Radical changes proposed in today’s Budget could herald the biggest shake-up to UK pensions ever. And it could happen as soon as 2015.
These welcome proposals would give pension savers more freedom, choice and flexibility than ever before over how they access their pension savings.
In this brief budget over view we cover the following – more information will be issued when we have more details.
1. New ISA
2. NS&I – Premium Bonds / Pensioners Bond
3. Pensions – Retirement Income
4. Tax Allowances and Thresholds
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 your clients can save any combination of amounts up to £15,000 overall between their cash 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 share ISA to cash.
This measure is intended to give greater choice and flexibility for savers but, in the current climate of low interest rates, clients should be carefully advised about switching fully to cash.
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
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, up again to £50,000 in 2015/16) and bigger prizes (two £1M prizes a month from August 2014).
The proposed fixed rates on the Pensioner Bond look attractive – 2.8% gross/AER for a one year term, and 4.0% gross/AER for a three year bond.
But there’s a £10,000 maximum investment limit and the income will be taxable
Pensions – Retirement Income
The detail isn’t set in stone. But this signals a clear Government desire to give savers more control, and responsibility, over their destiny in life after work. It could represent pension utopia, but only with advice to solve an increasingly complicated retirement equation.
These proposals will be consulted on this year, but in recognising the need for flexibility there is a boost for drawdown users almost immediately.
The chancellor has announced two welcome changes to income drawdown rules from 27 March:
•Capped income drawdown – limit up 25%: The maximum yearly income allowed under the pension capped drawdown rules will increase by 25%, from 120% to 150% of the GAD basis amount, for income years starting after 26 March 2014.
•Flexible income drawdown – MIR cut to £12k: The yearly secured income needed to meet the ‘minimum income requirement’ to access flexible drawdown will be cut from £20,000 to £12,000 for those applying to start flexible drawdown after 26 March.
Taken together, these changes give pension drawdown users even more flexibility to dial income up or down to adapt to changing circumstances.
Pension triviality limits increased
The Chancellor has announced welcome changes to the pension triviality rules from 27 March 2014:
•Triviality limit up to £30k: Individuals over age 60, with total pension savings of £30,000, or less can take it all as a trivial commutation lump sum – the current limit is just £18,000;
•Stranded pot rules relaxed: Small stranded pension pots of up to £10,000 can be taken as a lump sum – a significant increase from the current £2,000. And the number of small stranded personal pension pots that can be taken as a lump sum is increased from two to three.
These changes improve choice for more consumers who may otherwise have been forced to receive very small regular pensions for life, with limited ability to shop around for the best annuity. In both cases, up to 25% of the lump sum can be paid tax-free with the balance taxed as income.
55% Drawdown death benefits charge set to be cut
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.
Having a rate of tax on death which is greater than the income tax on withdrawing income could see the tax tail wagging the retirement income dog. The Government have recognised the need to have a tax system where pension savers are not penalised by only taking what they need from their pension fund.
This should see the ability to pass on pension death benefits to loved ones given a further boost and make the use of bypass trusts even more appealing.
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
The annual exemption will rise by £100 to £11,000 in 2014/15, and to £11,100 in 2015/16
As always should you require more information please do not hesitate to contact us on 01737 225665 or firstname.lastname@example.org