Budget 2012 – PensionsSaturday, April 14th, 2012
Automatic Review of State Pension Age (SPa)
Recent legislative changes have seen increases to the State Pension age from the familiar 65 for men and 60 for women. The current legislative position is as follows:
- SPa will be equalised at 65 for men and women by November 2018 (Pensions Act 1995, amended by Pensions Act 2011)
- SPa will be increased from 65 to 66 between December 2018 and October 2020 (Pensions Act 2007, amended by Pensions Act 2011)
- SPa will be increased from 66 to 67 between April 2026 and April 2028 (as per Autumn Statement announcement 29 November 2011, amending Pensions Act 2007)
- SPa will be increased from 67 to 68 between April 2044 and April 2046 (Pensions Act 2007)
A DWP Consultation in 2011 looked at two options for introducing a more automatic method of increasing the SPa:
- using a formula that automatically adjusts the SPa in line with increases in life expectancy, and
- reviewing the SPa at defined intervals, with any adjustment based on an independent report covering the key factors around longevity.
The Budget 2012 speech and Report confirmed the Government’s commitment to ensuring the SPa is increased in line with increasing longevity. Proposals will be published at the time the Office for Budget Responsibility (OBR) submits its Fiscal Sustainability report in the summer. This body was established after the Election in 2010 and their annual report assesses long-term sustainability of public finances and gives long-term affordability projections.
The Government has made clear its desire to link the availability of the State Pension to life expectancy. An ageing population represents a challenge to any Government and is one of the reasons for Auto-Enrolment responsibilities, commencing later this year. This challenge is recognised in the Report under the section ‘Long-term Policy Challenges’, in which it is noted that one of the issues is ‘reaching a high-level agreement with public sector unions on long-term reform of public service pensions, including on linking pension ages to the rising State Pension age’.
The International Longevity Centre-UK (ILCUK) endorsed the announcement, whilst advocating caution. Baroness Greengross, Chief Executive, said ‘The government is right to consider how the state pension age needs to increase in line with longevity. It is simply not sustainable for the state to adequately support us for the increasing number of years we are spending in retirement’. However, she added ‘Whilst many of us can expect to live 15 or 20 years after state pension age, parts of the country see much lower life expectancy. Further increases in state pension age must go alongside initiatives to tackle inequalities in health and healthy life expectancy’.
We look forward to the proposals later in the year.
Continuing with its Pension reform package, Budget 2012 confirmed that the Government is to simplify the pensions system with plans to introduce a single-tier State pension. This will impact ‘future pensioners’ and will be introduced at the start of the next Parliament, i.e. mid-2015.
The State Second Pension (S2P) will be abolished and merged with the Basic State Pension. The new merged pension will be above the means tested pensions credit and, at current values, the Chancellor estimated that this would be worth £140 a week.
The new pension will still be based upon contributions and changes will simply be a rebalancing of the Government’s books, with it costing no more than the current system. Further details will be published in a White Paper in the spring, with decisions and implementation set out at the next spending review.
There is little doubt that the current pensions system is complicated, with the Basic State Pension which may be enhanced by the Additional Pension via monies in the State Earnings Related Pension Scheme (SERPS) or the State Second Pension (S2P). The situation is further complicated by the issue of whether the employee is in Contracted-Out or Not Contracted-out employment. In his speech, Mr Osborne commented about the current means-tested system – ‘Such is the complexity of this means tested system, only someone like our pensions minister can work out exactly what someone’s entitled to – and what they need to save’.
Baroness Greengross, Chief Executive at The International Longevity Centre-UK (ILCUK) said ‘Providing people with a basic state pension above the level of means testing could also create a greater incentive for people to save privately. The confirmation of the introduction of a single tier state pension above the means test is very welcome’.
The move towards simplification is welcomed, however, what will be the interim burdens for employees, employers and existing and future pensioners? A single-tier option will prompt the end of Contracting-out of the S2P which, in turn will result in higher National Insurance costs for employees and employers. How will this be managed at HMRC and what will happen to the SERPS and S2P ‘pots’ that they hold there?
- ILCUK – Budget Response Press Release
Pension Contributions to a Spouse, Partner or Family Member
Since April 2006, Governments set the Annual and Lifetime Allowances for pension contributions. These indicate the maximum amounts of pension savings which benefit from tax relief. These allowances have reduced, particularly the Annual Allowance which reduced from £255,000 to £50,000 effective April 2011. One way to bypass these thresholds has been through a loophole, which allows similar tax relief for pension contributions made by the employer to a spouse / partner or family member into a registered pension scheme, often though flexible benefit / remuneration packages.
The Government will legislate in the Finance Bill 2013 to prevent sacrifices to these ‘Family Pensions’ from being tax and NICs saving vehicles from 06 April 2013.
This will impact both employees and employers seeking to maximise the tax and NICs savings. However, given the allowance carry forward arrangements announced at the time of the reduction to the Annual Threshold in 2011, Family Pensions remain an attractive option for this tax year, where a maximum of £250,000 Allowance may be available.
Pensions Tax Relief
The Annual Allowance was confirmed as £50,000 and the Lifetime Allowance as £1.5million for the tax year 2012/13.
After the changes in April last year, the lack of changes to occupational reliefs and thresholds this year is a relief to the pensions industry. The proposed reduction in the Additional rate to 45% will affect the amount of pensions tax relief that can be applied to high earners from April 2013.
When an occupational scheme member retires before their State Pension age, some defined benefit pension schemes pay a higher initial pension, which reduces at the time the State Pension becomes payable. This allows the member’s income in retirement to be smoothed between the time of leaving employment and the time of becoming entitled to the State Pension. This is known as a Bridging Pension (or Step-up, Clawback, Offset Pension).
The Finance Act 2004 places an upper age limit of 65 on the payment of these pensions. However, the introduction of increases in the State Pension age has meant that this upper limit will cease to be relevant and may lead to instances of hardship for scheme members. This is especially so where the upper limits of the Act are quoted in scheme rules and cannot be amended.
Budget 2012 announced that changes would be made to the Finance Act 2004 which will allow the alignment of Bridging Pensions rules with the SPa changes.
The changes will give trustees limited powers to amend the scheme rules where they are governed by the upper limits contained in the 2004 Act. This will ensure that Bridging Pensions can be paid for longer than the upper limit of 65 as the SPa increases past this limit. This will be part of Finance Bill 2013