Unlike last year’s far reaching Budget changes, the Chancellor’s final red box before the election didn’t contain too many surprises.
The much heralded new Pension freedom will go ahead as expected, turning conventional wisdom on how to take your retirement funds on its head. This means that sound financial planning advice is even more essential to ensure you use the new flexibility to maximum advantage.
There were announcements on ISAs, savings, tax (and tax avoidance), and some significant new rules affecting specific groups, such as farmers, first time buyers and charities. Here we take a look at the main points affecting individuals:
- Flexibility: For those with a modern, flexible Defined Contribution (DC) pension, freedom and choice will be a reality from 6 April.
- Annuities: From 2016/17 it is proposed that access to the new flexibility will be extended to annuitants by allowing them to sell their annuities (if the provider allows this). The lump sum received can then be held within the DC pension environment for flexible access, used to buy a flexible annuity, or taken as a taxable lump sum. Consultation is already underway on the fine detail of these proposals. It remains to be seen whether this freedom will be extended to those already locked into a final salary scheme (a Defined Benefit (DB) pension) that doesn’t best meet their needs.
- Taxation of inherited annuities: From April 2015 anyone inheriting from a person dying under the age of 75, with a joint life or guaranteed term annuity, will be able to receive future payments from such policies tax-free, provided that no payments have been made to the beneficiary before 6 April 2015.
- Allowances: Also from 2016/17, the pension lifetime allowance (LTA) will be cut from £1.25m to £1m. It is proposed that this allowance will be indexed in line with the Consumer Price Index (CPI) from 2018/19, to help maintain its real value going forward. A new transitional measure will be introduced, however, to allow savers who are already above, or expect to be above the reduced £1m LTA to lock into a higher allowance. There are no plans to revisit the pension annual allowance.
What should you do?
- Make sure you can access the new flexibility: Only modern, flexible DC pensions will support the new pension freedoms fully. Most older pensions will not. Now is the time to review your pensions to make sure they provide you with the flexibility you and your loved ones need. If they don’t do this, consider moving them to a modern pension that does, but make sure that you have taken proper advice before doing this.
- Review your nomination for death benefits: Non-dependants would normally only inherit a pension pot which has already been accessed for income (known as a ‘drawdown’ pot) if they have been specifically nominated to do so. Existing nominations won’t specify this, and they are also likely to carry terms distinguishing between ‘uncrystallised’ and ‘crystallised’ rights (i.e. pots which have been drawn upon and pots which have not), which is no longer appropriate from 6 April. Revisit your death benefit nominations to make sure that accumulated pension wealth will go to the right person in the right form.
- Do it now: Flexibility isn’t just about retirement. It’s about keeping your options open at every stage and in every eventuality. Don’t risk dying with the wrong pension, where inheritable drawdown, for example, is not available.
- Get advice on whether the new lower LTA will affect you: Pension funding plans now need to factor in the proposed cut in the LTA to £1m from 2016. You don’t need to be close to it at present to be affected. Additional contributions, and growth on your fund, can mean that even if you have more than a decade to go until retirement, you may still exceed your limit. Reassess your savings plans to see whether they need to be changed.
Personal allowances & Personal Savings Allowance
The personal allowance and higher rate threshold for 2015/16 will increase to £10,600 and £42,385 respectively, as announced last December.
Both, however, are set to increase in the next two tax years:
- Personal Allowance increases to £10,800
- Higher rate threshold increases to £42,700
(Basic rate taxpayers will be better off by £40. Higher rate taxpayers will be better off by £103.)
- Personal Allowance increases to £11,000
- Higher rate threshold increases to £43,300
(Basic rate taxpayers will be better off by a further £40. Higher rate taxpayers will be better off by a further £160.)
Starting rate band for savings income and Personal Savings Allowance
As announced last year, from April 2015, the savings rate of income tax will drop to zero (from 10%), and the starting rate band for savings income will increase from £2,880 to £5,000. This is a boost to those with low earned income (less than £15,600) but higher savings income. Those with higher levels of earned income, however, above £15,600, won’t benefit from the increased savings rate band at all.
From April 2016 a proposed new ‘Personal Savings Allowance’ will benefit both basic rate and higher rate taxpayers, irrespective of their level of earned income.
The allowances will be:
- Basic rate taxpayers: £1,000. Those with total income below £16,800 won’t have to pay tax on any of their savings and those with higher incomes (but less than £42,700) will still benefit from £1,000 of tax-free savings.
- Higher rate taxpayers: £500. Those with total income above £42,700 will be limited to a tax- free allowance of £500.
- Additional rate taxpayers: won’t benefit from the new allowance.
Another positive development for savers is that interest will be paid gross, with no deduction of 20% tax at source by their bank or building society from April 2016.
Fully flexible ISAs
From autumn 2015 savers with Cash ISAs will be able to dip into their savings and replace them, without it counting towards their annual subscription limits, provided that the new contributions are paid within the same tax year the withdrawal is made. These new flexible funding rules are not intended to apply to stocks and shares ISAs.
Help to Buy ISA
From autumn 2015 first time home buyers looking to save for their deposit could get tax relief on their savings under the proposed Help to Buy ISA.
The scheme will provide 25% tax relief on savings up to £12,000. This means that someone saving the full £12,000 would see the government add a further £3,000 to their savings, giving them £15,000 towards the purchase of their first home. This tax relief isn’t given at the point of saving in the same way as a pension contribution, however, but is added instead when the saver buys the home.
The new scheme will be a form of Cash ISA and, in line with current rules, it will not be possible to subscribe to two separate Cash ISAs (Cash & Help to Buy) in the same tax year.
Savings will be limited to a maximum single initial premium of £1,000 and regular savings of £200 each month. To qualify for the Government bonus, property values can be no more than £250,000 (£450,000 for properties in London).
Inheritance Tax (IHT): Deeds of Variation in the spotlight
The flexibility that a Deed of Variation can currently provide may be under threat after the Chancellor announced a consultation on their use in IHT avoidance. The consultation is due to report its findings in Autumn 2015.
Currently, a will can be changed after an individual’s death, through a legal process known as a Deed of Variation. Often this is combined with the efficient use of exemptions or the nil rate bands in order to make significant IHT savings. It can be used up to two years after death.
If you have received an inheritance within the last two years and are thinking about using this flexibility, you may wish to consider acting now.
The government proposes to abolish self-employed Class 2 national insurance contributions some time in the next parliament.
Self-employed farmers will be able to average their profits over five years instead of just two from April 2016.
Charities will be pleased by the proposed increase in the Gift Aid Small Donation maximum amount from £5,000 to £8,000 from April 2016.
The maximum amount that parents of disabled children will be able to receive under the new childcare scheme starting in the autumn will be increased from £2,000 to £4,000 a year for each disabled child.
Company car benefit
From 2019/20 the scale percentage of the list price of company cars that are subject to tax will be increased by 3% up to a maximum of 37% for cars emitting more than 75g/km of CO2.
There will be a 3% differential between the 0–50g/km and 51–75g/km bands and between the 51–75g/km and 76–94g/km bands. The rates for years up to 2018/19 are as previously announced.
The planned increase to the NS&I Premium Bond investment limit to £50,000 will take place on 1 June 2015.
Marketed avoidance schemes
New legislation covering several aspects of marketed tax avoidance schemes will be introduced. This includes tougher measures targeting ‘serial avoiders’ who persistently enter into tax avoidance schemes which fail, and an increase in the deterrent effect of the General Anti-Abuse Rule (GAAR).
Disclosure of tax avoidance schemes (DOTAS)
The DOTAS rules will be strengthened, notably in respect of inheritance tax. This widens the potential application of accelerated payment notices whereby the tax has to be paid up front and can only be reclaimed if the planning proves to be successful.
This certainly wasn’t a ground breaking Budget from a personal finance perspective, but equally, there was no sting in the tail for us to be concerned about.
Most of the positive news has already been announced in the last Budget or the Autumn Statement.
Like all Budgets, this one provides good reason to review your finances to see exactly how you might be affected.
We would be pleased to discuss this with you. We can be contacted on 0131 220 0000 or via firstname.lastname@example.org
The content of this document is for information only. It does not constitute advice. Before investing in any of the products referred to you should seek professional advice.