In sharp contrast to Budget 2014, Budget 2015 had far less surprises in relation to UK pensions. Given the revolutionary pension changes already going through in the UK on 6 April 2015, this comes as no surprise. However, there were two key pension announcements worth noting.
The government will be reducing the lifetime allowance (“LTA”) for pension contributions from £1.25MM to £1MM from 6 April 2016.
The LTA was introduced by the UK government in April 2006. Although there are no limits on how much an individual can save into a UK pension scheme, there is an overall limit on the total amount of an individual’s tax-relieved pension savings. In April 2006 the allowance was £1.5MM and by 2011 this had increased to £1.8MM, with reductions being announced several times thereafter. In nine years the LTA rate has in fact been changed nine times.
This most recent reduction in the LTA has received criticism from a number of industry experts. While £1MM may sound like a significant fund size, in reality if a 65 year old wished to purchase an indexed annuity with spouses benefits, this sum would purchase an income of about £27,000 p.a. The announcement that the government will index the LTA in line with the Consumer Price Index each year from 6 April 2018 is some consolation, but will only partially mitigate this issue.
The reduction to the LTA will not be retrospective and those with pension rights already over £1MM will be able to apply for transitional protection. The details of how this transitional protection will work has not yet been published.
The Chancellor has confirmed an already announced consultation on the ability for people to sell their existing annuities for a cash lump sum. The government estimates that up to 5MM pensioners could, as a result, be able to benefit from the pension freedoms announced in Budget 2014. Currently people who have bought annuities and wish to sell them would have to pay at least 55% UK tax to do so. However, from April 2016, tax rules would change so that people could sell their annuities and pay just their marginal rate of tax.
Industry experts who have been reviewing the consultation note that there will be many hoops to jump through for this proposal to work. For example, an annuity holder would need to get the permission from their existing annuity provider to sell their income stream to a third party. Not all annuity providers may provide this consent. In addition, the need for the third party purchaser to undertake health assessments, coupled with administration costs, is likely to reduce the cash lump sum a person would obtain for their annuity. Many have predicted discounts of around 20% being applied. For these reasons, amongst others, questions are being raised about the market for annuity sales and who will be advised to proceed with them.