The Budget delivered to the House of Commons by the Chancellor of the Exchequer on 3rd March 2021 contained no surprises as the key updates had been indicated in advance.
The aim was, and remains, to support the economy through this very difficult period, assist the recovery and then move public finances onto a sustainable path.
An area to watch will be the further steps likely to be taken on taxation, to be announced at the next Budget in the autumn.
Lifetime allowance frozen
The key announcement for pensions was that the lifetime allowance will remain at its current level of £1,073,100 until April 2026.
Over the last three years, it has increased in line with the Consumer Prices Index to maintain its value. The standard annual allowance, the money purchase annual allowance and the tapered annual allowance remain unchanged.
This change is significant not only for those who are retiring in the next few years but also for savers looking to the medium and long-term. Trustees and administrators will need to review their current communications to ensure that members continue to receive accurate information about the lifetime allowance.
Pension scheme regulation and investment
The Chancellor announced that the Government would look at the operation of the charge cap for default funds in relation to defined contribution (DC) pension schemes. A consultation was subsequently launched on 19th March 2021, looking at whether certain costs within the charge cap affect DC schemes’ ability to invest in a broader range of assets, such as high-growth companies and start-ups.
The Government aims to ensure that pension schemes are not discouraged from such investments and can therefore offer the highest possible returns for savers. The Department for Work and Pensions is due to introduce draft regulations to make it easier for schemes to take up such opportunities within the charge cap by smoothing certain performance fees over a number of years.
Pension scheme trustees need to be mindful of the targeted outcomes rather than be driven purely by cost considerations. In principle, diversification into a broader range of assets should help and if this boosts the economy, everyone wins.
However, there are traps beyond just the charge cap rules. Investment in illiquid assets has the potential to be problematic in a world of easy transfer rights, member choices, daily pricing and electronic processing systems. Defined benefit schemes are also progressively becoming more mature, with a focus on cashflow management and shorter time horizons.
Scale and time will be crucial, so broader investments may be most suitable to master trusts and schemes with long-term horizons.
Personal taxes, National Insurance Contributions (NICs) and savings
The principal items relevant to pensions include:
National Living Wage (NLW) and National Minimum Wage (NMW)
The NLW has increased to £8.91 an hour from 1st April 2021. Of more significance is that the NLW is payable from 1st April 2021 to people aged 23 and over (it’s no longer limited to those aged over 25). The recommended increases for the NMW were also accepted.
In light of these increases, employers operating a salary sacrifice arrangement should check the thresholds to ensure compliance with the higher rates.