Pensions lifetime allowance to be reduced
“As widely expected, the standard pensions lifetime allowance (LTA), which is the total value of pension savings that can be accumulated without a tax charge, will be reduced from £1.25 million to £1 million from 6 April 2016, and then index-linked based on CPI from April 2018. This follows a reduction from £1.8 million to £1.5 million on 6 April 2012 and a further reduction to £1.25 million from 6 April 2014. Any excess over that limit will be taxed at 25% (if used to increase pension) or 55% (if taken as a lump sum) when the member starts to take their pension or benefits. It is expected that this will generate tax of approximately £1.92 billion by 2019/20.
“Although this measure is costed to raise tax of £300m in 2016/17, the Red Book notes that only 4% of savers approaching retirement have savings of over £1m, so the change will have limited affect in many cases.
“New forms of transitional protection, similar to those available when there have been previous decreases, will be introduced for those who have been saving with the current threshold in mind.
“The additional erosion of the lifetime allowance will be unwelcome news for taxpayers who have built up pension savings with the earlier limits in mind. The total cuts over a four year period amount to over 44%, so taxpayers of relatively modest wealth may well find themselves affected by the cap. The new transitional protections should help to limit the impact of the allowance reduction, but individuals will need to check whether they should cease saving in pensions from 6 April 2016 if lifetime allowance charges are to be avoided.
“Following the last cut in the lifetime allowance in 2014, individuals who had pension savings valued at more than £1.25 million at that date, but do not hold primary protection, may still have the opportunity to apply for Individual Protection, whereby a personal lifetime allowance of between £1.25 million and £1.5 million can be secured. The deadline for claiming Individual Protection is 5 April 2017.
“No changes were announced to tax relief on pension contributions; higher rate relief continues to be available and the annual investment limit remains at £40,000.
Sale of annuities
“In an attempt to level the playing field for pensioners who have already taken an annuity, compared to those who will be within the new regime from 6 April 2015, the Chancellor has announced proposals to enable individuals who have already purchased lifetime annuities with their pension funds to sell the income stream from these to a third party for a lump sum, subject to agreement from their annuity provider. This is planned to take effect from April 2016 following consultation. The lump sum could either be treated as pension income on receipt or could be used to provide a flexi-access drawdown fund (as available for those retiring from April 2015), from which income payments can be taken as and when the individual wishes. In both cases the amounts paid out will be taxable as income. Approximately 5 million annuitants are potentially affected.
“The government is proposing that only annuities in the name of the annuity holder and held outside an occupational pension scheme are within the scope of these new freedoms. With regards to joint annuities, where more than one person is named, it will be for the annuity provider to decide whether and what confirmation is needed from secondary beneficiaries.
“The consultation opened today discussed how a secondary annuity market could operate and how the annuity income would be treated in the hands of the third party.
“Annuitants will need to fully understand the effects of selling the income from their annuity in this way, as it will not necessarily reverse the effect of their earlier decision as the second-hand value of the annuity could be significantly less than the net amount that the annuity has actually cost.
“The benefit of a lump sum will also need to be weighed up against the loss of a regular income stream. Consumer protection safeguards will need to be put into place.
“This proposal is estimated to produce around £1m over the next three years, presumably on the basis that individuals who sell their income streams are likely to withdraw the lump sum more quickly than they would have done if they had remained with an annuity.
Tax-free annuities for dependants and other beneficiaries
“Finally, the Chancellor confirmed the changes announced at Autumn statement and in February that individuals who inherited joint life or guaranteed term annuities from a member who died on or after 3rd December 2014 before the age of 75 or purchase an annuity with a lump sum using undrawn pension funds of the deceased member would receive this income tax free. In addition to the change in income tax treatment, annuities from undrawn pension funds will no longer be restricted to dependants of the deceased. The member can nominate any beneficiary (eg older children).
“The income tax exemption takes effect from 6 April 2015 in respect of relevant annuity payments that commence on or after that date and is welcome news in allowing people flexibility in their succession planning.”
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