UK Budget Special - New pensions tax structure unveiled
UK BUDGET SPECIAL - Pension saving in the UK will be taxed under a single regime with a tax-privileged pot for retirement set at a maximum £1.4m, rising incrementally to £1.8m by 2010, UK Chancellor of the Exchequer, Gordon Brown, today announced in the annual Budget Statement.
The new lifetime retirement saving allowance replaces eight different fiscal brackets currently used to calculate tax for UK pensions.
The Budget sets out that the lifetime allowance will be £1.5 million in 2006; £1.6m in 2007; £1.65m in 2007; £1.75m in 2009; and £1.8m in 2010.
The Chancellor rebuffed critics of last year’s December pre-budget report, some of whom claimed that up to 600,000 people could be hit by the new tax cap.
He argued that evidence showed an estimated 10,000, or 1,000 people per annum over ten years, would be impacted by the ceiling and that it would still be possible to save above this level, albeit without fiscal aid.
In addition the Chancellor announced the introduction of an option for pensioners to defer their state pension to have a taxable lump sum instead of higher weekly pension payments.
Individuals choosing to defer their state pension by at least one year from April 2005 will be able to take the lump sum with interest paid at the Bank of England base rate plus 2 per cent.
Help for UK pensioners over 70 to pay Council tax bills, as well as the possible backdating of applications for the Pension Credit to its inception in October 2003, were the other major pensions issues raised in the budget.
Commenting on the reforms, Chancellor Brown said they would bring: “simplification and increased flexibility that will ensure a transparent, consistent and flexible system that is readily understood, making it easier for people to concentrate on deciding when and how much to save for retirement.”
The Government will legislate on the Chancellor’s announcements in its Finance Bill 2004, although the simplified tax regime will only come into force in April 2006, in order, the government says, to allow employers and providers sufficient time to implement relevant structures and products.
The delay in introduction until 2006 surprised observers though, with some noting that there may be a problematic overlap with next year’s Pensions Bill regarding issues such as concurrency (paying into separate pension plans at the same time) and AVC provision (additional voluntary contributions).
Paul McGlone, principle and actuary at Aon Consulting, noted: “The 2006 date was a bit of a surprise and we had been concerned about the timescale. It’s sensible to have this to ensure that it is done properly and not rushed though
“The fact that the government has laid out the tax limits four years in advance is helpful also.”
However, Nigel Chambers, FIA director at Alexander Forbes Financial Services, was less keen on the delay, commenting: "It's a relief that simplification is going through but it's a disappointment that there will be a further year's delay before we can get on with the crucial job of making sure people save properly for their retirement."