There were no big pension surprises in this autumn statement but the Chancellor managed to squeeze some savings from auto-enrolled workers and pensioners. All eyes now turn to the 2016 Budget where the Chancellor is expected to make an announcement on the future of pension tax relief.
Change to auto-enrolment contribution phasing timetable.
The “realignment” of the phasing dates where auto enrolment phase upwards from current minima to the 4+3+1 rate means a further delay of 6 months before most enrolees see an increase in their mandatory pension contributions. NOW pensions have calculated that for an average worker – this means a loss of £770. The delay is bad news for providers and the ABI have called it “disappointing”. It puts further pressure on the business models of providers (including NEST).
Bad news for savers and providers- good news for HMRC.
For the Treasury, the delay saves a total of £840m, £390m in 2017-18 and £450m in 2018-19.
That these calculations are based on the current EET tax system suggests that whatever the Chancellor announces in the Budget 2016 as a result of the consultation on pension taxation, there are no plans to move from EET before the end of tax year 2018/19.
The FT, commenting on social media quotes David Fairs, Chair of the Association of consulting Actuaries “the AE delay paves the way for a fundamental change to the existing tax regime.” The numbers quoted assume the DWP’s current estimate of 28% opt-outs (up from the current rate of under 10%). If opt-out rates remain at current levels, the tax savings will be considerably higher and we suspect the Treasury are low-siding their estimates.
These savings demonstrate the importance to the Treasury of capping tax relief, since the majority of savers being auto-enrolled are basic rate tax payers, we suspect that for the Treasury to make significant savings from reforming the taxation of pensions, a more radical change to tax relief than a move to a flat rate is likely. We are therefore in agreement with the ACA that this move points to a Tax Exempt system.
It certainly shows how expensive (and potentially unsustainable) tax-relief will become after 2019 if the EET system is maintained. Any thought that we will auto-escalate beyond the proposed 8%, needs to take into account the cost to the public purse.
Changes which will significantly impact pension saving
Significant changes to anticipated spending capacity for those on low incomes
The Chancellor’s decision to U-turn on tax credits is a relief for those on low incomes and for the auto-enrolment project, for which the removal of tax-credits threatened a sharp increase in opt-outs. Pension saving is therefore a net beneficiary of this policy change.
Stamp Duty Hike on Buy to Let will keep money in pensions
The tide is finally turning against property in favour of pensions after the chancellor targets the burgeoning buy-to-let market
We also expect the surcharge of 3% on stamp duty for buy to let properties to reduce the attraction of this form of investment. This measure is expected to bring in £4bn in the next five years.
As much of the £4.7bn taken so far through the use of pension freedoms is reported to be destined for buy to let, we expect pensions to further benefit from this change in taxation.
Further pension news
The new state pension
The new full state pension will be set at £155.65 a week when it begins to be paid in April 2016. The Government has confirmed the weekly amount which will be paid to people with a full 35 year National Insurance Contribution record. Workers who have been contracted out of additional state pension during their careers will receive less. In addition, the basic state pension will rise by £3.35 to £119.30 a week from 2016.
Announcement on the Local Government Pension Scheme
The autumn statement coincides with the publication of the criteria for pooling Local Government Pension Scheme (LGPS) investments, alongside the consultation on the backstop legislation and draft amendments to the scheme’s investment regulations The publication contains a proposal to move towards a ‘prudent person’ approach to investment in the LGPS. This means the LGPS investment rules would mirror those of trust based pension schemes in the private sector
The Government to press ahead with a secondary market for annuities
The Government is to press ahead with plans to allow pensions to sell-off their annuities and will unveil a consumer protection package next month. The proposals will come as part of a response to a now-closed consultation on the reforms due in December. Funds left in drawdown pensions after death will not be subject to inheritance tax. The Treasury committed to legislative changes as part of the Finance Bill 2016.The exemption will be backdated to deaths on or after 6 April 2011. The Bill will also contain a simplification of the tax treatment of scheme pensions.
Tax Changes impacting payroll and auto-enrolment
From 6th April 2016: The personal allowance rises to £11,000 (+£400) with a new basic 20% tax threshold of £32,000 (formerly £31,785) – a potential tax saving of £43 per annum for those who hit the 40% bracket earnings under £100,000. However, the 45% tax bracket remains at £150,000 and the tax free pay restriction continues to kick in from £100,000 upwards.
National Insurance Contributions
For the first year in many, the majority of the NIC earnings bands remain unchanged. The exceptions is the Upper Earnings Limit (UEL) with the Upper Secondary Threshold (UST used for Under 21s) and the new Apprentice Upper Secondary Threshold (AUST) all matching each other at the new values of £43,000 per annum or £827 per week (formerly £815 where applicable).
- The weekly Lower Earnings Limit (LEL) remains as £112
- The weekly Primary Threshold (PT) remains as £155
- And the weekly Secondary Threshold (ST) remains as £156
The result with any wage inflation is that more UK workers will be paying NIC and those earning above the UEL will be paying slightly more NICs as well with an additional £1.20 per week (around £62.40 more per annum).
Scottish Rate of Income Tax (SRIT)
It is anticipated that the Scottish Parliament will announce the SRIT income tax rate which also applies from 6th April 2016 on Wednesday 16th December 2015.
The Income Tax Bands will remains the same as for the rest of the UK
Warning on salary sacrifice
The Government is investigating the use of salary sacrifice. The law firm Ashurst says salary “sacrifice is in the Government’s crosshairs and we should expect a “strong attack” on tax savings associated with these arrangements next budget”
Pension credit payments will be stopped to people who have left country for more than one month. This is bad news for pensioners taking extended breaks in the sun.