The Budget – changes to Pensions
The Chancellor was true to his word and there was no mention of altering or ending tax relief on pension contributions.
It was announced that the government consultation ‘Strengthening the incentive to save’ found that while the current system gives everyone an incentive to save into a pension, and the 25% tax free lump sum was popular, generally the system was inflexible and poorly understood.
They concluded that young people in particular were not saving enough, reasons for this were because many felt they had to choose between saving for their first home and saving for retirement. The 2016 Budget 2016 attempted to address both of these concerns.
The headline changes to pensions were:
Class 4 NICs are to be reformed, this follows the abolition of Class 2 NICs, this will enable self-employed individuals to build an entitlement to the State Pension and other contributory benefits.
The Lifetime ISA was introduced, this provides a flexible way for the self-employed to save for their retirement. The new Lifetime ISA will be available from April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year, and receive an annual 25% bonus from the government, up to the age of 50. It will be possible to run a standard and a lifetime ISA as long as the subscriptions do not exceed the annual limit (which is increasing to £20,000 from 6 April 2017). The Life time ISA can used to buy a first home at any time from 12 months after the account opening, those using it to fund a pension can not withdraw from it until the age of 60. Savers who are already using the Help to buy ISA can transfer this to the new Lifetime ISA.
It was announced that the government is considering limiting the range of benefits that attract Income tax and NICs advantages via salary sacrifice, but at present pension saving would continue to benefit from this arrangement.
As outlined in the Summer budget the reduction of the Pensions Lifetime Allowance from £1.25million to £1million from April 2016 will remain.
The Pensions Dashboard was announced, this should be in place by 2019 – This was based on research that over a third of people approaching retirement found it difficult to track there pension pots from their working life. A pensions dashboard is a digital interface where an individual can view all their retirement savings in on place.
There were also some technical amendments to support Pension Freedom and Choice Reforms, this included consolidating pension flexibilities by:
Re-aligning the tax treatment of serious ill-health lump sums, to ensure that someone aged under 75 who has accessed their pension but has less than a year to live can receive the payment tax free.
Making serious ill health lump sums in respect of individuals over 75 taxable at the marginal rate.
Legislating to convert dependants’ flexi-access drawdown accounts to nominees’ accounts when dependants turn 23, so they do not have to take their funds as a lump sum taxed at 45%
Legislating to allow defined contribution pensions already in payment to be paid as a trivial commutation lump sum, where total pension savings would be under £30,000.
Making top ups to fund dependants’ death benefits authorised payments
Removing unnecessary legislation relating to charity lump sum death benefits.