Pensions in the Budget
Well, that was a complete waste of an hour of my valuable time - Iíve just listened to the Chancellorís Budget speech and I really donít know why I bother to keep doing that year after year. I must be stupid or something. I mean, if this kind of time wasting happened on a football pitch the referee would do something about it.
Once again pensions hardly got a mention in the hour-long use of words except to say that a pensions White Paper is being prepared; something we really could use some detail on, but none was forthcoming. There was no mention of A-Day or the retrospective tax changes coming into force in just a few days time, nor of the fact that our final-salary pension schemes are falling like ninepins, or an acknowledgement even that the Parliamentary Ombudsman last week took the Government to task for its poor record of treating people fairly. Weíll just have to rely on the usual BeeHive radar systems picking up the real stuff from all the noise I guess, and I knew that before I even sat down to watch the TV so I donít know why I find it all so depressing.
Part of the way our radar works is that we have the BeeHiveís own Girl Friday, Bolette Bruun, and Rimmi Shah of the Jackson Consultancy sifting through the acres of information that hits the Government web pages the minute the Chancellor sits down. This is the real detailed stuff that ordinary people never get to hear about. The nitty-gritty. The trick as far as BeeLines are concerned is for us to extract the pension stuff from all the other information and thatís no easy task. Itís a bit like panning for gold - thereís a lot of rubbish to sift through to get to each and every pension nugget.
Iím pleased to say weíve found a couple of nuggets for you, but I donít think youíll necessarily like one of them, but anyway...
Headline stuff first. Inheritance Tax issues relating to Alternatively Secured Pensions (ASPs) will be clarified in this yearís Finance Bill, but the idea will be to knock on the head once and for all any hope anyone has of using this strange type of religious annuity as part of any wider IHT planning exercise. Thatís the bad news I suppose. The better news is that there is some important clarification of just exactly what John Huttonís five principles for pension reform might mean in practice. John Hutton, by the way, is the current Pensions Minister, or at least he was the last time I checked. If you knew that you might also know that he proposed five principles against which the Pensions Commissionís recommendations for reform will be judged. The interesting thing today is that I detect a very significant shift in emphasis in the way one of those principles is now described. These are the words that caught my eye:
ďThe Government has welcomed the broad framework of the Commissionís report and has set out the five principles on which its response will be based: the pension system must promote personal responsibility; it must be fair; it must be affordable; it must be simple; and it must be sustainable. The Government has said that the principle of affordability will be central. There will be no relaxation in fiscal discipline and the long-term sustainability of the public finances will not be put at risk.Ē
That sounds to me like the proposals to implement the new idea of a National Pension Savings Scheme (the NPSS) will only go ahead if they are not expensive as far as the Treasury is concerned. Given that the whole idea of the so-called reforms is to get millions more people saving rather than spending and that the savings would attract tax-relief, that looks like a bridge too far for the NPSS proposals to me, particularly as the cost of completely revising the State basic pension so that it is fair to all would cost†tens of billions in itself. Letís hope we hear a lot more about that over the coming weeks.
So you can read the stuff for yourself, though, Iíve copied and pasted the pension aspects weíve found in todayís pile of words into this BeeLine. I think my interpretationís sound, that IHT and pensions donít mix and that the NPSS will struggle to make it onto the statute books, but you can judge for yourselves. If anything else crawls out of the woodwork later on today weíll let you know asap.
Given my comments on the lack of fairness for pensioners in the past I ought to point out that the stuff we found was listed under the enigmatic title of Ďfairness for tomorrowís pensioners'. Like, whooee! Anyway, here it is:
Fairness for tomorrow ís pensioners
5.56 The Governmentís 2002 Pensions Green Paper 13 established the Pensions Commission to examine the regime for private pensions and long-term saving and to consider whether the current level of compulsion within the UK pensions and retirement system is appropriate. The Commissionís interim report was published in October 2004, 14 and a final report was published on 30 November 2005.15
5.57 The Government has welcomed the broad framework of the Commissionís report and has set out the five principles on which its response will be based: the pension system must promote personal responsibility; it must be fair; it must be affordable; it must be simple; and it must be sustainable. The Government has said that the principle of affordability will be central. There will be no relaxation in fiscal discipline and the long-term sustainability of the public finances will not be put at risk. In preparation for the publication of a White Paper in Spring 2006, the Government has engaged in a major consultation exercise, and convened public debates in six cities across the UK in March 2006 to mark National Pensions Day.
5.58 Empowering individuals to make informed choices about working and saving for retirement is fundamental to ensuring that future pensioners receive the income in retirement that they expect. During 2004-5, as part of the Governmentís informed choice strategy, 6.8 million automatically generated state pension forecasts and 2.6 million combined state and private pensions forecasts, were issued.
5.59 The establishment of the Pension Protection Fund in April 2005 ensures that, for the first time in the UK, members of defined benefit pension schemes will receive a meaningful proportion of their expected pension income if their pension scheme is in deficit when the sponsoring employer becomes insolvent. The establishment of a proactive Pension Regulator further improves the security of occupational schemes, while its risk based approach to regulation minimises burdens on schemes which are appropriately funded and run.
5.60 Pensions tax simplification sweeps away the numerous existing tax regimes and replaces them from 6 April 2006 (ĎA-dayí) with a single universal regime for tax-privileged pensions saving. The new regime will provide individuals with greater flexibility and choice over their retirement savings and will benefit both employers and pension providers through increased flexibility and reduced administration costs. A small package of supplementary measures providing additional flexibility for schemes and individuals, clarifying aspects of the new rules and smoothing the transition from old to new regime, is being introduced in this yearís Finance Bill. The Government will keep all aspects of the pensions tax simplification regime under review and will where necessary take action to tackle any abuse of the flexibilities offered by the new regime.
5.61 The longstanding position of successive Governments is that pension assets should be converted into a secure income in retirement by age 75. For most people an annuity or scheme pension is the best means by which they can do this. The new pension rules introduce an additional option for achieving this Ė an alternatively secured pension (ASP). As the Government made clear during the development of the new pension tax provisions, ASPs are specifically designed for those who have a principled religious objection to annuitisation. It has become clear, however, that some advisors are intending to use the ASP provisions for a much wider purpose to enable individuals to pass on tax-privileged retirement savings to their dependants rather than to provide a pension in retirement.
5.62 In order to prevent this, the Government is examining how best to restrict ASPs to their original limited purpose. Following consultation, legislation in Finance Bill 2006 will prevent ASPs being used to avoid inheritance tax by ensuring that appropriate inheritance tax charges apply. The current inheritance tax position for all other pension schemes will also be confirmed in the Finance Bill.
Now, even while I was writing that yet another important piece of the pension jigsaw popped up on Her Majestyís Revenue and Customsí website and this looks to be a bit of a climbdown on the recycling of tax-free cash bombshell that hit us a few weeks ago. In what will probably come to be known as the most disjointed BeeLine ever (and I apologise for that in advance), but in order to meet my deadline for getting this information to you this afternoon Iím just going to add it on here. Itís a document called BN 19 (which for all I know stands for Budget Note or something like that) and it is something I will come back to in detail in a future BeeLine where Iíll have time to explain how it will work in practice. But for now itís here for you to read:
Organisation: HM Treasury
Date released: 22 March 2006
Budget 2006: BN 19 - simplification of the taxation of pensions
Who is likely to be affected?
1. Pension scheme savers, employers, insurance companies, occupational and personal pension schemes and their advisers, and financial advisers.
General description of the measure
2. The simplified tax regime for pensions comes into effect on 6 April 2006 (A-Day). From that date, there will be a single set of tax rules for all taxadvantaged pension schemes. The relevant legislation is contained in Finance Acts 2004 and 2005, and accompanying regulations.
3. These new measures build on those in Finance Act 2004, providing additional flexibility and protection for schemes and individuals, clarifying aspects of the new regime and introducing further necessary anti avoidance and compliance rules.
4. Will have effect from 6 April 2006.
Current law and proposed revisions
5. Pension savings are currently governed by various different tax regimes limiting the amount that an individual can contribute to a tax-advantaged pension scheme and the consequent benefits that a scheme can pay out. Pensions simplification will replace the existing tax regimes with a single universal regime for tax-privileged pension savings. The numerous controls in the current regimes will be replaced by two key controls in the new regime:
- the lifetime allowance of £1.5m on tax privileged savings, rising to £1.8m by 2010; and
- The annual allowance of £215,000 for savings in a tax privileged pension scheme, rising to £255,000 by 2010.
6. New measures were announced on the HMRC website at http://www.hmrc.gov.uk/pensionschemes/pts.htm and in the HMRC Technical Note published alongside the Chancellorís Pre-Budget Report on 5 December 2005. These include measures to stop the potential abuse of the pension tax simplification rules in Finance Act 2004. The anti-abuse measures include:
- tightening the rules for self-directed pension schemes to remove the tax advantages for investing in residential property and certain other assets such as fine wines, classic cars, art and antiques; and
- preventing individuals from artificially boosting their pension funds by recycling tax-free lump sums with the removal of tax advantages.Following comments received on the draft legislation a revised version can now be found on the HMRC website. The rule will not be triggered where no more than 30% of the lump sum is recycled, and the threshold under which lump sums of less than £15,000 will not trigger the rule will be linked to the standard lifetime allowance. HMRC has also made numerous changes to the draft guidance on the legislation, which is also now available on their website.
7. An updated full regulatory impact assessment ďSimplifying the taxation of pensionsĒ is also published today.
From that youíll probably gather that a number of tweaks have been made to the A-Day pension rules and Iíll have to have a good look at whatís gone on so†I can let you know later in the week. Thereís just got to be an easier way of doing this hasnít there?
Maybe itís me, but I just donít find this amusing any more...
22 March 2006
13 Simplicity, security and choice: Working and saving for retirement, Department for Work and Pensions, HM Treasury and Inland Revenue, December 2002.
14 Pensions: challenges and choices, Pensions Commission, October 2004.
15 A new pension settlement for the twenty-first century, Pensions Commission, November 2005.
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