George Osborne delivered his 6th Budget on 18th March 2015. We have summarised the key announcements from a personal financial planning perspective:
- Pensions - Lifetime Allowance to drop to £1m.
- Pensions – Second hand annuity market to be developed?
- ISAs – allowance keeps increasing!
- Inheritance Tax – deeds of variation to be reviewed.
- Income tax – allowances changed as expected.
It should also be noted that with a General Election coming in May it seems likely that a further budget will be announced later in the year.
Pensions - Lifetime allowance (LTA) to drop to £1m
The LTA is the maximum amount that an individual can build up in pensions tax-efficiently. Where someone exceeds the LTA, the surplus is taxed at 55% if taken as a lump sum or at 25% if taken as an income. That income is then taxed at the individual’s marginal rate.
The LTA has reduced from £1.8m to £1.5m then to £1.25m and now down to £1m in just a few years. In our experience it is clients who have an element of their retirement income provided by a final salary pension scheme who are most likely to breach the LTA.
For example, a £25,000 p.a. final salary pension equates to £500,000 when measured against the LTA.
The LTA will remain at £1.25m for 2015/16 but will then drop to £1m for 2016/17. It will start to rise by CPI from 2018/19.
Many of our clients will be impacted by this unexpected drop from £1.25m to £1m and we will be contacting clients individually to help them understand what, if any, action can be taken.
Pensions – Second hand annuity market to be developed?
In last year’s budget the Chancellor announced that the over 55s will be given greater flexibility around how they can draw funds from their pensions. One group who don’t have that flexibility is people who are already in receipt of an annuity income. It has therefore been proposed that from 6th April 2015, lifetime annuities may be sold in return for a cash lump sum. This can be paid direct to the individual or transferred into a flexi-access drawdown scheme. It will be taxable as income at the point that it is received by the individual. Therefore, if it is moved into flexi-access drawdown, it is only taxed once an income is taken from that drawdown fund.
Very little detail has been provided around how this can actually be achieved. A consultation is therefore being launched to look at the market opportunity, how consumers can be protected so they receive the best price for their annuity and what legislation will need to be enacted.
Our concern is that this has “next mis-selling scandal” written all over it, should it get off the ground. For now, it’s a case of “watch this space”. The consultation is due to end on 18th June.
ISAs – allowance keeps increasing!
The ISA allowance will increase to £15,240 per person from 6th April and the full amount can go into a Cash ISA if required. From 6th April it will be possible for surviving spouses/civil partners to inherit their partner’s ISA tax advantages on death. This will be achieved by giving the survivor an increased allowance based on the value of the deceased’s ISA at the time of death. This is quite a generous and welcome change.
Regulations will also be introduced in autumn 2015 to allow people to withdraw money from their ISA and then replace it, without it counting towards their annual subscription limit. It’s hard to see this rule having much impact on people’s ISA decisions given how few people are able to fully fund a £15,240 ISA allowance each year.
Junior ISA allowances have now gone up to £4,080 and it is now possible, in theory, to convert a Child Trust Fund into a Junior ISA.
The ‘help to buy’ ISA is also to be launched in the autumn though which the government will top up contributions for those saving for a deposit for their first home. For every £200 saved, the government would top it up by £50, up to £3,000.
Inheritance Tax – deeds of variation to be reviewed
The Nil Rate Band remains frozen at £325,000 until the end of the 2017/18 tax year meaning that increasing numbers of households are falling into the IHT trap.
In quite a strange move, the Chancellor announced that he would be having a look at “deeds of variation”. This involves rewriting someone’s will in the two years after their death and has been an accepted estate planning rule for many years. This is often used as a means of passing the inheritance on to the next generation, so rather than money going from grandparents to parents (who may themselves have an IHT problem), it gets diverted directly to grandchildren.
However unexpected this review, it is a good reminder that if families want a robust estate planning strategy, this needs to be put in place in a timely fashion. Even if mitigating IHT is not important to you, having a valid will is the only way of ensuring that your assets will go to your intended recipients.
The tax-free Personal Allowance will increase from £10,000 to £10,600 in 2015/16. The basic rate (20%) band will be £31,785 which means that most people will start paying 40% income tax once income exceeds £42,385.
Child Benefit starts to be lost once income of the higher earning parent exceeds £50,000.
The next change of tax bands comes in at £100,000 when the Personal Allowance is lost at a rate of £1 for every £2 of income over that. This creates a 60% tax band for income between £100,000 and £121,200. Once income exceeds £150,000, the income tax rate remains at 45%.
It’s important to understand where your income sits compared with these thresholds as it should drive decisions regarding pension contributions and charitable donations.
Also, a new Personal Savings Allowance is being introduced from April 2016. This means that the first £1,000 of savings interest will be tax-free for basic rate tax payers and the first £500 will be free for higher rate tax payers
As always we will be discussing the budget on an individual basis with clients but if you have any questions about these areas in the meantime, please contact us on 0845 602 7875.