Emergency Budget Update

24 June 2010

by Neil MacGillivray

George Osborne’s first and much speculated ‘unavoidable’ budget was as very much as predicted. The focus has been on the increases in VAT and CGT as well as the massive planned cuts in public expenditure. Despite his assurances that there was ‘nothing hidden in the small print’ there are a number of important points relating to pensions.

Restricting Pensions Tax Relief

The Government appears to have listened to the concerns raised by the Pensions Industry over the complexity of the high income excess relief charge measure contained in the Finance Act 2010, designed to restrict the tax relief available on pension savings for high income individuals. It appears that the favoured approach is the one that has been advocated by many, namely, a reduction in the annual allowance. The Government is keen to ensure that this approach generates tax revenues in line with the original measure contained in the Finance Act 2010, and estimates that this would mean setting the annual allowance at £30,000 to £45,000 from 6 April 2011.

The Government will engage with stakeholders in the design of the new regime to consider, amongst other things, the following while achieving the objective set out above:

• How pension benefits under Defined benefit schemes are valued
• Ways to ensure basic-rate taxpayers and those who benefit from one-off increases in benefit accrual are not caught by the restriction
• Is there any flexibility over how charges are paid
• How compliance and delivery would operate in practice.

The intention is to repeal the relevant legislation contained in the Finance Act 2010 through regulations before the summer recess, and will be done after the Government has consulted on the detail of its approach.

On a disappointing note it has been confirmed that there will be no change to the anti-forestalling legislation, as the forestalling risk still exists under these new proposals.

Consultation on the removal of obligation to secure benefit at age 75 and transitional measures

From the 2011/12 tax year the Government will end the requirement to secure pension income from age 75. It will consult with the relevant parties on this issue, but in the meantime it will introduce a transitional measure for those under age 75 on 22nd June 2010.

The transitional measure will increase the age that pensions need to be secured to 77 with effect from 22nd June 2010 subject to legislation. This in effect extends the maximum period of Unsecured Pension by 2 years.

However, not everything linked to age 75 will be replaced with the new age 77. For example the right to a pension commencement lump sum will cease on attaining age 75 and it will not be possible to defer crystallisation of benefits past 75.

The application of IHT to any lump sum death benefit in unsecured pension will extend to age 77. In addition any lump sum death benefit payable will attract a standalone tax charge of 35%.

We will have to wait to see if the GAD tables will be extended to include ages 76 and 77.

Employee Financed Retirement Benefit Schemes (EFRBS)

The March 2010 budget announced action to tackle arrangements using trusts to reward employees which seek to avoid, defer or reduce income tax and national insurance or avoid restrictions on pensions tax relief of employees and directors. EFRBS are now to be included within the scope of this measure with the new legislation to take effect from April 2011. This will be an area to monitor over the following months as further details are made available.