While the Chancellor dismissed a total shift in pensions tax relief policy last week, there were nonetheless some seismic pensions policy shifts in the Budget – the key change being the introduction of a Lifetime ISA for under 40s, starting next year.
Set out below is a summary of that policy and some other pensions policy changes from the 2016 Budget announcement and report.
The main headline is the introduction of a new Lifetime ISA system for the under 40s from 6 April 2017. The key features of this new regime are as follows:
- it will be possible to save up to £4,000 per annum into a Lifetime ISA;
- the Government will pay a 25% bonus for each pound saved on contributions made up to the age of 50;
- the funds saved, including the bonus, can be withdrawn at any time after age 60 or at any age where the funds are used to buy a first home that is under £450,000;
- funds can also be withdrawn at any time for any purpose subject to losing the bonus (and any investment return on that bonus) and a 5% charge on the amount withdrawn;
- there will be a consultation on this new regime which will look at whether to allow:
- tax free release of lifetime ISA funds for other life events; and
- the ability to pay back into the Lifetime ISA to reinstate the Government's 25% bonus.
It is unclear whether an individual will be restricted on making such savings if they contribute toward a registered pension scheme (and vice versa). It is also unclear whether individuals will be able to save into these vehicles after age 50 (albeit without receiving any bonus).
While no immediate moves were made to restrict salary sacrifice, the Government is considering a limit to the range of benefits that attract income tax and NIC advantages when provided as part of salary sacrifice schemes. There is no specific detail but the Budget report states that this review is not intended to affect salary sacrifice on pensions, childcare or cycle to work.
The 2016 Budget also announces a number of initiatives around the area of financial advice on pensions, including:
- a new "Pensions dashboard" which is to be "designed, funded and paid for by pensions industry by 2019";
- legislation to increase the tax and NIC relief available for employer-arranged pensions advice from £150 to £500;
- a consultation on a new Pensions Advice Allowance allowing those under 55 to withdraw £500 tax free from their DC pot to pay adviser fees; and
- the streamlining of the Money Advice Service and the establishment of a new pensions guidance body.
DC lump sum commutation
The Budget report states that there will be legislation to allow DC schemes to permit pensions in payment to be paid as a trivial commutation lump sum where the total pension savings would be under £30,000.
Public sector pensions
The public sector pensions discount rate is to change and will result in employers paying higher contributions to public sector schemes from 2019-2020. It is unclear how this may affect private organisations that participate in funded public sector arrangements.