UK: Budget 2016: Lifetime ISA And Other Pension Points

Last Updated: 24 March 2016
Article by Ian Greenstreet

Summary and implications

Although the major changes to pensions tax relief which the Chancellor was considering have been put on the back-burner, today's Budget still contains one major announcement affecting pension saving and a few other relevant statements.

New Lifetime ISA for the under 40s

The government will be consulting on a new Lifetime ISA which will be available only to those aged under 40 when it is launched in April 2017. The key features are likely to be:

  • individuals may save up to £4,000 each year;
  • the Government will pay a 25 per cent bonus on annual contributions;
  • contributions can be made from the age of 18 to 50;
  • funds can be taken from any age to purchase a first UK home worth up to £450,000;
  • other funds can be withdrawn tax free from age 60 for any other purpose;
  • funds can be withdrawn early on the grounds of terminal ill-health;
  • funds can be withdrawn at any other time but the government bonus must be returned plus a five per cent charge applied;
  • funds remaining in a Lifetime ISA will form part of the estate of the deceased for IHT purposes; 
  • contributions will be included in the (new) overall ISA annual limit of £20,000; and
  • savings can be transferred into the Lifetime ISA from other ISAs.

A technical note has been published outlining how the Lifetime ISA will work. This is to be followed by more detailed consultation and legislation is expected in Autumn 2016.

Those choosing to save in a Lifetime ISA will still (if eligible) be subject to automatic enrolment so, for many, this may be an additional route to pension saving rather than an alternative to a pension. 

Salary sacrifice to continue for pension contributions

Despite fears that this might be an area on which the Chancellor might focus, he has confirmed that (at least for the time being) pension saving will continue to benefit from income tax and national insurance contribution relief when provided through salary sacrifice arrangements.

Technical changes to flexible benefits

There are to be some technical changes to certain flexible benefits which will be included in the Finance Bill 2016 and will come into effect immediately after it receives Royal Assent. The changes will:

  • remove the requirement that a serious ill-health lump sum can only be paid from an arrangement that has never been accessed;
  • replace the 45 per cent tax charge on serious ill-health lump sums paid to individuals who have reached age 75 with tax at the individual's marginal rate;
  • enable dependants with drawdown pension who would currently have to use all of this fund before age 23 or pay 45 per cent tax charges of up to 70 per cent on any lump sum payment, to continue to access their funds as they wish after their 23rd birthday;
  • remove the rule on paying a charity lump sum death benefit out of drawdown funds where the member dies under the age of 75;
  • enable money purchase pensions in payment to be paid as a trivial commutation lump sum; and
  • enable the full amount of dependants' benefits to be paid as authorised payments where there are insufficient funds in a cash balance arrangement when the member dies.

Financial advice and public engagement

There is to be an increase in the existing £150 income tax and relief limit for employer-arranged pensions advice to £500. This will be of value to employers embarking on incentive exercises where they are obliged to arrange and pay for financial advice for those affected.

There is also to be consultation on a new Pensions Advice Allowance. This will enable people to take up to £500 tax free from their DC pension savings before age 55 to redeem against the cost of financial advice.

There is also to be, from 2019, a Pensions Dashboard. This will mean that individuals will be able to view all of their pension savings in one place. It is to be designed and funded by the pensions industry.    

Increase in employer contributions to public service schemes

The discount rate used to value the liabilities of public service schemes is to be adjusted from 2019 onwards. The impact of this will be to increase the rates of employer contributions. This will affect not only public sector employers but also those in the private sector who have taken on former public sector staff in outsourcing and, as a result of New Fair Deal, have been required themselves to participate in a pubic service scheme.

Once the new rates are published, these should be taken into account when pricing tenders for new contracts or contract re-lets. Contractors will also need to consider the implications of this for any existing terms and review any adjustment mechanisms already built into their contracts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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