Budget Update - 'Tough but Fair'
George Osborne's first budget took place on 22nd June 2010 with a 'Tough but Fair' theme.
The areas affecting pensions were:
- Compulsory purchase of an annuity to increase from age 75 to 77
- Increase in the State Pension age to 66
- Basic State Pension link to earnings restored
- Review of Auto-Enrolment
- Pensions Tax Relief for High Earners
- Employer Financed Retirement Benefits Schemes
Changes to the age 75 annuity rule
The Government will end the existing rules that create an effective obligation to purchase an annuity by age 75 from April 2011 to enable individuals to make more flexible use of their pension savings.
Consultation will take place with further details to follow.
Transitional measures will be introduced for those who reach age 75 in the interim period, to move from age 75 to age 77; however, individuals will still have to take a tax free lump sum before age 75.
In addition, the announcement does not cover those already between the age of 75 and 77 - hopefully, this aspect will be dealt with as part of the review.
Increase in the State Pension Age
State Pension Age for men and women is currently 65 and under current legislation there will be a phased increase in the State Pension Age to age 66 starting in 2024.
The Government announced that a review of the existing timetable will take place, with plans to bring forward the date to 2016 for men and 2020 for women. They will also consider future increases to the State Pension Age and how best to manage the ongoing challenges posed by increasing longevity. Iain Duncan Smith said 'Everyone needs to take responsibility for achieving the income in retirement they aspire to'.
In addition, the Government will consult on how to phase out the default retirement age from April 2011.
Basic State Pension link to earnings restored
With effect from April 2011, the Basic State Pension will increase each year by the higher of 2.5%, the Average Earnings Index (AEI) or the Consumer Prices Index (CPI). The link to earnings was broken in 1980 from which time the Basic State Pension has increased in line with retail prices.
Review of Auto-Enrolment (NEST)
The Government has confirmed its support of auto-enrolment and will undertake an independent review of how to make it work in practice. The review will be carried out quickly and the Government has enlisted the help of three pensions' experts who will report back by September 30th.
Pensions Tax Relief for High Earners
The Government will continue with plans it inherited to raise revenues from restricting pensions tax relief from High Earnings (individuals earning over £130,000) but it believes that the approach legislated for in the Finance Act 2010 could have unwelcome consequences for pension saving, bring significant complexity to the tax system and damage UK business and competitiveness.
An alternative approach involving reform of existing allowances, principally of a significantly reduced annual allowance, might better meet the Government's objectives. Provisional analysis suggests that an annual allowance in the range of £30,000 to £45,000 might be the answer but this could apply to everyone not just high earners!
The existing complicated rules will continue to apply for the current tax year.
Employer Financed Retirement Benefits Scheme
The March 2010 Budget announced action to tackle arrnagements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce liabilities of employees and directors to income tax and National Insurance Contributions (NICs) or to avoid restrictions on pension tax relief. Legislation will come into force from April 2011. The Government has also confirmed that Employer Financed Retirement Benefit Schemes (EFRBS) are within the scope of this measure.
Summary
If you wish to discuss these changes in more detail or require further information, please contact your usual MGP adviser - or contact the office on 0161 273 8273.
