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2020 Budget – How Might It Affect PensionsWritten on February 12, 2020 by Kirk Rice LLP

2020 Budget – How Might It Affect Pensions
Financial Services Questions

The Question:

In the last 3 years, I have paid annual allowance pension tax because my employer’s pension scheme is deemed to be generous although I will only ever accrue 10 years’ service in it and it will not provide me with enough money in retirement to live on. I have been paying as much as I can afford into a personal pension too to improve my retirement income.

Do you know if the annual allowance tax will be removed in the 2020 budget and what else might affect pensions?

Kirk Rice LLP answers:

With the 2020 budget on the horizon, this is a topical question because this problem is happening to many key senior people in the NHS, teaching, the judiciary and the civil service. It led to NHS consultants not being available for extra work when needed to meet demand. It also causes some people to suffer unexpected tax liabilities after they have secured promotion.

From 6, April 2016, the tapered annual allowance was introduced to affect individuals with total taxable income exceeding £110,000 (threshold) and £150,000 (adjusted). The standard annual allowance is £40,000. Broadly, threshold income includes all taxable incomes and adjusted includes pension contributions and the value of accrual in defined benefit pensions. Unfortunately, the length of service is not factored in. When adjusted income exceeds £150,000, the annual allowance is reduced by £1 for every £2 over. At an adjusted income of £210,000 or more, reductions stop and the tapered annual allowance is fixed at £10,000. All contributions for personal pensions are added to any defined benefit scheme increase in the value of benefits accrued over the previous year (the pension input) to determine the tax payable for the excess.

In a year when this occurs, many people could benefit from the unused allowances from the previous three years too. If the unused allowances cover the excess for the current year, then no tax charge occurs. Since the introduction of the taper though, many people now have exhausted these unused allowances and face tax charges.

As an example: an individual has a defined benefit pension input of £42,000. Their tapered annual allowance is £10,000. They also paid £15,000 into a personal pension. The tax due is 45% of £47,000 (£42,000 + £15,000 – £10,000). Members and schemes cannot predict the pension input for a tax year, and it’s often six months for the scheme to be able to calculate these individually and send out notices. Rather than pay this personally in self assessment, the individual may qualify to invoke scheme pays rules. The defined benefit scheme could be asked to pay the tax due on the contribution of £42,000 because the input exceeds the normal annual allowance, and the tax due is more than £2,000. The Scheme Pays rules often mean that the scheme pays rules are not met. Many schemes offer the facility to members more broadly without reference to the scheme pays rules.

Note that the responsibility for the tax rests with the individual and it must be paid on time (usually no later than 31st January following the closed tax year). The scheme benefits will be reduced, which will mean less guaranteed pension in retirement.

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This complex system has been criticised as poorly understood, difficult to work and costly for schemes to administer. It was mentioned during the recent election campaign, but it is not specifically mentioned in the Conservative Party Manifesto.

The Conservative Party Manifesto does mention what will be in the budget, and I have copied below what I believe will be relevant to all pensions and long-term investments.

Page 7:

We will also prioritise the environment in the next Budget, investing in the infrastructure, science and research that will deliver economic growth, not just through the 2020s, but for decades to come.

Page 35:

While always backing entrepreneurs that choose to make the UK the place to invest and set up a business, we will take further action to redesign the tax system so that it boosts growth, wages and investment and limits arbitrary tax advantages for the wealthiest in society.

We will reintroduce legislation that protects pension pots from being plundered by reckless bosses, helps savers be better informed with pension dashboards, and creates a new style of pension scheme which is more sustainable for workers and employers.

Page 40:

Once we have got Brexit done, we will turn our attention to the great challenges of the future such as clean energy and advanced energy storage; a cure for dementia; and solving antibiotic resistance. To do this, we will make an unprecedented investment in science so we can strengthen research and build the foundations for the new industries of tomorrow.

We are committing to the fastest ever increase in domestic public R&D spending, including in basic science research to meet our target of 2.4 per cent of GDP being spent on R&D across the economy. Some of this new spending will go to a new agency for high-risk, high-payoff research, at arm’s length from government. We will continue to support our outstanding science sector as we leave the EU. We will unlock long-term capital in pension funds to invest in and commercialise our scientific discoveries, creating a vibrant science-based economy post-Brexit.

Page 55:

Our first Budget will prioritise the environment: investing in R&D; decarbonisation schemes; new flood defences, which will receive £4 billion in new funding over the coming years; electric vehicle infrastructure including a national plug-in network and gigafactory; and clean energy.

Source: Conservative Party Election Manifesto 2019

This shows that we can expect further reform of pensions in 2020 Budget, which could mean changes to the complex tax environment. It’s long been talked about providing tax relief only at basic rate tax and in more recent years that tax relief would cease. This would mean a system based on the ISA regime, where you invest taxed income and can use the money as and when without paying further tax in the future.

This could be like the Lifetime ISA, which at present also enables savers to receive a tax relief contribution based on the amount saved, but subject to smaller limits than we currently have with pensions. Click here to check out the details of the Lifetime ISA.

The new form of sustainable pension could mean changes to defined benefit schemes to reduce the financial burden on employers for these. The paragraph about unlocking long term capital in pension funds could mean defined benefit schemes being able to secure income for members in retirement from long term commitments to new science instead of being forced to buy GILTS which currently offer poor value in the long term.

It might mean investments made with pensions in this area receive a form of incentive that is not available on others. We currently have Seed / Enterprise Investment Schemes (SEIS), which provide tax incentives to investors for becoming involved in innovative, high-risk businesses. This government has also pledged to build on these Schemes.  Read our SEIS Blog 

To answer your question, I would say no, I do not know if it will be removed in 2020 Budget, but it is clear that pensions will be covered.

I suggest anyone who has available annual allowance (last three years and current) should make pension contributions before the 2020 Budget on 11th March.

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Any reader interested in discussing how the 2020 Budget might affect their pensions and actions they could take with one of our Financial Planners can telephone 01252 960 550 or email info@kirkrice.co.uk.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. Tax treatment is based on individual circumstances and may be subject to change in the future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases or, and reliefs from taxation, are subject to change. The Financial Conduct Authority does not regulate tax planning.