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Pensions: UK Budget 2021

Pension Board and Trustee Consulting|Pensions Corporate Consulting|Retirement

March 3, 2021

A note identifying, and commenting on, measures announced in the UK Spring Budget 2021 that affect pension provision.

There was only one significant change announced for the pensions tax regime in today’s Budget – the lifetime allowance is to be frozen at its current (2020-21) level until April 2026 (see below).

The absence of any other direct measures was not surprising, given the government’s focus on supporting the economy through the pandemic and a statement on 18 February that to “allow for more transparency and scrutiny, documents and consultations that would traditionally be published at a Budget will be published on 23 March”.

That statement noted the criteria for Budget day announcements – measures that “have implications to the government’s finances, that need to be captured in the OBR’s economic and fiscal outlook, and announcements of measures to be legislated in the Finance Bill”.

It follows that any pensions consultations were unlikely to be published today and, if we see any on 23 March, legislative provision for their implementation is unlikely until at least 2022.

Anyone hoping for quick resolution of the ongoing net pay versus relief at source conundrum, whereby low earners saving in a pension can end up in different financial positions, depending whether contributions are collected under the net pay or relief at source system, is likely to be disappointed. This did not feature in today’s Budget and so will not be addressed in Finance Bill 2021. Whether 23 March will see a consultation published (following last July’s call for evidence), remains to be seen.

Lifetime allowance (LTA)

The government has announced that the LTA will be frozen at its current level of £1,073,100 until 2026. Had the LTA increased as prescribed within Finance Act 2004 we would have expected it to have increased to £1,078,900 from April 2021 and, using the Office for Budget Responsibility’s forecast of CPI, would have reached £1,162,300 in 2025-26. So, in the absence of this measure, the LTA would have been expected to be £89,200 higher than will now be the case.

Focussing on the present, pension schemes are required to issue retirement packs at least four months before a member’s retirement date (at least in relation to money purchase/cash balance benefits). This means they will already have issued packs for members due to retire before 3 July 2021 and they are likely to have assumed a now-incorrect LTA level. Where a member’s benefit value is above £1,073,100 retirement packs are likely to need re-issue and explanation.

The government expects the LTA freeze to save close to £1 billion (£990 million) in aggregate in the period to 2026. It doesn’t give any indication of how much of this is derived from behavioural change (lowering of contributions or bringing forward retirement) and/or LTA charges.

Of course, this all presupposes that the LTA survives as a control on pensions tax relief until 2026.

Annual allowance (AA)

No changes have been announced to the AA.

The standard AA remains at £40,000 and the money purchase AA (applicable to defined contribution (DC) savings where a person has already accessed some DC savings flexibly) at £4,000. The rate at which the AA reduces (the tapered AA) and the thresholds from which this takes effect are similarly unchanged. Individuals with threshold income of at least £200,000 have their AA reduced by £1 for every £2 that their adjusted income (this includes employer contributions to pension schemes) is over £240,000. Once adjusted income reaches £312,000, no further taper is applied, delivering a minimum AA of £4,000.

Personal taxes

The Chancellor kept to the Conservative Party’s manifesto commitment and has not raised the rate of income tax or National Insurance Contributions (NICs). He has also honoured announcements that had already been made to raise the personal allowance, higher rate threshold (other than in Scotland, as this is set by the Scottish Parliament) and NIC limits in line with CPI from 2020-21 to 2021-22. Thereafter, the personal allowance will be fixed at the 2021-22 level of £12,570 and the higher rate threshold, National Upper Earnings Limit (UEL) and Upper Profits Limit (UPL) remain at the 2021-22 level of £50,270 until April 2026. Other NIC limits are subject to review. One effect of this fiscal drag is that as wages rise an increasing number of people can benefit from higher rate tax relief on their pension contributions.

Although not guaranteed, so far, the limits used for the calculation of qualifying earnings for automatic enrolment have matched those for the NIC lower and upper earnings limit. For 2021-22 this meant that the lower limit was unchanged. If the limits continue to be synchronised, then there will be no change to the upper limit from 2021 to 2026, but the lower limit and the earnings trigger could change.

Corporation taxes

The Chancellor has attempted to balance the requirement to allow the economy time to recover with the need to rebuild the nation’s finances by holding back any increase in corporation tax until 2023. The corporation tax rate will increase to 25% in April 2023 on profits over £250,000 with the relief tapering down to the current rate of 19% for profits under £50,000.

The increase in this tax may prompt corporates to take advantage of greater tax relief in the future by looking to defer short-term deficit reduction contributions beyond 2023 or back-end loading recovery plans. However, significant step-ups in contributions in 2023 could trigger spreading of tax relief, which would need to be considered along with a trustee board’s receptiveness to such an approach.

Furlough scheme extended to autumn

The Chancellor has announced that the furlough scheme will be extended in its current guise until the end of June with a phased withdrawal in two stages through to the end of September 2021.

Under furlough the Government covers 80% of wages up to £2,500 per month but employers are required to pay the furloughed worker’s minimum pension contributions and National Insurance contributions as has been required since August 2020. The phase-out will see Government reduce its cover to 70% of wages in July with employers then paying the extra 10%. It will further reduce in August and September with the split shifting so that the Government is covering 60% and employers 20% of the furloughed wage. The phased withdrawal reflects the previous cost-sharing measures that were applied in September and October 2020.

Bringing alternative investments within the (DC scheme) charge cap

Earlier this year, the government announced that it was not going to make any changes to the 0.75% charge cap for default funds used by employers to meet their automatic enrolment obligations. In that, the Government announced that it was keen to find a way to encourage investments in alternative and illiquid investments and cited this as a reason for not bringing transaction costs within the cap.

It has now announced that it plans to consult within the next month on whether certain costs within the charge cap affect pension schemes’ ability to invest in a broader range of assets. Today’s announcement also reveals that DWP will “come forward with draft regulations to make it easier for schemes to take up such opportunities within the charge cap by smoothing certain performance fees over a multi-year period”.

In the “Build Back Better” document the Government comments that it wants “to ensure pension savers can access the returns offered by venture capital and growth equity as part of a balanced portfolio”. This consultation will look at whether certain costs affect DC schemes ability to invest in a broader range of assets with the aim of ensuring these funds aren’t discouraged from investing in a way that generates the highest possible returns for savers.

This will encounter some familiar issues with liquidity and transfer rights, so it’s not clear how they will attempt to reconcile such issues with their stated aim.

Climate issues

The Budget and supporting documents contain numerous references to “green growth” and the “net zero” target.

Although not new, specific climate-related measures include implementing a Green Taxonomy for measuring firms’ environmental impacts and requiring firms to disclose their climate risks in line with the TCFD recommendations. In addition the government has confirmed that it plans to issue at least £15 billion of “green gilts” in the coming financial year to help tackle climate change and to create green jobs across the UK, with plans “to quickly build out a green yield curve in the coming years”. Further details of the types of expenditures that will be financed to help meet the government’s environmental objectives will be set out in a framework to be published in June 2021.

Overarching this, the remits for both the Monetary and Financial Policy Committees of the Bank of England are to be updated to “reflect the UK Government’s economic strategy for delivering an environmentally sustainable net zero economy” (the underlying inflation target remains unchanged as a symmetric target of 2% for the 12-month increase in CPI).

UK Infrastructure Bank – replacing the UK’s participation in the European Investment Bank

The Government intends to establish a new entity, headquartered in Leeds, with £22 billion of financial capacity to encourage and support public and private investment in “clean energy, transport, digital water and waste” infrastructure projects. The aim is to be operational from summer 2021 and the Government will publish a set of “investment principles” later in the spring.

However, the Climate Change Committee suggest that around £50 billion of additional capital investment is needed each year to meet the net zero target by 2050. The Bank will help bridge this gap by co-investing alongside the private sector. In particular, it will play a part in supporting and developing early-stage technologies with the intention of de-risking the projects and growing the overall UK market to create new opportunities. The bank will look to “work closely with pension funds and the institutional investor market” to build on the existing infrastructure finance market.

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