The Budget 2015 – a financial planning perspective

The Chancellors final budget before the election didnt contain anything which will have an immediate impact for IFAs or their clients. Pension freedom and choice will go ahead as expected, turning conventional wisdom on how to take retirement income on its head and placing advice firmly at the heart of successful use of the new flexibility; further changes in the pipeline will be of interest from autumn 2015 onwards, although these will be in the gift of the new Government.

PENSIONS

Flexibility:

  • For those with a modern, flexible DC (defined contribution) pension, freedom and choice will be a reality from 6 April. 

Annuities:

  • From 2016/17, it is proposed that access to the new flexibility will be extended to annuitants by allowing them to sell their annuities – if their provider allows them to.
  • The lump sum received can be held within the DC pension environment for flexible access, used to buy a flexible annuity or taken as a taxable lump sum. Consultation is already underway on the fine detail of these proposals. 
  • It remains to be seen whether this freedom will be extended to those already locked into a DB (defined benefit) pension income that doesnt best meet their needs.

Allowances: 

  • Also from 2016/17, the pension lifetime allowance (LTA) will be cut to 1 million. Its proposed that this allowance will be indexed in line with CPI from 2018/19, to help maintain its real value going forward. 
  • Government estimate this will affect around 4% of pension savers. 
  • A new transitional protection option will be introduced to allow savers already above the reduced 1M LTA to lock into a higher allowance. 
  • There are no plans to revisit the pension annual allowance.

ACTION POINTS:

Re-calibrate for flexibility:

  • Only modern, flexible DC pensions will support the new freedoms fully; most older pensions wont.
  • As an IFA we can review your pensions to make sure they provide the flexibility for you and your loved ones; or alternatively help you to move to a more modern pension which will meet your needs.

Review death nominations:

  • Non-dependants can only inherit a drawdown pot if theyve been nominated to do so; existing nominations wont do this, and theyre likely to distinguish between the treatment of uncrystallised and crystallised rights, which is no longer appropriate from 6 April. 
  • Revisit your death benefit nominations to ensure accumulated pension wealth goes to the right person in the right form.

Do it now:

  • Flexibility isnt just about retirement, its about keeping your options open in every eventually. Dont risk dying in the wrong pension, where inheritable drawdown isnt available.
  • Consolidate now.

Reforecast LTA position:

  • Pension funding plans needs to factor in the likely cut in the LTA to 1M from 2016; you dont need to be close to it now to be affected.
  • Reforecast fund projections if you are within a decade of retirement to assess if your savings plans need to change.

Personal Savings Allowance

  • As announced last year, from April, the savings rate of income tax will drop to zero (from 10%) and the savings rate band will increase to 5,000 (from 2,880). This is a boost to those with low earnings but with a higher level of savings income, as savings income can be received tax free; but those with higher levels of earned above 15,600 wont benefit from the savings rate band at all.
  • From April 2016 a proposed new Personal Savings Allowance will benefit both basic rate and higher rate taxpayers, irrespective of their level of earned income.

The allowance will be:

  • Basic rate taxpayers: 1,000:
    • So those with total income below 16,800 wont have to pay tax on any of their savings and those with higher incomes, but less than 42,700, will still benefit from 1,000 of tax free savings.
  • Higher rate taxpayers: 500:
    • Those with total income above 42,700 will be limited to a tax free allowance of 500. 
  • Additional rate taxpayers wont benefit from the new allowance.
  • And on another positive note, savers will see interest paid gross, with no deduction of 20% tax at source by their bank or building society from April 2016. 

ISAs

Fully flexible ISAs

There are planned changes for ISAs on the horizon:

  • From autumn 2015 savers with Cash ISAs will be able to dip into their savings and replace them without it counting towards their annual subscription limits.
  • The new contributions would have to be paid within the same tax year as the withdrawal for it not to be counted.
  • These new flexible funding rules are not intended to apply to stocks and shares ISA.

Help to Buy ISA

  • First time home buyers looking to save for their deposit could get tax relief on their savings under the proposed Help to Buy ISA from autumn 2015.
  • The scheme will provide 25% tax relief on savings up to 12,000. So someone saving the full 12,000 would see the government add a further 3,000 to their savings, giving them 15,000 towards the purchase of their first home. This tax relief isnt given at the point of saving in the same way as a pension contribution, but is instead added when the saver buys the home.
  • The new scheme will be a form of Cash ISA and, in line with current rules it wont be possible to subscribe to two separate Cash ISAs (Cash & Help to Buy) in the same tax year.
  • Savings will be limited to a maximum single initial premium of 1,000 and regular savings of 200 each month. And to get the Government bonus, property values can be no more than 250,000 (450,000 for properties in London).

IHT: Deeds of Variation in the spotlight

  • The flexibility a Deed of Variation may be under threat after the Chancellor announced a consultation on their use in IHT avoidance. The consultation is due to report its findings in autumn 2015. Its another measure that scrutinises what youdo with your money after death following the measures tackling pilot trusts announced in the 2014 Autumn Statement and tweaked in the forthcoming Finance Bill.
  • Currently, a will can be changed after an individuals death, through a legal process known as a Deed of Variation. Often this is combined with the efficient use of exemptions or the nil rate band so the end result also gives an IHT saving. This can be used up to two years after death.
  • If you are thinking about using this flexibility with an inheritance, and are within the two year window, you may wish to consider acting now. This would give you a greater certainty about your tax position. This measure also highlights the need for your wills to be drafted during life with an eye on tax efficiency post-death. After autumn 2015, the useful eraser of a Deed of Variation may not be as effective as before.

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