George Osborne delivered Budget 2014 to Parliament on 19 March. He unveiled several measures aimed at “makers, doers and savers”. With a whole host of changes announced in the pensions and savings landscape, there is certainly an awful lot of information for financial planners to get their teeth into!
No further changes to lifetime and annual pension allowances
Although there were no further changes announced in relation to the lifetime and annual allowances, from tax year 2014/2015, these allowances will reduce as per the announcement made in the 2012 Autumn Statement to £1.25 million and £40,000 respectively.
Major reform of pension income options
The range of options around drawing benefits from a defined contribution (DC) pension scheme has been completely overhauled.
Most of the changes are planned to become effective from April 2015, but, some will be available before the end of next week!
From April 2015, if you are over the age of 55, there will be no requirement to purchase a pension income at retirement. 25% of the fund can still be taken as a lump sum with the residual fund available to provide as little or as much income as you want subject to your marginal rate of income tax.
In the meantime, from 27 March 2014:
- flexible drawdown minimum income requirement reduced to £12,000 from £20,000
- maximum capped drawdown income increased from 120% to 150% of the maximum rate
- trivial commutation (where smaller pots can be taken in full as a lump sum) increases from £18,000 to £30,000
- the size of small pension pots that can be taken as a lump sum (regardless of overall pension wealth) is increasing to £10,000 from £2,000. Three pots of this size will be able to be taken by an individual, an increase from two.
With the reforms effectively abolishing the requirement for anyone to ever buy an annuity, specialist annuity providers Partnership and Just Retirement were left licking their wounds after seeing their share prices fall by 56% and 42% respectively!
Other pension changes
It’s been a day full of good news for drawdown users with the announcement of a consultation on the 55% tax charge on drawdown lump sum death benefits.
With much greater freedom proposed on taking pension benefits, there are plans to cut the rate of tax payable on drawdown death benefits from April 2015 to make it more closely aligned to Income Tax charges on drawdown.
New rules are likely to be introduced which will make it more difficult to transfer benefits from defined benefit schemes to defined contribution schemes.
Need for retirement income advice recognised
With the wider range of retirement benefit options available for members of DC pension schemes, the Government has announced a development fund of £20 million to ensure that every retiree can receive impartial face-to-face advice.
A nicer ISA!
In a major simplification for savers, the annual subscription limit will be increased to £15,000 (from £11,520), and there will no longer be a lower cap on the amount saved into a cash account. So you can save any combination of amounts up to £15,000 overall between a Cash ISA and Stocks and Shares ISA.
The simplified product will be known as a NISA (New ISA), and all existing ISAs will become NISAs. Savers may also transfer their Stocks and Shares ISA to a Cash ISA.
The annual subscription limit for Junior ISA and Child Trust Fund (CTF) will also be increased from £3,840 to £4,000.
All of these changes will have effect from 1 July 2014.
National Savings & Investments
Two key measures were announced for savers with National Savings and Investments.
Premium Bonds get a decent fillip: increased investment (£30,000 to £40,000 in June 2014 and up again to £50,000 in 2015/16) and bigger prizes were also announced with two £1 million prizes a month being available from August 2014).
With savings rates still very low, older savers will find the proposed fixed rates on the new Pensioner Bond attractive – 2.8% gross/AER for a one year term, and 4.0% gross/AER for a three year bond. However, there’s a £10,000 maximum investment limit and the income will be taxable.
Tax allowances and thresholds
- The personal allowance, set at £10,000 for 2014/15, will rise to £10,500 in 2015/16 for those born after 5 April 1948. At the same time, the level at which Income Tax becomes payable at higher rates will rise by 1% to £42,285, meaning that higher rate taxpayers with incomes below £100,000 will also be better off by £184 – a little less pressure on the ‘squeezed middles’.
- Age related allowances will remain at £10,660.
- From the 2015/16 tax year, a spouse or civil partner who doesn’t have income to fully use up their personal allowance, will be able to transfer up to £1,050 to their partner, provided that partner is a basic rate taxpayer.
Capital Gains Tax
As previously announced, the annual exemption will rise by £100 to £11,000 in 2014/15, and to £11,100 in 2015/16.
The nil rate band will remain frozen at £325,000 until 2017/18 and there is a consultation on emergency service workers killed in the course of duty being exempt from IHT altogether.
Starting rate for savings tax plummets to 0%
There was good news for those with no or low earned income and income from savings. Not only is the savings rate of Income Tax falling from 10% to 0%, but also the savings rate band increases to £5,000 in 2015/16. The band is only available to set against savings income and is lost if non-savings income (for most people, their wages) exceeds the personal allowance plus the £5,000 band and check out https://www.swishcash.co.uk.
This could give greater scope for planning opportunities with offshore bonds and non-taxpayers as bond gains are treated as savings income, meaning, potentially, up to £15,500 of offshore gains can be cashed in with no further tax.
Last but not least, we will have a new pound coin in 2017. The new coin has 12 sides and has been developed specifically to guard against fraud.