2013 Budget and Finance Bill: Pensions

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1 ADVISER FACTSHEET Tech Talk April Budget and Finance Bill: Pensions This bulletin builds on the content of an earlier Tech Talk issued in January this year that examined some draft legislation covering pensions. The Government has responded to representations it received on the content of the draft clauses with the publication of the Finance Bill The remainder of this bulletin will focus on certain aspects of the Bill together with any new pension measures announced in the recent Budget. Contents Reduction in standard lifetime allowance (SLA) to 1.25m from 6 April 2014 Trivial commutation lump sum Capped drawdown maximum Residential property Single-tier state pension Comment For professional advisers only

2 Reduction in standard lifetime allowance (SLA) to 1.25m from 6 April 2014: Enhancement factors In certain circumstances an individual may benefit from a lifetime allowance enhancement factor (LAEF): On receipt of a pension credit derived from previously crystallised rights Being a relevant overseas individual Receiving a transfer from a recognised overseas pension scheme The conditions associated with the different LAEFs and their calculation will not be covered in this Tech Talk (click here for more detail). Where an enhancement factor applies the individual enjoys a personalised lifetime allowance that is calculated based on the following formula: SLA + (SLA x LAEF) SLA standard lifetime allowance at the time of the benefit crystallisation event (BCE) LAEF lifetime allowance enhancement factor If an individual benefits from more than one LAEF these are aggregated and used in the formula. However, if the circumstance that resulted in the LAEF occurred before 6 April 2012, the formula applicable at a BCE occurring on or after 6 April 2012 is as follows: SLA + (1.8m x LAEF) where the SLA at the BCE does not exceed 1.8m. In anticipation of the reduction in the SLA to 1.25m from 6 April 2014 a different formula will apply where the circumstance that generates the LAEF occurs in either the 2012/13 tax year or 2013/14 tax year. The formula applicable at a BCE occurring on or after 6 April 2014 is as follows: SLA + (1.5m x LAEF) where the SLA at the BCE does not exceed 1.5m If more than one LAEF applies, the formula immediately above will not apply where the individual enjoys primary protection (see below) or because the circumstance generating one of the LAEFs occurred before 6 April An individual who enjoys primary protection also benefits from a LAEF and the personalised lifetime allowance is calculated as follows: 1.8m + (1.8m x LAEF) Where a previous BCE has occurred, in order to calculate the amount of lifetime allowance remaining in the event of a new BCE, any amount crystallised that did not suffer a lifetime allowance charge at the previous BCE is revalued in line with the change in the SLA. However if an individual has primary protection, for any BCE occurring on or after 6 April 2014 the relevant untaxed amount from any previous BCE prior to that date will instead be revalued based on the SLA at the later BCE being 1.5m, where the SLA applicable at that time is less than 1.5m. This will mean that the lifetime allowance available for the individual will be less as a result. This formula was introduced in the Finance Act 2011 to reflect the reduction in the SLA on 6 April 2012 from 1.8m to 1.5m. 2

3 Example 1 Julie s pension rights on 5 April 2006 were valued at 2.25m. She successfully applied for primary protection with a resultant LAEF of 0.5. On 1 December 2012 she crystallised benefits amounting to 0.75m. Her intention is to take the remainder of her benefits on 1 July 2014 and she wants to know how much lifetime allowance she will have available on that date. SLA in 2012/13 = 1.5m SLA in 2014/15 = 1.25m Assuming no change in legislation, the amount of lifetime allowance available on 1 July 2014 would have been: 1.8m + ( 1.8m x 0.5) ( 0.75m x 1.25/1.5) = 2.7m m = 2.075m Allowing for the change: 1.8m + ( 1.8m x 0.5) ( 0.75m x 1.5/1.5) = 2.7m m = 1.95m Reduction in SLA to 1.25m from 6 April 2014: Individual/Personalised protection Confirmation in the Budget that the Government is committed to offering an individual/personalised protection regime in addition to fixed protection Consultation on the detail of the regime is on going and legislation will be included in the Finance Bill Reduction in SLA to 1.25m from 6 April 2014: PCLS Where an individual does not benefit from any form of pension commencement lump sum (PCLS) protection the permitted maximum is capped at 25% of the SLA (or 25% of the remaining SLA if benefits have been taken previously). For lump sums paid on or after 6 April 2014 in respect of individuals with either enhanced or primary protection, but with no form of PCLS protection, the cap will be set at 25% of 1.5m where the SLA is less than 1.5m. Example 2 Looking at the previous example, if Julie s lump sum rights as at 5 April 2006 calculated in accordance with the relevant legislation meant that she did not have any form of PCLS protection, the cap on the PCLS available as at 1 July 2014 would be: 0.25 x ( 1.5m [0.75m x 1.5/1.5]) = 0.25 x 0.75m = 187,500 Therefore if on 1 July 2014, Julie crystallises 750,000 or more in total, the permitted maximum for the PCLS would be 187,500. Trivial commutation lump sum As part of the definition of a certain type of trivial commutation lump sum there is the requirement for the member s pension rights not to exceed the commutation limit (currently 18,000) on the nominated date. The member s pension rights include crystallised rights and these have to be revalued to the nominated date as part of the test under this requirement. Where the nominated date falls on or after 6 April 2014 these rights will be revalued in line with changes in the commutation limit rather than changes in the SLA. Capped drawdown maximum The Bill confirms that the date for the change from 100% to 120% of the basis amount is indeed 26 March The basis amount is derived from the Government Actuary s Department annuity tables. Therefore for all drawdown pension years commencing on or after this date the new maximum will apply. Note that the change refers to the percentage and that the basis amount will stay the same unless an event occurs requiring the basis amount to be recalculated e.g. the start of a new reference period. 3

4 Changes to the drawdown regime took place in April 2011 e.g. 100% of basis amount maximum and a reduction in the pre 75 reference period maximum from 5 to 3 years. Much of the detail is contained in the Finance Act 2011 including transitional provisions that allowed certain pre 75 drawdown arrangements to continue unaffected by the change for a limited period meaning that the existing 120% maximum could in some cases continue up to 5 April However the transitional provisions required that where such arrangements were transferred from one pension scheme to another, then a review had to take place at the end of the drawdown pension year in which the transfer occurred. This meant that the end of the current reference period coincided with the end of the drawdown year whether it was scheduled to or not and in the following reference period the 100% maximum applied. The Bill ensures that where such a transfer takes place in a drawdown year ending on or after 25 March 2013 there is no need for a review at the end of it, even where the transfer took place prior to 25 March Therefore the existing drawdown maximum and reference period can continue unaltered and in future reference periods the 120% maximum applies. Residential property The Government is to explore with interested parties whether the conversion of unused space in commercial properties in high streets and town centres to residential could be encouraged by amending legislation that makes the direct or indirect holding of residential property through a SSAS/SIPP unattractive because of the penal tax charges. Single-tier state pension The Government aims to bring forward the introduction of the previously announced single-tier state pension to the 2016/17 tax year. Contracting out on a defined benefit basis will cease on the same date. Comment Many in the pension industry may be experiencing a sense of déjà vu prompted by recollections of the consultation that preceded the introduction of the post April 2006 pension tax regime. The prospect of being able to hold residential property in a pension scheme seems to generate much excitement and the willingness of the Government to look at this again is more to do with stimulating the housing market than encouraging people to save for their retirement. Regardless of Government motives, any residential property rules relaxation would likely be good for SIPP and SSAS providers. Conversely, the impending capital adequacy requirements may mean that some SIPP providers will decide not to take advantage of any relaxation. Given that the Government has only given a commitment to explore the possibility of rule change for the moment, it is a case of wait and see. Ending contracting out on a defined benefit basis will provide an element of pension simplification and the resultant increase in National Insurance Contributions from the removal of the contracting out rebate will provide a boost to tax revenues. It is likely that the Government has been motivated by the latter in moving this forward. With regard to the other changes/proposals, many stem from the future reduction in the SLA and the need for clarity and fairness in terms of pension tax legislation. Clarity and fairness are to be welcomed, though it appears that more complexity has been added to the already complicated legislation.

5 Further information John Dunn Pension Specialist Technical Support Unit Please do not hesitate to contact the Technical Support Unit with any further queries on: Tax and Trust Technical Support: Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue Customs practice are subject to change. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 15 Union Street, St Helier, Jersey, JE2 3RF. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL and UPT have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. UPTL has its registered office at Boundary House, Charterhouse Street, London, EC1M 6HR. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(04/13) JHSTT 02 APR13 LD 6