2010 Emergency Budget and Pensions (July 2010)

The recent Conservative/Liberal Democrat Coalition Emergency Budget threw up a number of interesting reviews and potential changes to the pensions environment. The main changes are discussed below.

2011 high earner pension tax rules under review

The Chancellor announced in his emergency budget statement that the complex pension tax rules for high earners from 2011 introduced by the Finance Act 2010 will be repealed. The Government will consult on the design of simpler rules to achieve the same aim of restricting the cost to the public purse of tax relief on pension funding.

Full details will emerge as the consultation progresses, but there is already a strong hint that the main feature of the 2011 changes is likely to be a significantly reduced pension annual allowance in the range of £30,000 to £45,000 a year.

This may not be entirely what was hoped for, but is a distinct improvement on the previous proposals.

In particular, it would have the benefits of:

reinstating a level playing field for all pension savers.
maintaining the principle of tax relief at the highest marginal rate on personal contributions.
adhering to the original �pension simplification' principles by providing a simple, clear yearly allowance for pension savers to use.

Aside from the key matter of agreeing the level that the new annual allowance should be set at, the consultation will also aim to iron out related practical issues (such as the valuation of defined benefit rights and the treatment of those in special situations such as redundancy) to ensure that the new regime works properly and fairly.

The changes are likely to be introduced in a Finance (No.2) Act 2010 late this summer.

There will be no changes to the interim pension anti-forestalling regime for the current tax year.

Pensions - requirement to purchase an annuity deferred from age 75 to age 77

The planned abolition of the requirement to purchase an annuity is now set for 2011/12. To help those approaching their 75th birthday, the requirement to purchase an annuity will be put back from age 75 to age 77, so they will be able to benefit from the formal abolition next year. This will be within the Finance Bill (2) 2010 and have effect from 22 June 2010.

Those reaching age 75 on or after 22 June this year, and already in unsecured pension (USP), will be able to continue on the same basis and not be forced to adopt the alternatively secured pension (ASP) limits. Those with unvested money purchase pensions will still have to crystallise immediately before their 75th birthday, paying out any pension commencement lump sum and the balance will become USP.

In this interim period, before the changes due in 2011/12 arrive, the death benefits for those continuing in USP from age 75 will be the usual 35% on any lump sum paid for deaths after 22 June 2010. The potential IHT that could have applied on death in ASP will also not apply for those reaching age 75 after 22 June 2010.

However, it appears that the normal ASP income limits and death benefit options (with associated IHT issues) would still apply for those who reached age 75 prior to 22 June and already entered ASP, even if they are still below age 77.

For the formal abolition of the requirement to purchase an annuity in 2011/12, a consultation will be launched shortly to look at the issues surrounding this.

State Pension age increase to 66 to be brought forward

This review is expected to be conducted quickly as the changes need to be implemented fairly. There were no suggestions of the timescales for this within the Budget documentation, but the Coalition Agreement suggested that the date State Pension age would start to increase to 66 would not be sooner than 2016 for men and 2020 for women.

Iain Duncan-Smith has since said that moving the retirement age for men and women to 68 should happen sooner than the intended date of 2046.

Default retirement age of 65 to go

The Chancellor confirmed in his emergency budget statement that the promised consultation on the removal of the statutory retirement age of 65 will take place shortly. The Government's aim is to phase it out from April 2011.

This change will allow employees of all ages to continue working as long as they are able to meet the demands of their job, thereby removing an obvious anomaly in the UK's anti-age discrimination law.

The consultation is likely to focus on the practical implications of the change for employment terms and pension provision.

Contact us to discuss how we can provide guidance regarding these changes to help those in your organisation who will be affected by them.

Cartlidge Morland is an independent employee benefits consultancy. We provide benefit services to a wide range of partnerships, family companies, PLCs, charities and governmental organisations. We also provide financial advice to private clients, investment management and mortgage broking services

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