March 29, 2011

Pensions in the Budget

Filed under: Blog — Grove @ 3:16 pm

In case you missed it, there was a budget last week and, surprise surprise, most of the pensions content just confirmed decisions that we already knew about. Phew! Mind you, there was a sting in the tail. Isn’t there always?

Here’s a summary of the key pensions bits of this year budget:

Pension Tax Relief

Confirmation of the reduced annual contribution allowance of £50,000 effective from 6 April 2011 and the reduction in the Lifetime Allowance to £1.5m

Hutton Report

Lord Hutton’s recommendations for the reform of public sector pensions have been accepted in full and will form the basis of consultation with workers and unions. At the heart of the recommendations are a change  from ‘final salary’ to ‘career average’ (the reasons for which seem to be widely misunderstood) and increasing pension ages in line with state pension ages. Early signs are that the consultation and negotiation phase will be, well, interesting.

Tax relief on employer backed assets

In an effort to alleviate pressure from trustees in the face of large deficits and increasing regulation, sponsors have increasingly looked at transferring assets to their defined benefit pension schemes to reduce pressure on cash flow. To prove that it’s becoming more popular, the government has hinted at cutting employer tax relief on such asset-backed contributions. A consultation has been planned. Just goes to show; the only certainties in life are death and taxes.

Merger of Tax and NI systems

It was announced that separate tax and NI systems are pushing extra costs onto business and taxpayers and that, consequently, the government will consult on merging them. Everyone got very excited and started blogging and commenting furiously. Emergency strategy meetings popped up in every pension consultancy and accountancy in the land; well, except in ours as I was out that day.

A week later the Institute of Fiscal Studies announced that it had already ruled out a merger and in fact the full merger that had been alluded to was only an operational merger (there would still be separate tax and NI rates) and that isn’t happening yet either. Now you see it…….

State pension reform and the sting in the tail

It was announced that the Department of Work and Pensions will issue a green paper on the subject of state pension reform. The aim will be to alter state pension for future pensioners so that it provides simple, contributory, flat-rate support above the level of the means-tested Guarantee Credit. The proposed single tier pension is expected to be around £140 per week.

The sting in the tail is that the reform would go hand in hand with the end of contracting-out for defined benefit schemes as recommended by the Office for Tax Simplification. There’s lots of consultation to go yet but if it goes ahead, those of you with defined benefit schemes will have to re-design your schemes or face a cost increase of, currently 3.7% of member payroll.

Although the proposals make sense, the oft-cited ‘final nail in the coffin’ for defined benefits might finally be driven home this time. It’s more than just coincidence in my view that the decline of these high quality arrangements started with the governments push on Personal Pensions in the late 80′s and looks to be completed by the time that the governments auto-enrolment regulations take effect. I wonder how the pensions landscape would have looked if they’d just left well alone. Hmm.

If you’d like to discuss any of these issues, please feel free to get in touch.

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