Finance Bill 2013

Introduction

The draft Finance Bill 2013 was published for consultation on 11 December 2012. The Bill includes a number of measures for pensions, including provisions to implement the changes to pensions tax relief announced in the Autumn Statement.1

By publishing the provisions in draft, the Government aims to provide certainty for taxpayers and a greater window for scrutiny before the Bill becomes law. However, comments are invited on the technical aspects only, not on the policy itself. The Bill is due to be introduced formally to Parliament following the 2013 Budget.

Key points

The draft Bill includes:

the measures announced in the Autumn Statement to reduce the AA and LTA from 6 April 2014;
provisions to align the tax rules for bridging pensions with forthcoming changes in SPA; and
a number of other measures originally announced in the 2012 Budget.2

Pensions tax relief

The Bill introduces measures to reduce the AA to £40,000 (from £50,000) and the LTA to £1.25 million (from £1.5 million) with effect from the tax year 2014/15. To help those with pension savings at or near the current LTA, a transitional protection will be available, “fixed protection 2014”, based on the fixed protection regime brought in from April 2012, when the LTA was reduced to £1.5 million.

In addition, the Government will consider whether to offer a form of personalised protection that would entitle individuals to an LTA of the greater of the value of their pension rights on 5 April 2014 (up to an overall maximum of £1.5 million) or the standard LTA. But in contrast to the rules for fixed protection 2014, “individuals with personalised protection would not be subject to any restrictions on future contributions or accruing further benefits”. Further details of this proposal are awaited.

Bridging pensions

Some DB schemes pay members who retire before SPA a higher pension at the outset, which is then reduced at SPA to take account of State pension coming into payment. The aim is to allow the member to receive a similar overall level of income in retirement, regardless of when State pension actually starts.

Although often referred to as bridging pensions, these arrangements are also known by a variety of other names including “level pensions”, “step-up pensions” and “State pension offsets”. Bridging pensions may form an integral part of a scheme’s design (and therefore be payable automatically to anyone retiring before SPA) or, alternatively, they may be offered as an option.

In order to count as an authorised payment, the Finance Act 2004 generally prevents pensions being reduced once in payment. Reductions made to bridging pensions are an exception to this rule, provided that:

the pension is reduced between the ages of 60 and 65; and
the amount of the reduction does not exceed a specified limit3 (which is designed to ensure that the reduction is based on expected State pension).

The Bill includes provisions that are designed to align the tax rules governing bridging pensions with the forthcoming changes in SPA (namely, the equalisation of SPA between men and women by 2018 and the rise in SPA to 66 for both sexes by October 2020).

The provisions in the draft Bill follow in the wake of a DWP consultation4 in October 2012, on draft regulations to introduce a limited power for trustees of schemes providing bridging pensions to modify their rules to take account of the impact of changes in SPA.

Other pensions measures

The Bill also covers:

Abolition of DC contracting-out:5 following its abolition in April 2012, consequential amendments are proposed to remove or amend obsolete provisions that refer to contracting-out through a DC pension scheme. Some provisions will be repealed from 6 April 2013, with others repealed from 6 April 2015 and 2016, to allow time for late payment of amounts due before abolition, and adjustments to payments already made in respect of contributions due before abolition, to continue to be made to schemes with the same tax consequences as previously. Associated draft amendments to pensions tax regulations are due to be published in January 2013.
Drawdown policy: as announced in the 2012 Autumn Statement, the capped drawdown limit (namely, the maximum amount that an individual is entitled to withdraw from their funds each year) will increase from 100% to 120% of a comparable annuity.
QROPS: building on changes introduced in April 2012 to reinforce the information and reporting requirements for QROPS,6 reporting requirements and powers of exclusion relating to QROPS will be further strengthened. Broadly, schemes which permit tax advantages that are not intended to be available under the QROPS rules are to be excluded from being a QROPS. In addition, draft regulations are due in early 2013, under which a scheme manager will be required to continue to report to HMRC any payments made out of transfers of pension savings accepted from UK pension schemes, even where that scheme has ceased to be a QROPS since accepting the transfer.
Family pension plans: from 6 April 2013, contributions to a registered pension scheme for an employee’s spouse or family member as part of the employee’s flexible remuneration package will give rise to tax and National Insurance Contribution liabilities on both the employee and the employer.

1 Please see our Alert: “Autumn Statement 2012“(6 December 2012)
2 Please see our Alert: “Budget 2012: the pensions story“(22 March 2012)
3 Set out in the Finance Act 2004 (Schedule 28, paragraph 2(4))
4 Please see our Alert: “Consultation on draft legislation – bridging pensions” (8 October 2012)
5 Please see our Alert: “Abolition of DC Contracting-Out: The Final Countdown” (23 February 2012)
6 Please see our Alert: “Finance Bill 2012” (8 December 2011)