Chancellor Rishi Sunak presented his 2021 budget to Parliament on 3 March 2021, which was subsequently published alongside various supporting documents. For a detailed discussion of the budget, see our tax team's analysis.
The two biggest pensions related announcements in the Budget were firstly, that the pensions Lifetime Allowance ("LTA") will be maintained at its existing level until April 2026; and secondly, that the Government will take steps to "give the pensions industry more flexibility to unlock billions of pounds from pension funds into innovative new ventures". Additionally, information on pensioner spending and legislation dealing with the taxation of collective money purchase pensions was also published in the days following the Budget.
Lifetime allowance freeze
The LTA is the amount of pension benefit which can be drawn from an individual's pension (or pensions) without triggering an extra tax charge. The LTA hit a high of £1.8 million in 2010/11 but has been significantly reduced over the past 10 years. The LTA will now remain at its current level of £1,073,100 for the next 5 years, despite many expecting it to rise this year in line with CPI (Consumer Prices Index).
The impact of the freeze could see an increase in individuals facing a tax charge on their pension savings, particularly if a substantial increase in inflation occurs, resulting in the value of those savings being pushed above the LTA. Schemes should be aware of the potential impact on their members and consider whether they require to take any action (e.g. informing members of how the freeze will affect them and/or reviewing benefit statements to ensure they reflect the correct tax information).
Charge caps for defined contribution schemes
The Governments policy paper 'Build Back Better: our plan for growth' suggests that Defined Contribution (DC) pension schemes represent a 'largely untapped pool of capital from institutional investors'. As such, the Chancellor's promise to 'unlock billions of pounds from pension funds' appears to be focussed on DC schemes, where the Government believes the charge cap, introduced in 2015 to protect pension savers from high and/or unfair costs, could be discouraging investments in a broader range of assets.
The DWP launched a consultation in March, which closed last month, to consider whether changes to certain costs within the charge cap could encourage schemes to take up 'new and innovative investment options in a broad range of assets'. Draft regulations have already been published by DWP considering proposed measures to allow occupational DC schemes to smooth performance fees within the charge cap and make such investment options easier for schemes to take up. Schemes should look out for and consider the impact of the response to the consultation which is expected to be published in June 2021 alongside final draft regulations and statutory guidance.
Pensioner spending
In addition to the announcements made by the Chancellor, the Office for Budget Responsibility has published their economic and fiscal outlook which revealed that they expect pensioner spending by the Government over the 2020-21 and 2021-22 tax years to be £1.5 billion lower than they forecast in March 2020, mainly as a result of the Covid-19 pandemic. Additionally, it was noted that the DWP have identified underpayments of state pension for women dating back to 1992, the repayment of which is estimated to cost £3 billion over the six years to 2025-26.
Taxation of collective money purchase pensions
Alongside providing for the LTA freeze, the Finance Bill 2021 (published the week after the budget was announced) contains legislative provisions which incorporate collective money purchase pension schemes (or collective defined contribution schemes), introduced by the Pension Schemes Act 2021, into the tax relief provisions of part 4 of the Finance Act 2004. See our previous blog for more information about the introduction of collective money purchase pension schemes and other aspects of the Pension Schemes Act 2021.
If you would like to discuss anything raised in this blog, or any other pension matter, please get in touch with a member of the pensions team or your usual contact at Brodies.
Contributors
Senior Associate
Senior Associate
