Volume 2021 | Issue 37
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The Chancellor has unveiled his latest Budget, and the first to actually take place in the autumn as scheduled since the General Election.
There was noticeably less speculation about possible changes to pensions and other employee benefits than in the recent past, and thankfully it has proved to be a fairly quiet Budget for pensions.
A resolution to the net pay problem
There is no single way of applying tax relief across all pension schemes. Occupational pension schemes generally use net pay arrangements, while personal pensions normally use relief at source, with most members able to receive tax relief on their contributions. Unfortunately, due to the way that net pay arrangements operate, non-tax payers don’t receive tax relief, whereas those in pension schemes that operate relief at source do.
The Treasury has previously issued a call for evidence on plans to resolve this disparity, and it has now published its response which confirms that the government will resolve the anomaly by introducing a system to make annual top-up payments directly to low-earning members in schemes using net pay arrangement from 2024/25 onwards, with the first of these top-ups being paid in 2025/26. The full detail on how this system will work is still awaited.
A further consultation on the charge cap
In April 2015, the government introduced a charge cap of 0.75% of funds under management (or an equivalent combination charge) in respect of the default arrangements of defined contribution workplace pension schemes used for automatic enrolment. The charge cap has been kept under regular review since then.
The Treasury has now announced that it will consult before the end of this year on further changes to the charge cap to enable members to benefit from better growth in their long-term investments. The consultation will specifically consider amendments to the scope of the cap to better accommodate well-designed performance fees and enable investments into the UK’s most productive assets, while continuing to protect savers.
This signals a continuation in the government’s drive to open pension scheme investment up to more illiquid investments, a feature of several recent Budgets.
Scheme pays changes
Where a member has an annual allowance charge over £2,000 and their pension input amount for that scheme exceed £40,000, they can ask their pension scheme to pay the charge for them, in return for an actuarial equivalent reduction in the value of their pension savings. This is known as scheme pays.
Although not mentioned by the Chancellor, HMRC published a policy paper on Budget day which confirms the government is planning to introduce legislation on changes to scheme pays to allow members to use the facility for the previous six tax years where their tax charge has changed due to a retrospective change of facts, and when the scheme administrator must report and pay the annual allowance charge to HMRC.
Buck comment
The fact that the Chancellor has resisted any temptation to impose more change on the pensions industry should be welcomed. The changes announced seem either uncontroversial or expected.
While changes in pensions taxation shouldn’t necessarily be viewed negatively, all too often in recent years changes have seemingly been announced for short-term political gain, without any apparent consideration of the longer-term impacts on pension schemes, members, or sponsors.
The solution to the net pay problem is interesting as the Treasury appears to have had a change of heart. The option chosen is a variation of one that the government hadn’t previously been minded to take forward. It’s possible that responses to the call for evidence may have prompted a rethink.
The continued drive to encourage more illiquid investment by pension schemes is understandable from the government’s perspective, but we shouldn’t lose sight of the fact that, firstly, this needs to be in the best of interests of members, rather than to help the economy recover from the pandemic.