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Spring Budget 2017: Pensions and savings

ICAEW Tax Faculty provides analysis of the announcements relating to the taxation of pensions and savings in the Spring Budget 2017.

In contrast to recent budgets there was very little mention of pensions in the budget speech which brought a sigh of relief from pension specialists. There was confirmation of a couple of measures announced previously:

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Money purchase annual allowance

The tax allowable contribution into a pension after it has been accessed flexibly will be reduced from £10,000pa to £4,000pa from April 2017.

Foreign pensions

The taxation of foreign pensions received by UK residents will be aligned with the tax treatment of pensions earned in the UK. The 10% reduction in the taxable pension income received each year will no longer apply and lump sums built up after 6 April 2017 will be taxed as for UK pension lump sums.

Qualifying recognised overseas pension schemes (QROPS)

Members of pension schemes have taken advantage of QROPS for many years, one of the reasons was to enable them to access their pension fund in ways not available at that time in the UK regime or to avoid having to purchase an annuity. Following the introduction of the flexible pension regime from April 2015 many pension members have been able to achieve their objectives without having to transfer their funds into a QROPS but they are still used.

A transfer into a QROPS was not a taxable event up to and including 8 March 2017 and some individuals have been able to transfer their pension into a QROPS and then access the entire fund without incurring a tax charge. From 9 March 2017 there will be a 25% tax charge on transferring a fund into a QROPS with some exceptions where there is a genuine need to transfer the fund:

  • both the individual and the pension scheme are in countries within the European Economic Area (EEA); or
  • if outside the EEA, both the individual and the pension scheme are in the same country; or
  • he QROPS is an occupational pension scheme provided by the individual’s employer.

If the individual’s circumstances change within five tax years of the transfer, the tax treatment of the transfer will be reconsidered.

It is also planned to apply UK tax rules to payments from funds that have had the benefit of UK tax relief and have been transferred, on or after 6 April 2017, to a QROPS. UK tax rules will apply to any payments made in the first five full tax years following the transfer, regardless of whether the individual is or has been UK resident in that period.

Master trust tax registration

The supervision and authorisation scheme has been toughened for master trust pension schemes giving greater protection to members.

A trust based pension scheme is generally established by an employer for its employees, representatives of the employer will usually form the majority of the board of trustees. A master trust is typically established by a provider, generally an insurance company, it is a multi-employer occupational scheme where each employer has its own division within the master arrangement.

Many of these master trusts have been set up in response to auto enrolment, where companies are required to provide a pension scheme for their employees.

Life insurance policies: part surrenders and part assignments

Following on from the Lobler case, when Mr Lobler was assessed to pay a significant tax liability following the partial surrender of his life policies when in reality he had suffered an economic loss, changes will be included in Finance Bill 2017 to allow individuals in a similar predicament to apply to have the chargeable gain recalculated. We reviewed the draft legislation in ICAEW REP 12/17.

Lifetime ISA

The Lifetime ISA (LISA) announced in spring budget 2016 was confirmed to launch from 6 April 2017. The LISA is available to those aged under 40 who can save up to £4,000pa, a 25% bonus will be added by the government giving a maximum bonus each year of £1,000. The bonus will be paid at the end of the year for 2017/18 and monthly thereafter. The bonus is paid for each year the saver is aged between 18 and 50. The savings can only be used to help purchase a first home or when the saver reaches age 60, withdrawals that do not match these criteria mean the bonus is lost.

Several banks and investment house have said they will not be offering the LISA at 6 April 2017, some may come on stream later in the tax year – but the idea has not attracted many providers.

As an alternative to pension saving it offers the same ‘free’ cash as a pension contribution for a basic rate taxpayer but there is no employer contribution so an employee is probably better of sticking with auto enrolment.

As an alternative to the help to buy ISA it does allow an extra £1,000pa to be saved giving access to an additional £250 of bonus each year.

NS&I investment bond

The interest rate on the new investment bond announced in the Autumn Statement 2016 was confirmed at 2.2%. The bond is available to all savers aged over 16, with a minimum deposit of £100 and maximum of £3,000. The bond has a three-year term.

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