25th March 2011

Scottish Life 2011 Budget Summary

George Osborne delivered his second Budget on Wednesday 23 March 2011.
Thankfully few new measures directly affecting the pensions industry were announced. That's probably in recognition of the fact that lots of changes that will be included in the Finance Act 2011 have already been announced.

These include:
The restriction of tax relief through a reduced annual allowance
Removing the need to buy an annuity by age 75
Changes to the basis for GAD reviews
‘Disguised remuneration' restrictions which effectively end the tax attractions of Employer Financed Retirement Benefit Schemes
The reduction of the lifetime allowance from 6 April 2012.
The Chancellor did announce that the Government's intention to move to a single state pension of approximately £140 a week would result in the end of contracting out for defined benefit pension schemes. The Department for Work and Pensions will publish a Green Paper to consult on options for reform shortly. This will investigate the potential impact on employees and schemes in both the private and public sectors. The Budget document also stated that 'the Government will bring forward proposals to manage future changes in the state pension age more automatically, including the option of a regular independent review of longevity changes'.

In addition, it was announced that a merger of income tax and national insurance contributions is being considered. The consultation is planned for this year, with any change not expected to happen in this Parliament. There has been press speculation on the possible effect on benefits, including salary exchange schemes. Given the expected timescale for this change, salary exchange remains an attractive proposition for employers. Any assessment of the impact on pension tax relief is only really possible once we see the detail. We'll keep you updated on this as it develops.

The 50% tax rate on taxable incomes above £150,000 was confirmed as temporary. The Chancellor has asked HMRC to review the amount of tax the 50% tax rate actually raises, presumably with a view to removing it at some point. A 50% tax payer can get 50% tax relief on some or all of their pension contributions up to the limits allowed. As this tax rate is temporary, 50% tax rate payers should look to maximise their pension contributions as they're likely to pay a lower level of tax on their pension income.

The information provided is based on our current understanding of the Budget 2011 and associated documents and may be subject to alteration as a result of changes in legislation or practice.

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