Budget Update - Good For Pensions

The recent emergency Budget provided surprisingly good news for pension investors. The previous government placed hugely complicated restrictions on higher earners which ended up complicating pension planning for everyone. These rules put many people off making a pension contribution altogether. There was also much speculation about whether higher rate tax relief on all pension contributions would be removed. Fortunately it wasn’t. 

The Chancellor announced in his emergency Budget statement that the complex pension tax rules for high earners from 2011 introduced by the Finance Act 2010 will be repealed.  The Government will consult on the design of simpler rules to achieve the same aim of restricting the cost to the public purse of tax relief on pension funding. 

Full details will emerge as the consultation progresses, but there is already a strong hint that the main feature of the 2011 changes is likely to be a significantly reduced pension annual allowance in the range of £30,000 to £45,000 a year.

This may not be entirely what was hoped for, but is a distinct improvement on the previous proposals. In particular, it would have the benefits of:-

• Reinstating a level playing field for all pension savers.
• Maintaining the principle of tax relief at the highest marginal rate on personal contributions.
• Adhering to the original ‘pension simplification' principles by providing a simple, clear yearly allowance for pension savers to use.
• Aside from the key matter of agreeing the level that the new annual allowance should be set at, the consultation will also aim to iron out related practical issues (such as the valuation of defined benefit rights and the treatment of those in special situations such as redundancy) to ensure that the new regime works properly and fairly.

The changes are likely to be introduced in a Finance (No.2) Act 2010 late this summer.

Pensions - requirement to purchase an annuity deferred from age 75 to age 77

The Government's Coalition Agreement confirmed that the requirement to purchase an annuity at age 75 from a money purchase pension scheme would be abolished. This is planned to be introduced from 2011/12, and in the meantime, the age at which an annuity must be purchased has been increased from 75 to 77 with immediate effect.

The planned abolition of the requirement to purchase an annuity is now set for 2011/12. To help those approaching their 75th birthday, the requirement to purchase an annuity will be put back from age 75 to age 77, so they will be able to benefit from the formal abolition next year. This will be within the Finance Bill(2) 2010 and have effect from 22 June 2010.

Those reaching age 75 on or after 22 June this year, and already in unsecured pension (USP) will be able to continue on the same basis, and not be forced to adopt the alternatively secured pension (ASP) limits. Those with unvested money purchase pensions will still have to crystallise immediately before their 75th birthday, paying out any pension commencement lump sum and the balance will become USP.

In this interim period, before the changes due in 2011/12 arrive, the death benefits for those continuing in USP from age 75 will be the usual 35% on any lump sum paid for deaths after 22 June 2010. The potential IHT that could have applied on death in ASP will also not apply for those reaching age 75 after 22 June.

However, it would appear that the normal ASP income limits and death benefit options (with associated IHT issues) would still apply for those who reached age 75 prior to 22 June and already entered ASP, even if they are still below age 77.

For the formal abolition of the requirement to purchase an annuity in 2011/12, a consultation will be launched shortly to look at the issues surrounding this.

For further information with regard to changing pension legislation, please contact Chris Eaton at Greystone on

Chris Eaton
[email protected]
Tel: 0161 927 7222