In today's Budget speech the Chancellor had very little to say about pensions. He reiterated the two key changes for this year, ie a 50% rate of income tax on those with earnings over £150,000 and a gradual removal of the personal allowance for people with incomes over £100,000. The restriction of tax relief on pension contributions from April next year, announced at PBR 2009 (see Aries report) for those with incomes above £130,000, merited a single sentence which made no reference to the recent consultation, to which around 100 formal responses were submitted. These controversial proposals are nevertheless to go ahead.

Every year alongside the Budget speech itself, the Treasury publishes a host of other documents which describe the background and detail what is actually going to happen. As usual, the 2010 supporting documents cover some changes affecting pensions. One of them is entitled "Implementing the restriction of pensions tax relief: a summary of consultation responses".

This confirms that tax relief on pension contributions will be restricted for those on gross incomes of £150,000 and over, where gross income incorporates all pension contributions, including those provided by an employer. This is subject to an income floor of £130,000 (excluding employer pension contributions). The Government has decided how the restriction of relief will be applied and "delivered". Deemed contributions to defined benefit (DB) pension schemes will be valued using the age-related factors method. It is also insisting that all schemes - DB and DC - will have to offer the controversial 'scheme pays' option. No increase is proposed to the first £30,000 of a redundancy payment which is exempt. The accompanying final impact assessment (scroll down to page 44) acknowledges it will all cost pension schemes, employers and individuals a great deal more than the Government initially imagined in the condoc: £900m instead of £305m initially, plus ongoing annual costs of £115m rather than £90m, is what it is now saying.

To enable employers, pension schemes and individuals to prepare for the introduction of the restriction in April 2011, the Government intends to legislate for the core aspects of the policy at Finance Bill 2010. These are:

1. who the restriction will apply to - that is, the income definitions and thresholds, and how the taper will operate to determine the rate of relief to which individuals are entitled; and
2. what the restriction applies to - that is, both an individual's own pension contributions, and those made for their benefit by an employer, with the age-related factors (ARFs) method being used to value the deemed contribution to a DB pension scheme. Details of the scale of ARFs will be issued ahead of the introduction of the restriction.

In Finance Bill 2011, the Government is intending to introduce legislation to put in place the 'scheme pays' payment option and flesh out other remaining issues.

Key Government decisions following the consultation

• A stepped taper of 1 per cent of relief for every £1,000 of gross income is the most appropriate way to taper down the rate of relief available.
• Pension input periods will not have to be aligned with the tax year for the purposes of assessing pension benefit accrual against the annual allowance.
• The Government continues to believe it is appropriate to operate an income look-back in the year of drawing benefits, and will consider how such a look-back test might operate in practice (to be legislated in Finance Bill 2011).
• The restriction of relief will not apply in cases of death or serious ill-health.
• Where schemes began (or will begin) to wind up before April 2011, any surplus distributed can be treated as accruing to members at the start of wind-up, and hence as out of the scope of the restriction.

• Age-related factors (ARFs) represent the best means of valuing the deemed contribution to a DB scheme.
• The ARFs will vary by both age and normal pension age (NPA). There will be no separate provision in the scale for gender differences or employer insolvency risk. (Adjustments to the ARFs might apply in cases where individuals are eligible for particularly generous increases to their pension in payment.)
• In cases where different NPAs apply to tranches of an individual’s pension rights, the appropriate ARF will be used with respect to each tranche to calculate the deemed contribution.
• The ARFs will be reviewed at least every five years (earlier if appropriate): the GAD will advise on the scale.
• In DB schemes, the restriction of relief will be based on the deemed contribution, even where this may be smaller than the DB employee contribution for that year.

• Schemes will calculate the deemed contribution, and will be required to provide details of the deemed contribution to the individual within 3 months of a request to do so.
• Negative deemed contributions should be fairly recognised and taken into account and the Government will consider the options for doing this.
• In calculating the deemed contribution, the previous year's September RPI figure will be used to revalue the previous year's pension rights.
• The obligation for employers to automatically request a pension benefit statement on certain employees' behalves will not be extended to cover those employees for whom the employer has previously requested a pension benefit statement.
• Scheme pays will be available to members of both DB and DC schemes, where the member incurs a recovery charge exceeding £15,000. Individuals will be allowed to elect for a single scheme to pay the charge, which will be required to pay only that portion of the charge relating to contributions made to that scheme.
• Individuals incurring a recovery charge exceeding £15,000, whose scheme is not able to pay the charge on their behalf, will be allowed to spread payment of the recovery charge over 3 years, with interest charged on the deferred element.

Other pension mentions in the Budget

Assorted further tweaks to pensions tax legislation are in the pipeline. Budget Note 35 explains that new measures to be included in a Finance Bill to be presented in the next Parliament will:

• allow NEST to register with HMRC for tax purposes, and to be subject to the same tax rules as other tax-registered pension schemes;
• remove the tax liability on any interest charges on late pension contributions made by an employer to qualifying pension schemes;
• provide a regulation-making power to deal with any unintended tax consequences that may emerge as a result of the implementation of NEST and the employer duties and compliance as set out in the Pensions Act 2008; and
• remove the tax charge on borrowing linked to the cost of establishing and operating a registered pension scheme, subject to conditions.

Meanwhile HMRC announced today that the Government remains open to proposals for further simplification of the rules governing the commutation of small pension pots, provided the simplification would not be open to manipulation, nor increase the net overall cost to the taxpayer.

In particular the Government is interested in proposals about:

• extending rights to commute personal pension funds worth up to £2,000; and
• allowing couples to pool small pension pots in order to achieve better value by buying a joint life annuity.

No formal consultation is mentioned, however.

Employers have the legal right to require individuals to retire at the Default Retirement Age, currently 65. The Budget announces that the Government intends shortly to launch a formal consultation on reforms to the Default Retirement Age. No changes will be made before April 2011.

The Chancellor also said that the ad hoc addition to the winter fuel payment, an additional payment of £50 to households with someone aged over the female State Pension Age, and £100 to households with someone aged 80 or over, will continue to be paid in 2010-11. Above-inflation increases to the basic state pension will deliver a minimum pension of £132.60 per week when the pension guarantee credit is taken into account. With the higher personal allowance as well, a pensioner aged over 75 will not pay any tax on the first £10,000 of income.

New pensions legislation

1. The Registered Pension Schemes (Standard Lifetime and Annual Allowances) Order 2010 (SI 2010/922), laid today, formally confirms the five-year freezing of the LTA and the AA at 2010/11 levels (£1.8m and £255,000 respectively). This was originally announced at PBR 2008; see Aries report. 2010 Budget Note 34 covers it.

2. The following three SIs were all laid before Parliament on 10 March (see Aries report), and formally published yesterday; all three come into force on 1 April 2010.

• The Registered Pension Schemes etc (Information) (Prescribed Descriptions of Persons) Regulations 2010 (SI 2010/650)

• The Registered Pension Schemes (Enhanced Lifetime Allowance) (Amendment) Regulations 2010 (SI 2010/651)

• The Registered Pension Schemes and Overseas Pension Schemes (Electronic Communication of Returns and Information) (Amendment) Regulations 2010 (SI 2010/652)