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Budget 2004 Pension Taxation Simplification
Following the National Audit Office review in to the Government's proposals for pension taxation simplification, the Government has announced in the Budget that it will proceed with the simplification of the pension taxation regimes.
What's New?
- Implementation: The implementation date is to be pushed back again to April 2006 from the proposed April 2005.
- Lifetime Allowance: This is to be set at £1.5million from April 2006, increasing steadily to £1.8million from April 2010. This represents fixed increases of 5.2% per annum up to 2010 from the previously proposed £1.4million at April 2005, ahead of inflation projections for the period.
- Annual Allowance: This will be set at £215,000 from April 2006, increasing steadily to £255,000 from April 2010. This represents 5.0% per annum fixed increases on the proposed £200,000 at April 2005, again ahead of inflation projections for the period.
- Review of Allowances: The level and indexation of the allowances will be reviewed every five years, with the first review in 2010. There is no explicit reference to price inflation linking of either allowance within the Treasury or Revenue budget publications.
What's Been Confirmed?
The Revenue has confirmed in its publication 'REV BN39' that most of the proposals in the second consultation paper issued in December 2003 will be implemented. In particular:
- Recovery Tax: The tax charge for benefits above the Lifetime Allowance at retirement will be 25%.
- Pension Valuation Factors: Pensions from defined benefit schemes will be valued against the Lifetime Allowance using a factor of 20:1 at all ages. For valuing pensions in payment at A-Day a 25:1 factor will be used. Finally, a 10:1 factor will be used to measure the annual increase in defined benefits for checking against the Annual Allowance.
- Maximum Tax Free Lump Sum: This is to be 25% of benefit value below the Lifetime Allowance.
- Protection for Existing Benefits at A-Day: The primary and enhanced protection regimes set out in the December 2003 consultation document will be implemented.
- Minimum Pension Age: This is to rise from 50 to 55 by April 2010.
- Early Retirement: It will no longer be necessary for a member to leave employment in order to access employer's occupational pensions.
- Retirement by Age 75: Pension income will have to commence by age 75, with Alternatively Secured Income being available to provide pension income after age 75 as an alternative to a secured annuity.
- Employee Contributions: Individuals will not be taxed on pension contributions up to the lesser of 100% of their relevant earnings or the Annual Allowance.
What Are We Waiting To Hear On?
The Government described the response to the second consultation as "overwhelmingly positive, with almost all respondents favouring the new regime". They go on to say that a number of issues are still being considered which may lead to "minor changes". The following proposals from the December 2003 second consultation paper are still to be confirmed:
- Funded Unapproved Retirement Benefits (FURBS): The removal of their tax favoured status. The increase in capital gains tax to 40% from 34% is already being introduced from April 2004.
- Divorce: The maintaining of a divorced individual's Lifetime Allowance both before and after the settlement.
- Minimum Income Drawdown: The minimum income level of £1 per annum.
- Trivial Commutation: To be permitted for benefits up to 1% of the Lifetime Allowance in aggregate.
What's Next?
The legislation will proceed in the Finance Bill 2004, which is expected to be published early in April, prior to Royal Assent in July.
...and the Earnings Cap is to be £102,000 for the 2004/05 tax year.
Please speak to your usual Barnett Waddingham contact to discuss the above.
Barnett Waddingham, March 2004.