taxation is one aspect of the UK’s fiscal architecture which seems to be permanently covered in scaffolding.
Ever since Gordon Brown’s 2004 Finance Act which fundamentally changed how private pension provision is treated by the taxation system, no previous Chancellor has been able to resist tinkering with the system at every available opportunity, usually in an attempt to raise additional tax.
Tempting as it might have been for Rishi Sunak to continue this tradition, he appears content to ease off and allow the pension rules to remain broadly unaltered for a while.
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The Finance Bill 2021-22 will contain no sudden “bolts from the blue”, but there will be some small changes arising from past consultations.
Normal minimum pension age
The Bill will include provisions to raise the age at which benefits can first be taken from authorised pension schemes without incurring an unauthorised payment charge.
At present the earliest date at which pension rights may be crystallised is 55. The government proposes to raise this to 57. This will have effect from 6 April 2028, and will not apply to certain public service schemes (firefighters, police and armed forces).
Scheme pays
An “annual allowance charge” is triggered if the value of an individual’s pension rights increases in a year by more than the annual allowance (currently £40,000 but subject to taper for high earners down to as little as £4,000).
This charge is strictly a liability of the individual, and charged at his or her marginal tax rate. Since FA2011, it has been possible for the pension scheme administrator to pay the tax out of scheme funds, by making a corresponding reduction in the value of the member’s rights.
New provisions will extend the deadline for the scheme administrator to pay the tax, by tying it to the date when the administrator is asked by the member to pay on his behalf, rather than the end of the tax year in which the charge arose.
The curious affair of the dog in the night
To the massive relief of those of us who have endured the ever-changing field of pension tax law since 2004, none of the things people expected to see in the Budget actually occurred.
The annual allowance and lifetime allowance remain at their present levels (£40,000 subject to taper and £1,073,100 respectively), and tax relief on authorised pension contributions continues to enjoy relief at the individual’s marginal rate. Perhaps we will now see a period of stability, with pensions no longer seen within the Treasury as a cash cow for short-term revenue boosts.
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Hi there
surprised you've made no mention of the extremely delayed and clunky solution to the NPA anomaly, the RAS review or the further consultation on the pension charge cap, unless those are covered elsewhere?
Best wishes
Kate
'An “annual allowance charge” is triggered if the value of an individual’s pension rights increases in a year by more than the annual allowance (currently £40,000 but subject to taper for high earners down to as little as £4,000).'
It says this in the piece. That makes no sense to me. Surely you mean 'if contributions exceed the annual allowance there will be a charge', not, 'if the value of one's pension rights increases by more than the annual allowance, there will be a charge'.
Hi Arbitrary
Sorry for the delay, I've been AFK for a few weeks. The reason I used those words is because the situation is somewhat more complex.
There are two very different types of pension, both of which have been shoehorned into the same set of legislation:
1. Defined contribution (aka money purchase), where contributions are made (whether by the member or the employer) into a member's individual pension pot;
2. Defined benefit (aka final salary), where there usually are no actual contributions into the member's pension pot - and indeed no actual individual pension pot!
For the latter type of pension, an employer, via the pension scheme's actuary, accounts each year for changes in the anticipated overall level of pension (based upon each individual member's salary and the number of qualifying years of service). For example, someone's pension entitlement might accrue at a rate of 1/40 of salary every year: if his salary in year 1 was £100k, that would mean a pension of £2500 (1/40 x 100k). If his salary rises to £102k in year 2, his new pension entitlement is £5100 (2/40 x 102k). That means that over the course of the year, the pension to which he will be entitled has risen by £2600. Because the legislation imposes a 16x multiple (FA2004 s234) for the purposes of the Annual Allowance calculation, the member's pension rights (essentially a notional pension pot) has risen by £41,600.
For a final salary pension, the only possible definition for triggering an AA charge is this "increase in the value of the pension rights".
In a money purchase scheme, the corresponding increase in value of the member's rights is directly measured by the making of contributions. The value of your pension pot has directly and unambiguously increased by the amount of cash you have added.
In both cases, the term of art is "pension input", but that would make no sense to the average reader, so when writing about pensions I use a phrase which covers both scenarios.
Most people only think about money purchase arrangements (where planning is straightforward - simply pay a lower contribution), but the devil in this particular legislation is mainly being found in final salary schemes (especially the NHS Scheme, which I've covered in earlier articles).
High earners can find themselves liable to a tax charge for having exceeded the AA simply by virtue of a pay rise, or even by merely having accrued a further 1/40 of an unchanged final salary! If your personal AA is only £4000, your salary is going to be well north of £200k, so an extra 1/40 accrual is going to take you over the Allowance without so much as lifting a finger.
This is getting long. Hope it makes some sense.
Thank you for explaining so clearly. You are of course right. I had not thought of defined benefit pensions. Silly of me. I have read about the problems for these, in particular the problems for NHS consultants (which I view as a bit spurious, on envy grounds-I wish I had that sort of problem!).