Budget 2014 update
2014 Budget Update
Retirement income – a brave new world?
Radical changes proposed in today’s Budget could herald the biggest shake-up to UK pensions ever. And it could happen as soon as 2015.
These welcome proposals would give pension savers more freedom, choice and flexibility than ever before over how they access their pension savings.
- If the changes go ahead, anyone of pension age would be able to draw as much (or as little) from their pension pot as they choose at any time.
- 25% would still be tax free. The balance would be taxed as income in the year it is taken.
The detail isn’t set in stone. But this signals a clear Government desire to give savers more control, and responsibility, over their destiny in life after work. It could represent pension utopia, but only with advice to solve an increasingly complicated retirement equation.
These proposals will be consulted on this year, but in recognising the need for flexibility there is a boost for drawdown users almost immediately.
The chancellor has announced two welcome changes to income drawdown rules from 27 March:
- Capped income drawdown – limit up 25%: The maximum yearly income allowed under the pension capped drawdown rules will increase by 25%, from 120% to 150% of the GAD basis amount, for income years starting after 26 March 2014.
- Flexible income drawdown – MIR cut to £12k: The yearly secured income needed to meet the ‘minimum income requirement’ to access flexible drawdown will be cut from £20,000 to £12,000 for those applying to start flexible drawdown after 26 March.
Taken together, these changes give pension drawdown users even more flexibility to dial income up or down to adapt to changing circumstances.
Pension triviality limits increased
The Chancellor has announced welcome changes to the pension triviality rules from 27 March 2014:
- Triviality limit up to £30k: Individuals over age 60, with total pension savings of £30,000, or less can take it all as a trivial commutation lump sum – the current limit is just £18,000;
- Stranded pot rules relaxed: Small stranded pension pots of up to £10,000 can be taken as a lump sum – a significant increase from the current £2,000. And the number of small stranded personal pension pots that can be taken as a lump sum is increased from two to three.
These changes improve choice for more consumers who may otherwise have been forced to receive very small regular pensions for life, with limited ability to shop around for the best annuity. In both cases, up to 25% of the lump sum can be paid tax-free with the balance taxed as income.
55% Drawdown death benefits charge set to be cut
It’s been a day full of good news for drawdown users with the announcement of a consultation on the 55% tax charge on drawdown lump sum death benefits.
With much greater freedom proposed on taking pension benefits, there are plans to cut the rate of tax payable on drawdown death benefits from April 2015 to make it more closely aligned to income tax charges on drawdown.
Having a rate of tax on death which is greater than the income tax on withdrawing income could see the tax tail wagging the retirement income dog. The Government haverecognised the need to have a tax system where pension savers are not penalised by only taking what they need from their pension fund.
This should see the ability to pass on pension death benefits to loved ones given a further boost and make the use of bypass trusts even more appealing.
Proposed clampdown on DB to DC transfers
The only questionable pension news from the Budget are proposals to severely limit, or even ban, transfers from defined benefit schemes to defined contribution pension plans. This goes against the Government’s general thrust of empowering consumers to give more freedom around their pension choices.
- Public Sector: The intention is to ban transfers from public sector DB schemes to DC plans, except in exceptional circumstances.
- Private Sector: The Government will consult on whether, and if so to what extent, similar restrictions should be imposed on private sector DB schemes. The initial options put forward are:1. no change – business as usual
2. minimal change – requiring the ceding DB trustees to approve transfers
3. minimal change – no transfer restriction, but no access to the proposed new ‘unlimited access’ DC regime
4. significant change – a new transfer cap imposing an annual limit on the amount that can be transferred
5. radical change – transfer ban in line with the proposed public sector change.
Impartial financial advice for every retiree
From April 2015, the government propose that pension providers and trust based schemes must offer each DC customer a “guidance guarantee” at the point of retirement. This must be access to advice that is:
- impartial and of good quality;
- covers the individual’s range of options to help them make sound decisions and equip them to take action, whether that is seeking further advice or purchasing a product;
- is free; and
- offered face to face.
The FCA, Pensions Regulator and DWP will develop the standards and framework for the guidance, supported by a development fund of up to £20M.
The government recognises that this guarantee will lead to an advice need for many, for example where drawdown is the right answer for a client. Over the course of the consultation, it should become clearer what this could mean for your business.
And there’s more in the pipeline for pensions…
Minimum pension age going up?
- The earliest date you can take retirement benefits is set to become linked the state pension age. As the state pension age increases to 67 in 2028 the normal minimum pension age will also increase from 55 to 57. From then on it will remain 10 years below the state pension age.This won’t impact those retiring early due to ill-health. But we await the detail on how this will affect those who have early protected pension ages such as professional sportsmen and women.
Tax breaks on contributions after 75?
- The over 75s may be able to continue making tax relievable pension contributions. Consultation is set to begin on removing the age 75 cap on pension funding.
Relaxation of dependants’ scheme pension rules?
- Dependants’ Scheme Pension rules are in line to get an overhaul. A consultation will look to ensure the rules apply fairly, and reduce administrative burdens.
A simple ISA is NISA
In a major simplification for savers, the annual subscription limit will be increased to £15,000 (from £11,520), and there will no longer be a lower cap on the amount saved into a cash account. So your clients can save any combination of amounts up to £15,000 overall between their cash and stocks and shares ISA.
The simplified product will be known as a NISA (New ISA), and all existing ISAs will become NISAs. Savers may also transfer their stocks and share ISA to cash.
This measure is intended to give greater choice and flexibility for savers but, in the current climate of low interest rates, clients should be carefully advised about switching fully to cash.
The annual subscription limit for Junior ISA and Child Trust Fund (CTF) will also be increased from £3,840 to £4,000.
All of these changes will have effect from 1 July 2014.
NS&I: A boost for Ernie, but 2 cheers for pensioners?
Two key measures were announced for savers with National Savings and Investments. Premium Bonds get a decent fillip: increased investment (£30,000 to £40,000 in June 2014, up again to £50,000 in 2015/16) and bigger prizes (two £1M prizes a month from August 2014).
But do pensioners do so well? The proposed fixed rates on the Pensioner Bond look attractive – 2.8% gross/AER for a one year term, and 4.0% gross/AER for a three year bond.But there’s a £10,000 maximum investment limit and the income will be taxable.
Starting rate for savings tax plummets to 0%
A good news story from the Budget? It will be for those with no or low earned income and income from savings. Not only is the savings rate of income tax falling from 10% to 0%, but also the savings rate band increases to £5,000 in 2015/16. The band is only available to set against savings income and is lost if non-savings income (for most people, their wages) exceeds the personal allowance plus the £5,000 band.
Tax-free childcare: more to be claimed, sooner
Working families struggling to meet childcare costs will get a welcome £2,000 a year boost from the Government.
From Autumn 2015 families can get 20% tax relief on savings used for childcare up to a maximum of £10,000 for each child under 12 years old. An online scheme will be run by HMRC in partnership with NS & I.
To be eligible, families must have both parents in work (which includes self-employment), with each earning less than £150,000 a year, and they must not already receive support through tax credits or universal credit.
Families can’t be in both employer supported childcare schemes and the new tax-free childcare scheme. Some families will be better off in one or the other, so guidance may be needed for some.
Tax allowances and thresholds
- The personal allowance, set at £10,000 for 2014/15, will rise to £10,500 in 2015/16 for those born after 5 April 1948. At the same time, the level at which income tax becomes payable at higher rates will rise by 1% to £42,285, meaning that higher rate taxpayers with incomes below £100,000 will also be better off by £184 – a little less pressure on the ‘squeezed middles’.
- Age related allowances will remain at £10,660.
- From the 2015/16 tax year, a spouse or civil partner who doesn’t have income to fully use up their personal allowance, will be able to transfer up to £1,050 to their partner, provided that partner is a basic rate taxpayer.
Capital gains tax – As previously announced, the annual exemption will rise by £100 to £11,000 in 2014/15, and to £11,100 in 2015/16.
IHT – The nil rate band will remain frozen at £325,000 until 2017/18.