As the dust settles on George Osborne’s Autumn Statement and the headlines give way to analysis of the detail, we thought we’d take a look at how your pension will be affected by the various announcements.
The Autumn Statement contained three key changes regarding pensions; in our opinion were two negative and one positive.
Let’s look at each one individually.
Negative change #1: Lower Annual Allowance
The Annual Allowance is the amount you can pay into your pension each year, whilst claiming tax relief and in George Osborne’s first Budget it had been reduced from £255,000 to £50,000.
Leading up to the Autumn Statement speculation had been rife that it would be reduced further, with some people predicting it could be reduced as low as £30,000. There was perhaps therefore some relief that only a £10,000 reduction was announced, which will not be introduced until the 2014/15 tax year.
The delay in cutting the Annual Allowance means that pension savers have 16 months to take advantage of the current £50,000 Annual Allowance. Furthermore, no changes were announced to the Carry Forward rules, which allow previous years unused Annual Allowances to be ‘mopped up’, creating even greater opportunities for people who want to pay large sums into their pensions.
Whilst very few people, less than 1% according to Mr Osborne, pay the maximum possible amount into their pension each year, there are some significant consequences for many pension savers.
To start with business owners, who often like to make pension contributions as a way of reducing their tax bills, are likely to be affected. As are those people with fluctuating earnings, who might want to make large pension contributions in one year and then none the following year. The lower Annual Allowance could affect long serving members of Final Salary or Defined Benefit pensions, especially if they receive large pay rises and their pension contributions consequently rise.
Negative change #2: Lower Lifetime Allowance
George Osborne announced that the Lifetime Allowance will be reduced from £1.5 million to £1.25 million from the start of the 2014/15 tax year; any money held in a pension, above the Lifetime Allowance is subject to tax unless ‘protection’ has been applied for.
Again, this move will not affect many people with Personal Pensions, although some members of Final Salary or Defined Benefit pensions may well get a nasty shock.
At the same time as the reduction was announced, it was confirmed that people currently with a pension of between £1.25 and £1.5 million will be able to apply for ‘protection’ against the new limit. This is likely to be similar to the fixed protection which was bought in the last time the Lifetime Allowance was reduced, although the government are consulting on a “personalised protection regime for individuals”, which frankly could mean anything!
Watch this space for more news.
Positive change #1: Good news for people in Income Drawdown
Three things have contributed to the problem.
Firstly the government previously reduced the maximum amount of income available, from 120% of the GAD (Government Actuary’s Department) figure to 100%. Secondly, shortly after this change gilt yields, which are used to calculate the GAD rate, start to plummet to all time low levels, causing the GAD rate to fall. Finally, the government changed the rules so that maximum incomes had to be recalculated every three years, rather than every five, meaning that the opportunity for incomes to be reduced came around more quickly.
In the run up to the Autumn Statement the calls for a change to the rules, to help beleaguered Income Drawdown investors, had grown louder; it seems as though the Chancellor has listened.
George Osborne announced that his previous decision will be reversed, with the maximum income available rising from 100% of GAD to 120%.
Disappointingly there was no detail in the full Autumn Statement explaining when this change will be introduced. It appears that a change in legislation will be needed, which the government hopes to have drafted in time for the next Budget, after which consultation with the pensions industry, HMRC and presumably special interest groups will take place, before the new rules come into effect.
So whilst it is excellent news that the Chancellor has listened to concerns of Income Drawdown investors, it’s a shame that the changes will not take place sooner, to help out retirees who have seen such large falls in their pension income.
Again, watch this space for updates.
What didn’t change?
In the run up to most Budgets and Autumn Statements there is generally speculation that rate of tax relief on pensions will be cut and the maximum tax free lump sum, currently 25% of the fund and available after the age of 55, would be cut.
Fortunately no such announcements were made in this Autumn Statement, although it could be argued that reducing the Annual Allowance effectively reduces the amount of tax relief available.
Are you worried about the changes?