Single-tier state pensions to go ahead
The 2012 Budget confirmed that existing proposals relating to state pensions and state pension age would go ahead. It also included a mass of fine detail on other issues with which the industry will need to get to grips.
On this page:
Single-tier state
pension proceeds
Raising state pension age
Age allowance and other income tax changes
Treatment of bridging pensions to be adjusted
Asset-backed contributions rules refined still further
Pension tax changes
Investment matters
Other changes.
Key points
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Chancellor of the Exchequer George Osborne's Budget included an announcement that the Government is to go ahead with the plan to introduce a single-tier state pension and therefore end contracting out. The other key pensions element of the Budget is confirmation that the Government intends to link state pension age to improvements in mortality. However, it is the decision to phase out the age allowance for those aged 65 and over that has generated the most column inches in the national press.
There was widespread acclaim for the Government's decision not to make any changes to pensions tax relief following the reduction of the annual cap on pensions relief to £50,000 from April 2011. There had been persistent rumours that tax relief might be restricted to the basic rate.
Here we look at all of the announcements concerning pensions.
Single-tier state pension proceeds
Last year, the Government published a Green Paper setting out two options for delivering a simple, flat-rate contributory state pension. The Government's own summary of responses indicated that more than three-quarters of organisations responding favoured a single-tier option over hastening the move to two flat-rate pensions that has already begun.
In his Budget statement, the Chancellor confirmed that the Government "will introduce a new single-tier pension for future pensioners, set above the means test". He said that the means test is currently "estimated at around £140" and, as the standard minimum guarantee credit for a single person has just increased to £142.70 for 2012/13, the plan is presumably to set the new single-tier pension above this rate.
It is not clear whether the reference to "future pensioners" means all of those retiring from a given implementation date would be affected fully immediately, or whether the new pension would be based on future accrual of entitlement from the implementation date and therefore phased in, possibly over 40 or more years.
The Chancellor indicated that the pension would, as now, be based on contributions made and not therefore be a so-called "universal pension" as advocated by many. Osborne also indicated that "it will cost no more than the current system in any year".
As the Chancellor claimed, it would represent a "major simplification" of the benefit system. What it would also mean is the end of contracting out on a defined-benefit (DB) basis.
Commentators have largely welcomed the announcement, on the grounds that it is desirable to remove the huge complexity involved in contracting out. However, many are also concerned that this move will require the redesign of every contracted-out DB pension scheme (and that is almost all of them) and further encourage employers to ditch DB pensions for a defined-contribution alternative.
The Government has undertaken to publish a white paper with more details "later this spring", with final decisions about the form of the pension being taken at the time of the next spending review in the autumn. The new system is planned to be introduced early in the next Parliament.
Raising state pension age
In an effort to address the costs of an ageing population, the Chancellor also confirmed that the Government is to "consider proposals to manage future increases in the state pension age, beyond the increases already announced". In his Budget speech he announced that there will be an automatic review of the state pension age to ensure it keeps pace with increases in longevity. Details of how this mechanism will operate are to be published alongside the Office for Budget Responsibility's long-term fiscal sustainability report in summer 2012.
It seems likely a committee or commission would have responsibility for assessing mortality data and applying them. Reasons of practicality suggest that the Government would not want state pension age to be increased by a few weeks at frequent intervals; step changes in pension age less frequently seems more likely.
Baroness Greengross, chief executive of the International Longevity Centre UK, says that raising state pension age without increasing support to enable people to work longer could result in a growth in poverty in later life. She points out that the average retirement age remains below the state pension age and that people retire early due to a combination of factors, including health, caring responsibilities and ageism. She suggests that the Government considers whether or not future Budgets could include fiscal incentives to support gradual retirement.
Age allowance and other income tax changes
One surprise in the Budget was the Chancellor's announcement that, from April 2013, the cash value of the age allowance for pensioners will be frozen until it is overtaken by the increasing personal allowance. New pensioners from 6 April 2013 will not receive the age allowance and no new pensioners will receive the higher rate allowance from that date. This has been dubbed the "granny tax" by the media.
The age-related allowances for 2012/13 are £10,500 for those born between 6 April 1938 and 5 April 1948, and £10,660 for those born before 6 April 1938. The plan is to leave these unchanged for 2013/14.
The Government's aim is to make the first £10,000 of everyone's income free from income tax. The personal allowance is being raised much more quickly than inflation would suggest and was already planned to go up from £7,475 in 2011/12 to £8,105 in 2012/13. The Chancellor has now committed to raising it by a further £1,100 in April 2013, taking it to £9,205 in total. If further increases at this rate are made, the age allowances will cease to be relevant after a further year or two. In a related move, the income on which only the basic rate of income tax will apply is to be reduced from £34,370 to £32,245 in 2013/14.
The decision has proved to be contentious. The Government says that it reduces the number of pensioners needing to fill in a self-assessment tax form by 150,000, points out that the Office of Tax Simplification has recently highlighted age allowances as a particularly complicated feature of the tax system and maintains that the National Audit Office has found that many pensioners do not understand them. However, according to financial advisers Key Retirement Solutions, 4.5 million pensioners are worse off as a result and the TUC says that the "Chancellor's decision to raise more than a billion extra pounds in tax from pensioners by freezing age allowances will come back to haunt him".
The Budget also announced that the top rate of income tax would be reduced from 50p to 45p from April 2013. Advisers are already highlighting the advantage of making additional pension contributions in 2012/13 when the higher level of tax relief is available to those affected by the existing 50p rate.
The final measure on income tax relevant to pensions is the Government's decision to consult in detail "after the Budget" on the integration of income tax and national insurance. The Treasury issued a call for evidence on the subject last year and published a response paper. It now plans to take this a step further and set out a range of options. However, the Government has repeatedly stated that it does not plan to levy national insurance on pensions or to extend it to employees above state pension age. It previously indicated that changes may be introduced in 2017.
Treatment of bridging pensions to be adjusted
The Budget documentation announces that the Government plans to legislate to align the tax rules on the payment of bridging pensions with forthcoming changes to the state pension age. These changes will not be made until the Finance Bill 2013.
Bridging pensions are paid by some schemes between the date a pension comes into payment and state pension age so as to make up an occupational pension prior to the state pension coming into payment. Very little detail is given on the nature of the planned legislation. However, law firm Eversheds helpfully explains that under current rules a bridging pension must cease by the age of 65. The new legislation will amend the bridging pension conditions so that such pensions can be paid up until state pension age as the latter increases above 65.
Asset-backed contributions rules refined still further
Last year, the Treasury consulted on plans to legislate on the tax treatment of asset-backed pension contributions. Clauses for the Finance Bill 2012 were published at the time of the autumn statement, effective from the date of the statement, and further clauses on 22 February, effective from that date. The aim of all of these clauses is to ensure the amount of tax relief given to employers making asset-backed pension contributions to registered pension schemes accurately reflects the amount of payments made, and does not give rise to unintended excess relief.
Further clauses for the Finance Bill 2012 were published just prior to the Budget, effective from that date, to deal with previously unanticipated issues, and a technical paper is available from HM Revenue and Customs (HMRC).
Pension tax changes
The Budget reiterated the Government's plan to allow individuals over the age of 60 to commute personal pensions valued at no more than £2,000, but they may only commute a maximum of two such funds in a lifetime. The Treasury consulted on these plans previously and Regulations have now been made.
Regulation-making powers are to be included in the Finance Bill 2013 to ensure that the reduced annual allowance of £50,000 for pensions works as intended. In addition, adjustments are to be made to the fixed protection from which individuals can benefit by safeguarding benefits already accrued before the new lifetime allowance was introduced in April 2012.
The Government has also issued a warning that it will "continue to monitor the use of unfunded pension arrangements, and remains ready to act as necessary to prevent new and extensive use of these arrangements from creating a significant fiscal risk".
Investment matters
The Chancellor reiterated in his statement that the Government is seeking investment from British pension funds in British infrastructure. He stated that the Government was now working with a dozen of the largest pension schemes on this project. The Budget document says the Government will "support the establishment of a new pension infrastructure platform owned and run by UK pension funds". The National Association of Pension Funds (NAPF) and the Pension Protection Fund signed a memorandum of understanding with the Government in autumn 2011 and the NAPF says the plan is to raise £2 billion.
Actuarial consultancy Barnett Waddingham welcomes this move but says that it will not be an easy task to make it work. It comments: "Large greenfield infrastructure projects inevitably come with a significant degree of risk attached in terms of constructing and implementing on budget and on time. Not all pension schemes are going to feel confident about taking on this risk."
A further investment initiative in the Budget speech was the announcement that the Government's Debt Management Office will consult on the case for issuing gilts with maturities longer than 50 years, and the case for a "perpetual" gilt with no fixed redemption date. Currently, the longest-dated gilts are for 50 years.
Other changes
The Chancellor confirmed the plan to transfer £28 billion of assets from the Royal Mail pension fund to the Exchequer on 1 April 2012 and to transfer £37 billion of liabilities to a new unfunded public-service scheme at the same time. Most of the assets are to be sold and the gilts cancelled.
It was announced that changes to primary legislation will be introduced in the Finance Bill 2013 to strengthen reporting requirements and powers of exclusion relating to the qualifying recognised overseas pension schemes regime.
The Chancellor's statement also mentioned that the Government would be publishing a White Paper on social care, which could have implications for pensions, depending on how care might be funded.
This feature is based primarily on the Chancellor's Budget statement and the main supporting document. It also draws on material on the HMRC website and commentaries and summaries produced by a range of organisations, but in particular by Barnett Waddingham and Eversheds.