George Osborne’s 2014 budget has taken us all by surprise at Hunter Aitkenhead. There are some huge changes affecting pension schemes that will be of significant interest to all customers;

 

 

ISAs

 

  • As of July 1st 2014 all ISAs become New ISAs (NISA).
  • Maximum annual limit on NISAs raised to £15,000 of either Stocks & Shares, Cash, or any combination.
  • This is a major change for cash savings, as it almost triples the cash ISA limit.
  • Transfers will be allowed from Stocks & Shares (S&S) NISAs to Cash NISAs (for the first time), as well as vice versa.
  • Only one subscription to a new S&S NISA or Cash NISA per year, which is the same as current rules, although unlimited transfers are allowed between them.
  • Peer to peer loans will be eligible to be placed inside ISAs
  • In addition, Junior ISA limits will be raised to £4,000, also from 1st July 2014.

 

Comment; Clients can make more use of tax efficient ISA savings. Clients who are switching from existing investment funds to ISAs each year will have their annual transaction deferred until July to keep the paperwork down to a minimum.

 

 

Pensions

 

There will be a significant relaxation of pension taxation regime, from 27th March 2014, with the following changes:

 

  • Small pot pension commutation (taking an entire small pension in one go, subject to taxation) limits raised from £2,000 to £10,000.
  • The number of small pots that can be taken under this rule raised to 3, from a previous maximum of 2.
  • Trivial commutation (taking all pensions in one go, subject to taxation) limit raised from £18,000 to £30,000.
  • Maximum capped drawdown income limit raised from 120% to 150% of the “GAD maximum”.
  • Reduction in the minimum guaranteed income requirement to access “flexible drawdown” from £20,000 PA to £12,000 PA.

 

Comment; This is great news for customers in Drawdown. The maximum income available has increased significantly. Many customers will be able to use flexible drawdown rules to increase the rate of withdrawal significantly in cases of, for example, severe ill health.

 

The above changes are a precursor to the largest shake-up in pension rules for many years, which is due to take place in April 2015 and consists of:

 

  • The ability to draw an entire pension pot of any size in one go at retirement, receiving 25% tax free and the remainder being taxed at ordinary rates of income tax.
  • Maximum income drawdown limits being removed.
  • The promise that anybody approaching retirement with a private pension will have access to free, impartial “guidance”, funded by the pensions industry.
  • As a result of these changes the government intends to remove the option of transferring a defined benefit pension into a defined contribution pension, primarily to protect the unfunded government pension system.

 

Comment; More great news for Drawdown customers and an admirable simplification – no income withdrawal limits to apply after April 2015!

 

 

Income Tax

 

  • The tax free personal allowance will be raised to £10,500 from April 2015. This is a larger increase than expected.
  • In addition the higher-rate tax band will be increased from April 2015.
  • The 10 percent income tax band for savers is being abolished from April 2015, and being replaced by an increase in tax free personal allowance to those with only savings income to £15,500
  • The married couple’s transferrable tax allowance will be set at 10% of the personal allowance from April 2015, meaning that £1,050 can be transferred between spouses. This does not apply when one spouse is a higher rate taxpayer.

 

Comment; Everyone will welcome an increase in their personal allowance, and for once the “squeezed middle” aren’t being squeezed. As for the Government encouraging marriage with a tax allowance – We are not sure that a £200 tax saving each year quite conveys the message with as much vigour as the Government might think it does.

 

 

Savings

 

  • A “pensioners bond” will be available from January 2015 through National Savings & Investments. They are projected to pay 2.8% AER on a 1 year fixed rate bond, and 4.0% AER on a 3 year bond. These are very competitive rates and the limit will be £10,000 per individual.
  • Pensioners will also be able to make an additional lump-sum Class 3A national insurance contribution from October 2015. This will only be available to those reaching pension age before 6th April 2016 and will boost their State Second Pension entitlement, which is inflation-linked. The plan is for this to be cost-neutral and based on life expectancy, and so the outcome is likely to look like an inflation-linked annuity.
  • Premium bonds limits are increasing from £30,000 to £40,000 from 1st June 2014, and to £50,000 in April 2015. There will also be two £1 million prizes each month, rather than one. This is unlikely to affect the overall “equivalent interest rate”, which is around 1.3%, and is tax free.

 

Comment; Great news for those looking for a decent savings rate, although the tax treatment of the new bonds is unclear. Obviously, £10,000 per individual isn’t of much use to larger investors. Premium Bonds are very popular with customers and so the increase in investment limit is welcome, even if the tax-free returns are modest.

 

 

Other points to note

 

  • Fuel duty has been held again, with the proposed rise in September scrapped.
  • Air passenger duty rates on long haul flights will be reduced from 2015.
  • Corporation tax is being reduced to 21% in April 2014 and 20% in April 2015.
  • £200 million will be made available to repair pot-holes in roads.
  • Beer duty has been reduced by 1p, again, and duty on scotch and cider has been frozen.
  • Employer National Insurance contributions for under 21s will be abolished from April 2015.

 

Comment; This is Mr Osborne’s pre-election give away. Enjoy it whilst it lasts… We are delighted about the cash available for Britain’s roads, but is it enough?

 

 

We will pick up on any financial planning points in the normal way at customer’s annual financial planning review.