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Budget 2012 - Pension news summary

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 tax year.

Those particularly relevant are:

Pension tax relief remains unchanged for 2012/13 tax year

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 unchanged also.

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 review.

State pension age to be automatically linked to changes in longevity

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 Insurance

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 allowances.

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 understand.

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 £1.5m.

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 charge

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 scheme

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.

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