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Budget: Possible pensions, tax and investment changes and a wish list

17 November 2017

Les Cameron, head of technical at Prudential, considers the key pensions, tax and investment issues the Chancellor could address and adds a wish list of his own.

Tax relief

A reduction in tax relief and potential removal of the tax-free lump sum are often mooted before budgets but I don’t think the tax-free lump sum will be removed; it’s an excellent incentive to save and is one of the things the general public like and understand about pensions.

Changes to pension tax relief seem inevitable in future but I don’t believe they will be addressed in this Budget. Making changes will not be simple and I don’t think there will be enough parliamentary time available to see them through to legislation. Tax is likely to be raised from the pension system but this will probably be through changes to the Annual and Lifetime Allowances.

Annual Allowance, Lifetime Allowance

We could see a reduction in the standard Annual Allowance from £40,000. The Chancellor could  bring more people into scope of the tapered Annual Allowance. The income limits for that are currently £150,000 and £110,000 and would be straightforward to reduce.

The Lifetime Allowance is about to increase from next year and while I don’t think there will be a reduction it’s possible the Lifetime Allowance increase could be deferred or cancelled completely.

Defined benefit valuations

To value defined benefit schemes for Lifetime Allowance purposes you currently multiply the pension taken by a factor of 20.  For Annual Allowance, the factor is 16 times. These factors were determined in 2006 and 2010 respectively. The value of defined benefits are fundamentally different these days so could we see a change in the valuation basis for defined benefit schemes for Annual and Lifetime Allowance purposes. 

Venture Capital Trusts and Enterprise Investment Schemes

The 30% tax relief on Venture Capital Trusts and Enterprise Investment Schemes could be a target. Likewise the availability of IHT business relief for EISs and AIM shares could be looked at. It seems counterintuitive that you would be allowed to hold and have access to an investment but also have it outside your estate.

My Budget wishes:

IHT planning

I would make it easier to give money away for IHT planning to encourage the cascading of wealth to the next generation. An increase in the gifting allowances, which have been frozen for many years, or a reduction of the seven-year time-limit for gifts to leave the estate would be good outcomes.

Pensions

One simple pension reform would be to allow members of pensions schemes and their beneficiaries to use the Open Market Option to access income drawdown. At present, if an individual or beneficiary also wants to enter an income drawdown arrangement, the scheme they are in, must allow drawdown.

If an individual’s scheme does not allow drawdown, then a full transfer needs to be done. In a beneficiary’s case, they would be forced to receive a lump sum or buy an annuity which may not be desirable. There is a permissive override in place that allows schemes to put people into drawdown which can then be transferred away if the scheme does not want to operate it.

This is complicated. Individuals should be allowed to get their tax-free lump sum from one scheme and buy a drawdown from another scheme. In the case of death benefits a transfer to another scheme’s drawdown should be made an allowable death benefit. This would make things much simpler for all, encourage shopping around and open up pension freedoms to everyone

 

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