This budget included some very important changes to the UK’s ISA and pensions regime, making pensions more attractive for long-term tax-relieved savings and considerably increasing the amount which can be placed into ISAs.
Pensions: changes to income drawdown
Many people still associate pensions with having to purchase an annuity. (An annuity is a contract for long-term regular income, normally up until the death of the annuitant.) Annuities have become unpopular because of the relatively low levels of income and their inflexibility – once you have an annuity you normally have it for life with no option to withdraw. From 2015, under the new rules, you will have the option to withdraw as much as you like from pensions, with the value after tax-free cash (25% of the fund) being subject to income tax. This could fit well with increasingly common new patterns of working where people continue to be part-time employed as they retire gradually. For example, a person from 2015 might retire at 65 and take maximum income from their pension pot in that year but choose to reduce the level of income they take in the following tax year – perhaps because they continue to have some employed earnings. It is likely that annuities will be purchased far less and more people will want to take retirement income from a drawdown plan. Another major change will be how individuals plan their investment strategies as they approach retirement. The conventional wisdom of moving assets into cash and gilts pre-retirement will not be as attractive. Life insurance and investment businesses will have to re-think the process of life-styling funds.
Pensions: the details
Legislation will be included in the Finance Bill 2014 that will make the following changes, all effective from 27 March 2014:
- reduce the minimum income requirement for accessing flexible drawdown to £12,000,
- increase the capped drawdown limit to 150% of an equivalent annuity,
- increase the total pension wealth that people can have before they are no longer entitled to receive lump sums under trivial commutation rules to £30,000,
- increase the small pots limit, raising the size of a pension pot that can be taken as a lump sum regardless of total pension wealth, to £10,000,
- increase the number of pension pots of below £10,000 that can be taken as a lump sum from two to three.
Access to defined contribution pension savings
From April 2015, the Government will change the tax rules to allow people to access their defined contribution pension savings as they wish from the point of retirement. Drawdown of pension income under the new, more flexible, arrangements will be taxed at marginal Income Tax rates rather than the current rate of 55% for full withdrawals. The tax-free pension lump sum will continue to be available. Those who continue to want the security of an annuity will be able to purchase one. Equally, those who want greater control over their finances in the short term will be able to extract all their pension savings in a lump sum. Those who do not want to purchase an annuity or withdraw their money in one go will be able to keep their pension invested and access it over time.
ISAs – a much larger tax-free savings allowance from January 2014
At Barchester we love ISAs; this is because they are normally low cost, flexible and the growth is tax free, which is all very useful if you are trying to build up your medium to long-term savings. A New Individual Savings Account (NISA) is to be made available from 1 July 2014. They will incorporate a number of changes:
- The annual subscription limit for cash and stocks and shares ISAs will be equalised at £15,000.
- The restrictions on the movement of funds between stocks and shares and cash accounts is to be removed.
- Certain rules that determine the types of securities and other investments that can be held in an ISA are to be changed.
Also from 1 July 2014, the annual subscription limits for the Junior ISA and the Child Trust Fund (CTF) are to be increased to:
- Junior ISA - £4,000
- CTF - £4,000
Social Enterprises should see their own special tax relief on new investment later this year. The changes to the personal tax regime, will help many people avoid higher rate tax on their incomes.
Income tax rate bands
There was significant press commentary prior to the Budget announcements lobbying for an increase in the threshold at which tax payers are liable for the 40% income tax rate. The declared higher rate thresholds are:
- For 2014–15 - £41,865
- For 2015–16 - £42,285
If your income before allowances exceeds these amounts you will be paying 40% Income Tax on the excess (this assumes that you are only entitled to the basic personal allowance). The threshold at which the 45% rate starts is unchanged at £150,000. There were no changes to the basic income tax rate (20%), the higher rate (40%) and the additional rate (45%). It was also great to see a special tax relief for theatrical production – although this is not likely to impact on very many of our clients in the short term!
Please bear in mind that this is not intended as an exhaustive explanation of the changes mentioned and is no substitute for taking independent professional advice.