The Chancellor delivered his second Budget of 2021 on 27 October. From a pensions perspective, we were encouraged to see that the Government did not introduce a reform of pensions tax relief but it did provide a long-awaited solution to the Net Pay/RAS anomaly. These two decisions reflect points made in the PLSA’s Budget Submission to the Chancellor.
However, the Government has announced a consultation on amending the AE charge cap so as to make it easier for pension schemes to invest in assets that charge performance fees. HM Treasury say this will not involve a change to the level of the charge cap but how it treats spikes in charges due to performance fees.
Other announcements, listed in this briefing, include topics related to: the State Pension Triple Lock; National Insurance; extra money to MaPS for debt advice; public sector pay; audit in local government; and McCloud.
Pensions Tax Relief – No Change
During the past year, there has been much speculation that the Government may be looking at reforming pensions tax relief as a source of additional revenue, in light of the financial pressures that have arisen during the covid-19 pandemic. The PLSA was pleased to see that the Government did not undertake any reform of pension tax relief at the Budget. Analysis from our 5 Principles for Pension Taxation suggests that no single reform of the current system is perfect and that most leave many people with lower pension savings and create very substantial cost and complexity for employers and occupational pension schemes. There were no changes to the annual allowance or lifetime allowance. The lifetime allowance was linked to inflation but was frozen until 2025-26 at the last budget at £1,073,100. (The ISA and savings allowances were left unchanged.)
Net Pay/RAS Anomaly for Low Earners
In the Budget the Treasury released a response to the Pensions Tax Relief Administration Call for Evidence which looked at the net pay/RAS anomaly. This anomaly results in lower earners in net pay schemes not receiving tax relief on their contributions, while those in enrolled in RAS schemes do receive tax relief. The Government is planning on resolving this anomaly by introducing a system to make top-up payments directly to low-earning individuals saving in net pay schemes from 2024-25 onwards. HMRC will calculate the amount of top-up an individual is entitled to and invite them to provide details to HMRC to enable payment. HM Treasury estimates this change will benefit around 1.2 million people, mainly women, and result in a payment of around £50 per person on average. Prior to the Budget, the PLSA called on Government to provide an efficient, cost-effective solution. We welcome the Government taking action on this issue and look forward to further details. The Government is also investing £71 million in modernising the administration of pensions tax relief, including RAS claims.
AE Charge Cap – Performance Fees
The Chancellor has confirmed that the Government plans to consult on changes to the charge cap, specifically to the scope of the cap, to ‘better accommodate’ well designed performance fees, with a view to encouraging investments that are not currently possible within the current rules. This is part of the Government’s agenda to encourage more investment in long-term, productive assets. The PLSA understands that the Government has no plans to alter the level of the cap.
The PLSA is generally supportive of the currently level and scope of the cap, although we did not oppose changes consulted on earlier this year, which resulted in the exclusion of performance fees from the pro rata cap. These changes took effect earlier this month. We would rather the Government take time to review the impact of those changes, but we will of course fully review the proposals when they are available. As members of the Productive Finance Working Group, we note that this was not a recommendation of the group, and we would agree that the factors that drive investments decisions are complex, and wouldn’t necessarily be dictated by the charge cap.
State Pension – Triple Lock
The Government confirmed that the earnings link of the State Pension Triple lock is suspended temporarily for next year and that pensions would rise by the higher of 2.5% or CPI. (Also, the planned merger of Pension Credit and Housing Benefits has been postponed until 2025.)
The Lower Earnings Limit for National Insurance will increase by 3.1% which also has a knock-on effect on AE contributions as rate paid based on earnings above the LEL. The Government is also introducing new emergency powers to create tax relief for income tax and national insurance for specific expenses and benefits in kind during times of national disaster.
Money and Pensions Service – Debt Advice
The Money and Pensions Service will receive extra funding for the provision of Debt Advice to help those in financial difficulty.
Public Sector Pay
The Chancellor announced public sector workers will see pay rises over the next 3 years. The Autumn Spending review and Budget 2021 document confirms the Government will be seeking recommendations from Pay Review Bodies where relevant. We will wait to see further details on whether it may have a material impact on the staff retention and recruitment issues currently faced by the Local Government Pension Scheme (LGPS), across the UK.
Audit – Local Government
Local Government will receive an additional £34.5 million of funding to strengthen local services and transparency. This funding will also establish the Audit, Reporting and Governance Authority as the new local audit systems leader, which is aimed at promoting transparency.
Public Sector members McCloud Tax Exemption
HM Revenues and Customs have announced a number of measures to ensure public sector scheme members will not have to pay more tax if they receive an uplift in their benefits due to the McCloud remedy. This does not yet appear to apply to members of the Local Government Pension Scheme (LGPS), but we will alert our membership as we learn more.