George Osborne used his summer Budget to launch a wide-ranging review of the tax treatment of pensions. With a complete overhaul on the cards, PP looks back at how the current system of reliefs has changed over the last ten years.
The first major tax relief restrictions since A-Day in April 2006 began with Alistair Darling's 2009 Budget, when he announced he would restrict higher-rate tax relief on pension contributions for people with incomes over £150,000.
Restrictions had previously been governed by the A-Day reforms, which gave an absolute lifetime allowance of £1.75m and an annual allowance of £245,000 (limits for the 2009/2010 tax year).
In his 2009 Budget, Darling said that, from 2011 and for incomes above the £150,000 level, the value of pensions tax relief would be tapered down until it is 20% for those on incomes over £180,000 - making it worth the same for each pound of contribution to pension entitlement as for a basic rate income tax payer.
In addition, Darling said that, in anticipation of this change, he was also introducing legislation to prevent individuals taking advantage of the pensions tax relief while it is still available to them at a higher rate - and making substantial additional pension contributions prior to the restriction taking effect.
Darling said: "It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes, as now, to the top 1.5% of pension savers."
Pre-Budget Report 2009
In his pre-budget report of December 2009, Darling announced higher-rate tax relief restrictions - originally announced in the April 2009 budget - would now include employer contributions and affect those with relevant income of £130,000 and over rather than the previously announced figure of £150,000 and over.
This would have effectively meant anyone with income of £130,000 or more would not receive higher-rate tax relief on their contributions.
It was believed as many as 150,000 people could be caught out by this extension of higher-rate tax relief restrictions.
A statement by HM Treasury at the time confirmed: "From April 2011 tax relief on pension contributions will be restricted for individuals with gross incomes of £150,000 and over, where gross income incorporates all pension contributions, including the value of any benefit funded by, or eventually funded by, an individual's employer.
"Tax relief will gradually be tapered away so that above £180,000 it is worth 20%, the same rate received by a basic-rate income taxpayer. To provide more certainty for individuals around whether they are affected, and to reduce administrative burdens for schemes, this will be subject to an income floor at £130,000 of pre-tax income (excluding the value of any employer pension contributions)."
In what would be his last Budget, Darling rejected industry pleas to change the way it was going to implement pensions tax relief restrictions.
Darling confirmed: "Tax relief on pensions will be restricted but only for those earning £130,000 a year."
HM Treasury also published a summary of the responses it received on its consultation on implementing the restriction of pensions tax relief - and outlined the Government's response and the next steps for developing the restriction ahead of its proposed introduction in April 2011.
But it rejected pleas from the pensions industry to reduce the annual or lifetime allowance instead - saying such a move would hit lower earners.
It said: "A reduction in the annual or lifetime allowance would potentially apply to pension savers with much lower incomes, particularly in DB schemes. Furthermore, it would allow high-income individuals to continue to benefit from a higher rate of tax relief than other pension savers.
"In addition, alternative options could not be implemented fairly without making significant adjustments to the pensions tax system that would also add their own complexity."
It continued: "The government does not propose any changes to the annual allowance or the lifetime allowance at this stage."
And the Treasury remained adamant that restricting tax relief was the right thing to do.
It said: "The government remains clear that the restriction of pensions tax relief is proportionate and necessary, and many stakeholders agreed that action to restrict the amount of relief going to those on the highest incomes is appropriate.
"The measure also represents an important part of the government's consolidation of the public finances. In restricting relief on pension contributions, the government's objectives are to rebalance the pensions tax system to ensure that pensions tax relief remains affordable, and to address the disproportionate levels of relief going to those on the highest incomes, around 2% of pension savers."
The Budget also announced further decisions on how the restriction of relief would be applied and delivered - noting that deemed contributions to defined benefit pension schemes will be valued using the age-related factors method.
And it said the restrictions would primarily be delivered through self assessment - noting tax returns would be modified to report additional information to HMRC and to calculate the restriction of pensions tax relief.
It said, where individuals are affected, HMRC will collect a recovery charge reflecting the restriction of relief through self-assessment.
A cost-benefit analysis, published at the time of the Budget, revealed that HM Treasury had trebled its estimate of the one-off costs that pension schemes, employers and individuals would incur as a result of the tax on higher earners' pension contributions.
The new impact assessment said the one-off costs incurred during the transition to the new regime will total £900m - or around £3000 for each of the 300,000 taxpayers affected - compared with the £305m estimate published in December.
The increase is particularly pronounced for employers, whose one-off costs are now expected to be £330m rather than £40m. Annual costs are now expected to be £115m, rather than £90m.
Emergency Budget 2010
In his Emergency Budget - held just after the coalition government came to power - Chancellor George Osborne announced he would work with the pensions industry on "alternative ways" to implement pension tax relief restrictions - and was considering reducing the annual allowance to as little as £30,000.
Osborne said: "Many businesses are alarmed at complexity. I have listened to those concerns, however, I must also protect £3.5bn revenue it would create.
"I will work with industry on raising same amount of revenue - potentially by reducing the annual allowance."
In a Treasury document - published alongside the Budget - the government said "provisional analysis suggested an annual allowance in the region of £30,000 - £45,000 might deliver the necessary yield".
The document also confirmed the government has "reservations" about the approach adopted in Finance Act 2010 - saying it could have "unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness".
It said the government wanted to engage employers, pension schemes, experts and other interested parties to determine the best design of a regime - looking at a wide range of issues that will need further consideration.
National Association of Pension Funds chief executive Joanne Segars feared the proposals as they stood would cost between £2.5bn to £3bn to implement and lead to senior corporate decision-makers disengaging from workplace pensions, eroding employer interest in the schemes.
The trade body suggested reducing the amount of pension contribution eligible for tax relief from £255,000 to about £50,000, which will limit the tax relief available to high earners, but in a way less harmful to pension provision.
"This will be less damaging to pension saving and cost far less to implement," Segars said.
Treasury announcement - October 2010
In October 2010, the Treasury confirmed the annual allowance would be cut from £255,000 to £50,000; the lifetime allowance reduced from £1.8m to £1.5m, and the factor for valuing final salary benefits increased from 10 to 16.
It said this would replace the "complex proposal" legislated for by the Labour government.
The Treasury said the measure would raise £4bn a year - but would be targeted at those who make the most significant pension savings
It said these new allowances will for the time being be frozen - with options for indexing to be considered from 2015-16.
Pension benefits for deferred pensioners will be exempt from the annual allowance regime.
The Treasury estimated the changes would affect 100,000 pension savers - 80% of those will have incomes of more than £100,000.
However, the government said it was committed to protecting individuals on low and moderate incomes as far as possible.
It said to protect individuals who exceed the annual allowance due to one-off "spike" in accrual, the government would allow individuals to offset this against unused allowance from the previous three tax years.
The Treasury said it would also introduce a CPI exemption - which would mean only pay rises in excess of CPI inflation would be taken into account for final salary benefit calculations.
In addition, it said it would consult on options enabling people to meet tax charges out of their pensions.
The Treasury said in order to protect the public finances it was necessary to introduce the reduced annual allowance from April 2011. The government said it planned to introduce the reduction in the lifetime allowance from April 2012.
Financial secretary to the Treasury Mark Hoban said: "We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.
"The coalition government believes that our system is fair, will preserve incentives to save and - compared to the last government's approach - will help UK businesses to attract and retain talent."
It confirmed the move, first announced on 14 October, last year would come into force from 6 April 2011
The document also confirmed the lifetime allowance would be £1.5m.
In the run-up to the the 2012 Budget, a cut to the annual allowance emerged as the "strong favourite" to be announced by the Chancellor.
The Liberal Democrats had been calling publicly for cuts to higher-rate tax relief to fund a hike in the income tax threshold to £10,000.
At the time it was said three options were on the table: a cut in the higher-rate tax relief from 40% to 20%, a further reduction in the annual allowance or changes to the size of the tax free lump sum available on retirement.
Industry commentators believed it was "75% likely" a cut in annual allowance would be included in the Budget but hoped the governement would leave tax relief "alone entirely".
In the end, the government decided to make no further changes to tax relief.
Autumn Statement 2012
The Chancellor said the cut to the tax-free allowance would save the Treasury £1bn a year by 2017/18.
He said 98% of the population have less than a £1.25m pension pot and noted the median pot in the UK was £55,000 with 99% of savers' annual contributions less than 40,000.
Osborne said the average annual contribution was less than £6,000.
The Autumn Statement said that in 2010-11, tax relief for pension savings cost the Government around £33bn - with over half of this relief going to higher rate taxpayers.
And it said, even with changes made to reduce the cost of pensions tax relief, the government was still likely to forgo around £31bn in tax revenues this year, rising to £35bn in 2015-16.
HM Treasury revealed in the budget that it would include legislation on the practice in the Finance Bill 2013.
It said: "As announced at Budget 2012, legislation will be included in Finance Bill 2013 to remove the tax and NICs incentives for employees and employers respectively from arrangements where an employer pays a pension contribution into a registered pension scheme for an employee's spouse or family member as part of their employee's ﬂexible remuneration package."
Autumn Statement 2013
The Chancellor announced he would abolish the 55% tax charge levied on beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity.
In a widely anticipated move, the government said beneficiaries would be able to receive any future payments from such policies tax free where no payments have been made to the beneficiary before 6 April 2015.
It said the tax rules would also be changed to allow joint life annuities to be paid to any beneficiary.
If the annuitant dies after the age of 75 then the beneficiary will pay the marginal rate of income tax, or 45% if the funds are taken as a lump sum payment.
Lump sum payments will be charged at the beneficiary's marginal rate from 2016-17.
The announcement will bring tax treatment for annuities in line with income drawdown. The original proposals would have weighted the decision-making in favour of the riskier - but more flexible - income drawdown option.
From 27 March 2014, the government said it would slash the minimum income requirement for retirees entering flexible drawdown from £20,000 to £12,000 and raise maximum GAD limits for those in capped drawdown from 120% to 150%.
In a widely anticipated move Osborne also raised trivial commutation limits from £2,000 to £10,000 and the trivial commutation lump sum limit will increase from £18,000 to £30,000.
However the government said it planned to be even more radical - saying that from April 2015 it would allow anyone over the age of 55 to take their entire pensions pot as cash, subject to their marginal rate of income tax in that year.
The government also said it would raise the age at which an individual could take their pension savings under the tax rules from 55 to 57 in 2028.
And said it would offer all DC scheme members access to free and impartial face-to-face guidance on the range of options available to them at retirement.
Delivering the changes Osborne said: "We will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity."
The government estimated the move would raise £320m in 2015/16, £600m in 2016/17; £910m in 2017/18 and £1.2bn in 2018/19.
Chancellor George Osborne confirmed the lifetime allowance would be reduced from £1.25m to £1m from the 2016-17 tax year, netting the Treasury an extra £600m a year.
But he said he would index the lifetime allowance from the 2018-19 tax year - and also ruled out making any further change to the annual allowance.
Delivering the Budget, Osborne said: "From next year, we will further reduce the lifetime allowance from £1.25m to £1m. This will save around £600m a year. Fewer than 4% of pension savers currently approaching retirement will be affected.
"However, I want to ensure those still building up their pension pots are protected from inflation so from 2018 we will index the lifetime allowance."
This comes after Labour leader Ed Miliband revealed his party would cut the lifetime and annual allowances in an effort to reduce university tuition fees if it wins the general election.
Summer Budget 2015
In his Summer Budget, George Osborne announced he would cut the amount of tax relief high earners can claim on pension contributions to fund an increase in the inheritance tax threshold.
He said that, for those earning more than £150,000, 50p of tax relief will be lost for every additional pound earned between this threshold and £210,000, down to a minimum annual allowance of £10,000.
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