23 March 2012
As expected the Chancellor of the Exchequer's budget contained
several changes to pension rules and regulations many of which take
effect in the 2013/14 tax year.
The budget also confirmed a number of proposed changes contained
in earlier legislation that will come into effect in the 2012/13
Those particularly relevant are:
Pension tax relief remains unchanged for 2012/13 tax
The budget has made no significant changes to the tax relief
available in connection with pension saving for the tax year
2012/13. The annual allowance has not been reduced and
remains at £50,000 and higher-rate tax relief remains
The Chancellor of the Exchequer has proposed a change in the
additional rate of tax from 50 per cent to 45 per cent for the tax
year 2013/14 and this will affect the amount of pension tax relief
that could be claimed by high earners.
New single-tier state pension
Following the announcement last year of the government's
intention to reform the state pension into a single tier benefit
for future pensioners, the Chancellor announced that the new system
will be introduced early in the next parliament and will be set at
a level above the current means tested pension credit.
The government has said that it will publish further detail in a
white paper in the spring, with final decisions on the detailed
implementation of the policy being taken at the next spending
State pension age to be automatically linked to changes
The government has made a commitment to reviewing the state
pension age automatically to take into account increases in
longevity. In order to do this the government has said that
further reforms are needed to ensure that there is a sustainable
welfare system and the demands on public services can be met within
the resources available.
This proposal is at an early stage, and further details are
expected to be published later on in 2012.
Amalgamating income tax and National
The government has also committed to issue a consultation
on the feasibility of merging income tax and national
insurance contributions. Further information will be
published after the budget and will build on research already
carried out in 2011. The consultation is likely to set out a broad
range of options for the operation for employee, employer and
self-employed national insurance contributions.
Simplification of age-related income tax
The Chancellor of the Exchequer announced that tax allowances
for those over age 65 and over age 75 will no longer be increased
in line with inflation but will be frozen at 2012-2013 levels from
5 April 2013. In addition, also starting in 2013, anyone
turning age 65, who would have qualified on doing so for the lower
rate and those age 65 plus on reaching age 75 for the higher rate
after that date will no longer qualify for the relief at the level
that would have been due. It is thought that the move will save
£1bn a year by 2015, and the new system will be simpler to
Tax allowances are currently more generous for the over-65s, who
can have an income of up to £10,500 before they become liable
to income tax. This threshold is raised to £10,660 when
a person reaches the age of 75.
The Chancellor also said that as the personal tax allowance is
being raised rapidly, it would have eventually overtaken the
over-65s allowance anyway.
Lifetime allowance to be reduced to
The budget also confirmed that the lifetime allowance will be
reduced from £1.8 million to £1.5 million from 6 April
2012, in line with changes made in Finance Act 2011 to restrict the
cost of pension tax relief.
The lifetime allowance is a limit on the value of
retirement benefits that you can draw from approved pension schemes
before tax penalties apply. It is possible to protect savings
over the limit if you have applied for protection against the tax
Individuals over age 60 can commute some small
pot personal pension scheme funds.
The Government will extend pension commutation rules to allow
those people over 60 to commute small pension pots of £2,000
or less held in money purchase pension plans, such as personal
pensions, regardless of their other pension savings. This can
be done a maximum of two times in the member's lifetime. The
legislation will be effective from 6 April 2012.
Tighter legislation on QROPS
People who have built up pension funds in the UK and who then
leave to live and retire abroad can transfer their funds to
qualifying schemes in their new country. The government
allows transfers from UK schemes only into schemes abroad that are
recognised and are on the QROPS (Qualifying Recognised Overseas
Pensions Schemes) register. To avoid abuse, the government
are to tighten the rules.
The government will introduce changes in primary legislation to
strengthen reporting requirements and powers of exclusion relating
to QROPS. The Government also announced that where the
country or territory in which a QROPS is established makes
legislation, or otherwise creates or uses a pension scheme to
provide tax advantages that are not intended to be available under
the QROPS rules, the Government will act so that the relevant types
of pension scheme in those countries or territories will be
excluded from being QROPS. (Finance Bill 2013)
Read more about QROPS here.
Employer contributions to a recognised pension
As part of the work to close loopholes, the government plans to
make changes in the Finance Bill 2013, which will mean a
contribution paid by an employer in respect of an employees's
spouse or family member, as part of their employee's flexible
pay package, cannot be used to obtain tax and national
insurance advantages for the employee or the employer.