I have never before experienced such a game-changing Budget as that announced by George Osbourne last week. From pensioner bonds to scrapping of the compulsory purchase of annuities to opening up of flexible drawdown, the need for advice when planning your retirement is now greater than ever.
The Chancellor announced the “most radical change to the taxation of pensions since 1921,” declaring that he was prepared to trust people with their pensions. The move is predicted to bring in extra revenue for the Government, as people gain the ability to withdraw money from their pension funds on a more flexible basis and consequently contribute more through income tax.
It’s all good news
However, the reforms are a good thing for savers and there is little doubt that these changes will have a significant impact on the way people manage their pension income and plan for retirement. They open up so many more options and opportunities, that people will need advice to put all the pieces of their individual retirement jigsaw together.
The pension reforms announced by the Chancellor will be introduced in two stages; some aspects will commence almost immediately, whilst others will require legislation and are intended to come into force from April 2015.
The measures coming in to effect from 27 March 2014 include:
- Flexible drawdown: The amount of relevant income needed for flexible drawdown reduces from £20,000 p.a. to £12,000 p.a (including state pension). This will give many more people the opportunity to access their retirement savings in a more flexible way to meet their income needs.
- Capped drawdown limits: Income limits on capped drawdown increase from 120% of basis point to 150% of basis point. Being able to access more of your pension fund will provide more flexibility in how you fund your retirement.
- Trivial commutation: At present an individual aged 60 or over who has total pensions savings of £18,000 or below can withdraw this as a lump sum. This limit will increase to £30,000. This is great news for employees who end up with a small pension pot as a result of auto-enrolement.
Subject to legislation
Further measures due to come in to force from 6 April 2015, subject to new legislation, include:
- Annuities: The requirement to buy an annuity or conform to any drawdown limits when taking benefits from a defined contribution scheme will be removed. This appears to mean that there will be absolutely no constraints on how much (from 0 – 100%) of your pension fund you can drawdown in any one year.
Wow – this is really quite revolutionary and makes pension provision much more attractive than previously.
I advised a client this morning, for example, to pay a large lump sum in to his pension to receive 60% tax relief (due to the client’s specific earnings level), in the knowledge he will be paying a marginal rate of tax of 15% when he draws the money out. With increased flexibility in how you can now withdraw your pension funds, this type of opportunity becomes incredibly attractive.
- Tax free cash & death benefits: The ability to take tax free cash will remain and there will be a consultation on the level of tax charge on lump sum death benefits. The tax payable is currently 75% after the age of 75, if you haven’t crystallised your pension. This always appeared to be a crazy rule, so I will be interested to see how this concludes.
In his speech, George Osbourne cited that British people had ‘borrowed too much and saved too little in the past’. This Budget would therefore see “hard working people” (a perennial favourite phrase of the Chancellor) keep more of what they earn through the introduction of new savings vehicles.
With effect from 1 July 2014:
- New ISA: The introduction of a New ISA (NISA) will allow a maximum annual contribution of £15,000. The investor decides on the mix of cash and stocks and shares within this limit, and there will be an ability to switch stocks and shares ISAs into cash.
- JISA/Trust Fund: The annual limits increase from £3,720 to £4,000.
As part of our ongoing wealth management service, we will open all clients’ annual ISAs at the start of the new tax year in April as normal, then top them up in July to the increased maximum allowance.
Pensions vs. ISAs?
Interestingly the debate of making ISA vs. pension contributions to fund your retirement provision will now rage, but it will all come down to the individual’s tax position both while earning and once retired, as to which is the right solution for you.
Further savings initiatives proposed to take effect over coming months include:
- Tax relief on savings: The 10% savings rate band of £2,790 will be abolished and replaced with a £5,000 zero rate band for savings income from April 2015. This will “sit on top” of the personal allowance but the rules for its availability will be broadly the same as those that apply to the current 10% band.
- National Savings bond: With effect from January 2015 people aged over 65 will be able to apply for a new National Savings bond. Early suggestions were that the rate would be 2.8% for the one year bond and 4% for the three year bond, with pensioners able to save £10,000 in each of these National Savings bonds. Great news for our retired clients with cash savings, to help maintain the real value of your savings in the on-going battle against inflation.
Let’s not forget IHT…
With much of the noise in the media focused upon the abolition of annuities, it was easy to miss the announcement about Inheritance Tax. The nil rate band is now frozen at £325,000 and will remain so for a further three years. This move will result in more money pouring in to the Chancellor’s pot, as estates continue to grow in value. The Inheritance Tax rate increased by 7.5% last year. But then there is no-one easier to tax than the dead!
Finally, on a slightly more light-hearted note, thanks to the lobbying of the MP for Northampton North, the Government has set aside £200m for the repair of potholes across the country. I wonder how much of this money will be going to repair the ‘4,000 holes in Blackburn, Lancashire’ as the Beatles famously sang.
What this means for you
We will of course be talking through the implications of the Budget with all affected clients at our next review and planning meetings, but don’t hesitate to get in touch in the meantime.