How is pensions tax looking post-Budget?

With an unusually long run in there was plenty of time for speculation about what would be announced and, as usual, rumours about changes to pensions featured heavily.

So where did the Budget leave the pension tax world?

To an extent pensions tax has been left largely unchanged, particularly when it comes to the things that matter most to those looking to fund their retirement.

The tax-free cash rules remain the same, as does the operation of pension tax relief. The state pension triple lock also remains and state pensions are set to rise by 4.1 per cent next year.

A period of stability in the tax world, when it applies to pensions, should be widely welcomed, as, if not properly considered, any changes could risk disincentivising pension saving. 

The government is in the process of conducting its Pension Review, part of which is looking at how we ensure that people have good retirement outcomes and make sufficient retirement provision.

Tax-free cash and tax relief are clearly incentives to save, so it is right to have a period of sustainability and consider tax incentivisation alongside the overall review. 

There were rumours of employer national insurance being applied to employer pension contributions, which would have impacted salary exchange arrangements – where you give up some salary in exchange for an employer pension contribution – but these did not come to pass.

Perhaps ironically, the increase in employer national insurance from 13.8 per cent to 15 per cent on amounts paid over £9,100 and £5,000 respectively have made salary exchange more attractive.  

However, there were two 'small' changes announced that do have an impact. 

The first one was mentioned in Reeves’ speech and has widespread and far-reaching consequences. This is bringing pensions into the scope of inheritance tax.

The second was something that appeared in the supporting documentation and has a more niche impact. This is a policy paper entitled “Reducing tax-free overseas transfers of tax relieved UK pensions”.

Reducing tax-free overseas transfers of tax relieved UK pensions

An overseas transfer charge was first created from March 9 2017.

The overseas transfer charge applies on the total value of funds transferred abroad unless it was covered by an exclusion. The charge is 25 per cent.

The exclusions were:

1. The member and qualifying recognised overseas pension scheme (QROPS) were resident in the same country.
2. The QROPS was in Gibraltar or the European Economic Area and the member was UK or EEA resident. 
3. Broadly, the QROPS was an employer arrangement and the transferor was an employee.  

If the members' circumstances changed within five years of a transfer, which meant they now met the exclusion circumstances, then any charge paid could be refunded. The converse also applies where there was no original charge. 

The second exclusion above meant a member could transfer to a QROPS and stay resident in the UK without a charge as long as the QROPS was inside the EEA and Gibraltar.  

Further to the abolition of the lifetime allowance, three new allowances were introduced to limit the tax privileged amounts that could be taken from UK pension schemes.