A Budget Brimming With Change!
Much of the budget will have been publicised by now and we at Tarvos are as surprised as any at the significant changes made to pensions. 2015 will be a defining year for pensions with most of the current restrictions when taking benefits at retirement swept aside in favour of complete flexibility and individuals’ right to decide what to do with their pension fund. Alongside that we also saw changes to the personal allowance, Individual Savings Accounts and the saving rate band of income tax. We set out the key changes affecting financial planning and our thoughts.
Individual Savings Accounts
From 1st July 2014 a New ISA (‘NISA’) will become available where the overall annual limit will be increased to £15,000 from £11,880. Investors will have full flexibility to benefit from tax free returns using the new allowance for either cash or stocks and shares ISAs or a combination of both. Funds may also be transferred between cash and stocks and shares ISAs without restriction whereas at present it is only possible to transfer cash ISAs to stocks and shares ISAs.
As we have seen over the years since the first tax exempt savings vehicle TESSA, maximising savings into these schemes can build up significant funds, particularly where investment funds are used. This is good news for savers and for retirees, adds another dimension to the increased flexibility in arranging retirement income. Many will use ISAs as a complementary savings vehicle to pension schemes. Although no tax relief is available on contributions, income and gains are paid with no further tax liability. For inheritance tax savings, investment qualifying for Business Property Relief can now be invested in an ISA using AIM shares.
Savings Rate Band
From 2015 the starting rate of tax which exists for savings interest will increase from £2,880 to £5,000. Savings interest includes deposit interest, income from government or corporate bonds and gains on offshore investment bonds. The savings rate band of £5,000 reduces £1 for £1 for any taxable income received in excess of this band.
This change could be very useful for individuals with moderate income and who wish to keep larger amounts in cash deposits. When considered with other investments such as ISAs it could provide excellent benefits for some people, particularly at retirement. Careful planning could ensure that an individual’s entire income is tax free. For example, each person has a personal allowance of £10,000 (£10,500 2015/16) so any earned income or pension income within this amount will have no tax payable. These individuals could receive up to a further £5,000 from interest on savings or investment bond withdrawals with no additional tax. In addition, a portfolio of cash or stocks and shares ISAs built up over time could provide additional income which will also be free of tax on the individual.
Pensions – Flexible Benefits
From 2015, personal pension funds may be drawn down without limit. 25% may be taken tax free, with any excess taxed at marginal rates of tax i.e. added to other income and taxed accordingly. Currently, taking lump sums from pensions in excess of the 25% is an unauthorised payment and suffers a charge of 55%.
How the pension industry will deal with the changes will become clear in the next year, however there are some transitional changes which come into effect on 27th March. Individuals currently in income drawdown will be able to take a higher level of income from their next review date. The maximum income is currently 120% of the Government Actuary Department rate and this will increase to 150%. We already have the facility to draw down lump sums from pensions where other guaranteed income of at least £20,000 is being received. This level is being reduced to £12,000 during the transitional period. From April 2015, income drawdown and flexible drawdown limits will disappear.
Clearly there remains a need for proper financial planning advice for those looking to take retirement benefits. Those taking benefits this year will need to consider the implications of doing so now or whether they would be better off waiting until the changes come into effect next April.
Those keen to take the cash from their funds will need to consider the best way of doing this as there will surely be a hefty tax bill for doing so at once.
The pension pot will, we assume, be included in financial assessments for clients funding care fees or going through bankruptcy so again, careful advice will be needed.
We hope that the annuity market will respond by improving products and rates. These plans will still be suitable for some people and should still be considered when looking at the options available for taking retirement benefits.
The government are consulting on death rate of tax applicable on drawdown fund which should see the ability to pass on pension benefits to family given a further boost and make use of bypass trusts more appealing. Consultation is also in place regarding the removal of the restriction on the over 75s claiming tax relief on pension contributions.
Small Pots and Pension Commutation
From 27th March, small pension pots of up to £10,000 each may be taken as a lump sum. This has increased from £2,000 and the number of pots that may be taken in this way increases from 2 to 3. There is no regard to total pension wealth for this allowance to be useed.
For those with a total pension pot of up to £30,000, this may be taken as a ‘trivial commutation lump sum’ rather than as an annuity.
Stamp Duty on unit trusts and OEICs
Finally, we are pleased to see that the government have abolished stamp duty on collective funds such as unit trusts and open ended investment companies. Currently the tax is 0.5% payable by the manager where they buy back units from investors wishing to sell their holdings. A welcome reduction which should benefit the performance of the fund for investors.