Following the Chancellor's Budget Statement this afternoon, it’s very good news for investors in pensions and ISAs. Savers were placed firmly at centre of this year’s Budget, with the Chancellor’s clear message being empowerment. Grim was the word we used last year to sum up the Budget as Britain seemed on the edge of a double-dip recession and austerity was biting hard. What a difference a year makes!
Given this is the last Budget to have an effect on people’s pockets before next May’s election, some of the ‘feel-good’ measures come as little surprise. With the Chancellor announcing a ‘Budget for savers’, his cards have been placed firmly on the table.
The ‘rabbit out of the hat’ in this Budget was what the Chancellor himself termed ‘the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921’ – and for once it is positive news.
Pensioners are no longer to be ‘patronised’ and are to be given freedom to choose how to draw their pensions.
The many changes announced today are wide-ranging and will be warmly welcomed, but it is too soon to tell the full extent of the potential repercussions.
With effect from 27 March 2014 – next Thursday – the Government will:
- Reduce the minimum income requirement to qualify for flexible drawdown from £20,000 to £12,000
- Raise the amount that everyone can withdraw from capped drawdown by 25%
- Increase the size of a small pension pot that can be taken as a lump sum from £2,000 to £10,000
- Almost double the total pension savings people can take as a lump sum to £30,000
The Government will consult on further reform that requires legislation, but with the expectation that new rules will be effective from April 2015.
The aim is to provide everyone from age 55 with the opportunity to withdraw as much as they want from their pension fund with no limits and there will be no requirement for anyone to buy an annuity in the future.
The Chancellor confirmed that the tax free cash sum (usually 25%) will remain, which dispels rumors that it might be abolished.The Government is also consulting on the tax treatment on death possibly reducing the current 55% tax charge. Furthermore everyone is to be offered free and impartial face to face guidance on their options.
The changes have certainly come as a surprise and will certainly alter retirement strategy and future planning.
NS&I Bonds for pensioners
As the majority of elderly rely on their savings for income National Savings and Investments will be introducing a new Pensioner Bond with market leading fixed rates for those over age 65.
These will be available from January 2015 and will be taxed at the pensioner’s marginal rate.
Eligible individuals will be able to invest £10,000 per bond and current assumptions are that a One Year Bond will pay 2.8% AER and a Three Year Bond will pay 4% AER.
ISAs – another crowd-pleaser that has emerged from the Budget is the increased ISA allowance and the accompanying measures to improve their flexibility and simplicity.
From 1 July 2014, a ‘new’ ISA (NISA) is to be introduced with an increased allowance of £15,000. Importantly, with the new arrangement there will no longer be a difference between the stocks and shares element and the cash element of ISA wrappers, with a single ISA taking its place. This also means that stocks and shares ISAs can be transferred to Cash ISAs as well as the other way, something that was previously not an option.
This ISA allowance increase goes some way to countering the fall in the maximum pension contribution limit from £50,000 to £40,000 which is effective from 6 April 2014.
Saving for children is also being encouraged, with a 7.3% increase in the annual Junior ISA limit to £4,000 from £3,720. Child Trust Funds have also increased.
VCTs – the Chancellor announced that VCTs offering enhanced buybacks are not operating in the spirit of the legislation.
Following this, investments in VCTs that are conditionally linked in any way to a share buyback will be excluded from qualifying for new tax relief with effect from 6 April 2014. This will also be the case for any new investments in VCTs that have been made within 6 months of a disposal of shares in that VCT.
Income Tax – the Personal Allowance (PA) will increase to £10,000 from 6 April 2014, then to £10,500 from 6 April 2015. From 2016/17 it will increase in line with inflation as measured by the Consumer Price Index.
The Basic Rate limit will increase to £31,865 on 6 April 2014, meaning that the threshold for paying Higher Rate tax will be £41,865 in the 2014/15 tax year. This meagre 1% increase on 2013/14 rate means it is still failing to keep up with inflation.
2015/16 will see another 1% rise which means a Basic Rate limit of £31,785 and a Higher Rate threshold of £42,285.
Basic, higher and additional rates of Income Tax will remain unchanged.
There is still no reform of 2014/15’s anomalous 60% effective rate of tax on income between £100,000 and £120,000 as the PA is clawed back for those with income over £100,000.
Transferable tax allowance- the transferable tax allowance for married couples and civil partners (the amount of PA that can be transferred between partners) due to be introduced in 2015/16, will be set at 10% of the PA – starting at £1,050. To qualify, neither partner should be a higher or additional rate taxpayer.
Capital Gains Tax – as announced at the Autumn Statement 2012, the Government will increase the annual exemption by 1% for 2 years. The Capital Gains Tax allowance will be £11,000 in the 2014/15 tax year, with this increasing to £11,100 in the 2015/16 tax year.
Private Residence Relief: Also announced in the Autumn Statement 2012, the Government will legislate to reduce the final period exemption from 36 months to 18 months in most cases from 6 April 2014.
Inheritance Tax – there is no change in the Inheritance Tax threshold with the Government extending the freeze of this at £325,000 until 2017-18.
Emergency Service Personnel: The Government will consult on extending the existing inheritance tax exemption for members of the armed forces whose death is caused by injury while on active service to members of the emergency services.
Stamp Duty – no changes were announced for private property purchases, despite pressure to reduce the rate of Stamp Duty at £250,000.
However, the Government is clamping down on residential property purchases made through corporate structures. Previously this only applied to purchases over £2million, but from midnight tonight any property worth over £500,000 purchased in such a way will attract the 15% stamp duty rate.
The Help to Buy Scheme has been extended and will now run until 2020. An extra 200,000 new homes are to be built as a result of the overall measures in the Budget, including the development of a new garden city at Ebbsfleet.
The Chancellor has announced up to £2,000 for each child under 12 in tax breaks for working families. Families where both parents work will be able to claim 20p from the Government for every 80p deposited into the scheme from autumn 2015, to pay for child care costs up to £10,000.
In a bid to keep the administration simple, there will be no means testing. Instead, there will be a simple earnings limit of £150,000 for each parent.
For a macro view on the 2014 Budget, read Senior Research Analyst, Ben Seager-Scott's article.