Thankfully the Budget was very light on significant changes to pensions. It was no surprise to us that the tax free lump sum was untouched but more surprising that tax relief on pension contributions was also unchanged.
That seems more likely to be a stay of execution than a lifetime pardon with the introduction of a new Lifetime ISA for the under 40s (see below) looking like the first step towards an ISA style pension system for that generation.
The standard ISA allowance (which stays at £15,240 in the 2016/17 tax year) will be increased to £20,000 from 6 April 2017.
Another further positive development was the reduction in capital gains tax rates from 6 April 2016. The higher rate will reduce from 28% to 20% and the basic rate from 20% to 10%, albeit these changes do not apply to sales of second homes or let property, where the current rates will still apply.
The Lifetime ISA (LISA) will be introduced from 6 April 2017 as a complimentary savings scheme for younger savers, not (yet) a replacement for traditional pension saving. Higher rate tax payers will continue to enjoy tax relief at 40% on pension savings of up to £40,000 a year, arguably keeping pensions as their number one long term savings plan. Indeed, the under 40’s will be able to use both.
LISA – how it will work
Money in
The LISA will only be available to the under 40s and will include a 25% Government top up at the end of each tax year. It won’t be possible to pay as much into the LISA as you can into a pension. Contributions will be limited to £4,000 each year which will be topped up to £5,000. And savers will stop receiving their top up once they reach age 50.
LISA contributions will count towards the total ISA savings limit which will increase to £20,000 in 2017/18.
Money out
Funds can be accessed tax free after the age of 60. But to help first time buyers, funds may be withdrawn tax free to cover the cost of a deposit on their first home. And anyone already saving in a help to buy ISA will be able to transfer their existing savings to the new LISA.
Accessing savings before age 60 for other reasons will be allowed but the Government Bonus, and the growth on it, will be lost. There will also a 5% tax charge applied on the amount withdrawn.
As with other ISA schemes, the LISA will form part of the estate for Inheritance Tax purposes.
The Government aims to encourage long term saving with the inclusion of a ‘buy four get one free’ bonus, but with the ability for first time buyers to use savings to get a foothold on the property ladder.
Old News
As usual, the Chancellor “announced” plenty of “news” that was already known, effective from 6 April 2016:
• Reduction in the standard lifetime allowance for pension benefits from £1.25million to £1million – it will be possible to apply online for protection against this reduction from this July but care should be taken over making further pension contributions or drawing benefits after 5 April 2016 – an interim process will be available for those who need to register for protection but who want/need to draw benefits before the online application is available.
• Pension contributions: the standard £40,000 Annual Allowance will be reduced by £1 for every £2 of ‘income’ clients have over £150,000 in a tax year, until their allowance drops to £10,000, meaning for those earning over £210,000 the new limit will be £10,000 per year
• A new dividend allowance which sees the first £5,000 of dividends paid tax free. Tax rates above that allowance are changing considerably and therefore if you believe you will receive (or accumulate) more than £5,000 of dividends outside of ISA or pension accounts please contact us.
• The personal saving allowance first £1,000 of savings interest will be tax free (£500 for higher rate taxpayers). Interest will also be paid gross so that non-taxpayers no longer have to reclaim tax deducted at source. Additional rate (e.g. 45%) tax payers will not benefit from this new allowance.
Autonomy Wealth View
The reprieve for the status quo on tax relieved pension contributions may be short-lived and therefore planning to make the most of the allowances available where possible should be a priority for higher rate and additional rate taxpayers. If you have been a member of a pension scheme during the last three years but have unused allowances, ‘carry forward’ remains available.
More broadly, the changes to capital gains tax, the new dividend allowance and the planned increase in the ISA allowance provide considerable opportunities to plan a tax-efficient retirement income – reducing the tax drag on investment returns can make the money last longer and also reduce the investment return needed to meet your objectives.
The FCA does not regulate tax planning.