Budget 2015 – How to build a new system in 365 days…
18th March, 2015
Commentary over the last few weeks has speculated on further wide reaching reforms. As a Trustee still patiently waiting for full visibility of the 2014 budget changes, such additional material reform could only have added further scope for complexity and confusion for members where simplicity and clarity are needed.
The radical changes proposed in the 2014 budget require time to bed in and I think it is therefore unsurprising that this budget was fairly uninspiring from a pension perspective.
I think therefore I should start with what we did not get. Wholesale changes trailed on tax relief appear to have been shelved although, I sense deferred not abandoned. The Chancellor agreed to maintain the Annual Allowance at the current level. This would ease a potential headache for DB Trustees as more change here would further restrict growth in long serving mid earners DB pensions.
So what did we get, and how does this impact Trustees? The potential to cash in annuity policies is a widely expected extension of pension freedoms. Given that the accompanying consultation suggests that providers will not be allowed to buy back their own annuity policies and the proposed legislation will not alter the contractual basis of any annuities currently held then it will be interesting to see if and how this market develops.
It is only fair that retired members taking advantage of this further freedom receive no greater tax penalty than those retiring in April 2015 and electing not to annuitise but we await the devilish detail. In particular, how will this relate to annuities held in Trustees’ names or to DB members in receipt of a scheme pension – the consultation appears silent on these points?
If they have not already done so, Trustees should be considering their policy on annuity purchase and how this can be dovetailed with the new rules on partial transfers and enhanced flexibility. Trustees also need to consider how better member outcomes can be delivered and avoid unreasonably restricting members’ choices.
Trustees will need to communicate the Lifetime Allowance (LTA) change to members. This will create presumably, a third tranche of LTA protection and will start to impact a greater number of long serving mid earners. The 4% of scheme members identified by the Chancellor in his speech is a current statistic and over time a much greater number of individuals who have built up reasonable pension funds will be caught. More positively the announcement of the cut was tempered a little with a promise to index the new LTA in line with inflation from 2018. However, we should remember that the LTA was previously increased annually, then frozen and then reduced. I would hope the LTA may at last be allowed to settle at a known and certain level and that future Governments will resist the urge to tinker further with it.
To summarise this is a period of consolidation, as Trustees we must look forward to April 2015 and deal with the challenges created. The budget announcement has not impacted this planning greatly and we have a busy 12 months ahead.