Budget 2016 – Pensions


Changes from 6 April 2016

By recent standards, today’s Budget speech was relatively uneventful so far as pensions are concerned. The key changes from this 6 April are therefore the ones we already knew about, namely:

  • the tapering down of the annual allowance from £40,000 to £10,000, for those with an adjusted income of over £150,000 for the tax year; and
  • the lifetime allowance reduction from £1.25m to £1m (subject to transitional protections), with CPI-linking from April 2018.

The Budget confirms that these will go ahead, along with further changes from 6 April announced in last year’s Autumn Statement:

  • simplifying the test for paying a dependant’s scheme pension;
  • adapting the bridging pension provisions for the new state pension; and
  • ensuring that there is no inheritance tax on any remaining drawdown funds on death.

This year’s Finance Bill will also amend the pensions flexibilities introduced last year by:

  • re-aligning the tax treatment of serious ill-health lump sums with lump sum death benefits, so that they can be paid tax-free when someone aged under 75 has less than a year to live but has already accessed their pension;
  • making serious ill-health lump sums taxable at an individual’s marginal rate when paid in respect of individuals aged 75 and over;
  • legislating to convert dependants’ flexi-access drawdown accounts to nominees’ accounts when dependants turn 23, so they do not have to take their funds as a lump sum taxed at 45%;
  • legislating to allow defined contribution pensions already in payment to be paid as a trivial commutation lump sum, where total pension savings would be under £30,000;
  • making top-ups to fund dependants’ death benefits authorised payments; and
  • removing unnecessary legislation relating to charity lump sum death benefits.

Other changes

Other changes are:

  • an increase in public sector employer contributions from 2019/20, following a change in the discount rate;
  • the introduction by 2019 of an industry-designed digital “pensions dashboard” where members can view all their pensions savings in one place;
  • an increase in the existing £150 income tax and national insurance relief for employer-arranged pension advice to £500;
  • a consultation on introducing a “pensions advice allowance” permitting people under age 55 to withdraw up to £500 tax-free from their defined contribution pension to redeem against the cost of financial advice; and
  • a restructuring of the Money Advice Service, The Pensions Advisory Service and Pension Wise – including the establishment of a new pensions guidance body so that consumers can have all their pensions questions answered in one place.

Salary sacrifice

The government is considering limiting the range of benefits that attract income tax and NIC advantages when they are provided through salary sacrifice. However, the government’s intention is that this should not affect the use of salary sacrifice for pension saving (or for childcare or health-related benefits).

 Please do not hesitate to speak with your usual Linklaters pensions contact if you would like to discuss these issues further.