The Chancellor has not announced any further changes around the taxation of pensions in the March 16th Budget. This leaves Schemes, employers and employees with the previously announced changes to Lifetime and Annual Allowances to deal with from 6th April 2016.
He announced a new Lifetime Individual Savings Account (LISA) for under 40 year olds as an alternative method of saving for retirement, with more flexibility to access funds if required. Individuals will be able to save up to £4,000 a year into this and receive a Government top up of 25%. Funds saved may be withdrawn to purchase a first home, or accessed in full from age 60.
For the unfunded public sector pension schemes a change to the discount rate used to set employer pension contributions is projected to add a further c£2bn to these costs. This figure is subject to change as it is based on the scheme data used for valuations as at March 2012, so will be updated for scheme data as at March 2016 (and used in the next valuations) which will set the contribution rate payable from 1 April 2019.
Pension Dashboard – The Government will ensure the industry designs, funds and launches a pensions dashboard by 2019. This will enable individuals to view all their retirement savings in one place via a digital interface.
KPMG Comment - The change to the discount rate for valuing pensions for the unfunded schemes will be an unwelcome one for employers who participate in the unfunded pension schemes, (including the Police and Firefighters’ Pension Schemes). Changes to the discount rate are outside cost cap agreements, so cannot be shared with employees. This actuarial assumption will be included in the next round of valuations for these schemes, alongside an update of member data, so the actual cost of the change may vary and the increase to contributions attributable to this could be hard to separate from other changes included in the valuations.
The widely anticipated changes to pension tax relief did not appear in this Budget, yet it remains to be seen whether these re-emerge in the Chancellor’s mind after the EU referendum. There is plenty still to do to deliver the reduced lifetime allowance and tapered annual allowance regime and employees who are affected will still need support understanding the impact on them and their pensions.
The Lifetime ISA may be the start of moving away from traditional pension saving and could perhaps be viewed as a toe in the water to more fundamental change. Whilst this initial product (available from April 2017) is only available for the under 40’s, (and with a limited savings restriction) the proposed Government support of £1 added for every £4 saved can be likened to a flat rate 20% tax relief. Is this the fore-runner of the end of higher rate relief for retirement savings?
It remains to be seen what ‘the industry’ will develop to meet the requirement for the new Pension Dashboard, but we anticipate that there will be costs involved in providing whatever information may be required. Those planning long term budgets may wish to include a provision for any additional effort required gathering data and meeting this new obligation.
Ian Pollitt CBE
Public Sector Pensions
Tax, Pensions and Legal Services