How do the changes affect your pocket?
Change to retirement age
The Chancellor confirmed in Budget 2012 that he would increase the state pension age and that we should brace ourselves for having to work much longer in the future. There are already two increases to the state pension age scheduled for 2019 and 2026. If after 2026 the state pension age increases in line with our changing life expectancy, we could expect that someone who is currently 37 won’t be able to start drawing their state pension until they are 70 and someone who is
21 won’t receive it until they are 75.
This means that children born in 2012 are unlikely to get their state pension until age 80, if life expectancy at retirement rises in line with the last 30 years. This is a considerable change for everyone, but women in particular have to make a big psychological adjustment as their state pension age is leaping forward.
The two increases already planned for 2019 and 2026 will be followed by increases every five years thereafter. If you are thinking ‘this won’t really affect me, I’m still going to aim to retire at 60 or 65 anyway’, unless all of us save a lot harder, many people could still be working well into their seventies.
Pensions tax relief
The Chancellor did not make a change to tax relief on pension contributions. This valuable incentive encourages more people to save for their retirement years. Tax relief on qualifying contributions into private pensions means that a £100 investment made by a basic rate tax payer is automatically topped up to £125. And if you are a higher rate tax payer you can still claim the higher rate tax rebate too. This tax incentive encourages many to make the most of pension contributions now, so they can make the most of their retirement in the future.
No change on GAD maximum
The government did not make changes to the drawdown Government Actuary’s Department (GAD) maximum. People starting drawdown or who have reviewed it during the last year may have had their income affected by falling gilt yields caused by the Bank of England quantitative easing programme. At the same time annuities have also experienced a similar impact, but to a lesser degree as they are backed by a mix of corporate bonds and gilts.
Government ends salary sacrifice to fund employee’s spouse’s pension
The government announced the cessation of salary sacrifice to fund an employee’s spouse’s pension. This tax ‘idea’ involved an employee sacrificing salary or bonus and their employer paying this into the employee’s spouse’s pension up to the annual allowance, including carry-forward.
Introduction of a general anti-avoidance rule (GAAR)
The direction of travel towards a more limited form of GAAR was set out in the Aaronson Report in November last year. Those endorsing sensible tax planning should have nothing to fear if the recommendations in that report, which target schemes that are artificial or contrived, are implemented. Individuals implementing tried and tested routes to mitigate UK tax should not be affected.
Extension to IHT spouse exemption for European domiciled spouse
A consultation review of the restriction on the spouse/civil partner exemption was announced. In the last few years, EU law has had an increasing impact on UK Inheritance Tax (IHT). IHT reliefs and exemptions for agricultural property and charities have been extended to cover the European Economic Area in 2009 and 2010. The announcement is good news for those whose spouse/civil partner is from another country, meaning they are domiciled there rather than in the UK. It should remove a tax worry and layer of IHT complexity for mobile people with international connections.
Changes to discretionary trusts
One of the most complex elements of IHT, the ten-year charge and exit charge calculations for IHT in discretionary trusts, is to be simplified. This could be good news for trustees and beneficiaries of these trusts, of which there are thousands in the UK. HM Revenue & Customs statistics show that 101,000 of these types of trust were included in tax returns filed in 2009/10.
Laws and tax rules may change in the future. Information is based on our understanding in March 2012. Your personal circumstances also have an impact on tax treatment.