Once again, it’s budget time and, as ever, it gives us both expected and unexpected changes to the legislative landscape; with the added element of an imminent election.
Below are some of the key points from a financial planning point of view…
Reduction of the Lifetime Allowance… again!
It wouldn’t be a proper budget without changes to pension legislation. Thankfully, tax relief and tax free cash was untouched. However, from April 2016 the lifetime allowance (LTA) will be reduced to £1 million. The LTA will then be index-linked in line with the consumer prices index (CPI) from 2018/19 onwards. Any pension savings above this level will be subject to significant tax charges when the pension is accessed.
As with previous reductions in the LTA, there will be transitional protection available for those with pension rights already above £1 million. With the last set of transitional protections open for application until 5 April 2017, and the new transitional protection yet to be announced; it is essential that those who can benefit from the protection do so before it’s too late.
The Pension Freedom reforms announced in the March 2014 budget come into force from 6 April 2015. As well as this, there was a consultation announced on the setting up of a second hand market for existing annuities.
These changes are welcome and will make pensions a more attractive option to save for retirement. But care must be taken with regard to tax and the possibility of eroding the pension pot to quickly. Financial planning advice (with a long-term view) will become essential.
A new type of ISA, called a ‘Help to Buy’ ISA, will be launched in Autumn 2015. This new product will enable savings towards a first home of up to £200 per month in addition to a one off starting payment of £1,000. The government will then boost these savings by 25%, up to a maximum of £3,000, which will be paid when a property is purchased.
ISA’s will retain their tax free status when passed on to a spouse or civil partner on death. There will also be new flexible ISA rules consulted on during the Autumn of 2015 to allow withdrawals from cash ISA’s to be paid back into the account before the end of the tax year without affecting their ISA subscription.
From 6 April 2016, a tax free savings allowance of £1,000 will be available to basic rate taxpayers, a £500 tax free allowance to higher rate taxpayers and no tax free allowance to those earning over £150,000 per annum.
The Inheritance Tax (IHT) nil rate band remains frozen at £325,000 until 5 April 2018. With no rise in the nil rate band, targeted rules to tackle tax avoidance through multiple trusts and a review into deeds of variation being announced, IHT is becoming more and more of an issue. This makes a carefully drafted will an even more important part of estate planning than it already is.
Finally, as part of the governments vision to modernise the tax system, both paper and online tax returns will be replaced by digital tax accounts for millions of individuals and businesses.
The legislative environment continues to change and evolve. With the pension freedoms, there are further flexibilities in how we deliver financial planning to meet our clients aims and objectives. However, with a budget deficit still firmly on the minds of Westminster, the tax implications of any financial planning needs to be firmly in everyone else’s mind.
As always, these changes reinforce the need for regular reviews of investments, pensions, tax and estate planning arrangements in the context of an overall financial plan. We will be assessing the impact of the budget on each of our clients individually. In the meantime, if you have any questions on any of the above, please do contact me.
Equally, if you know of anybody who would benefit from our services, please don’t hesitate to pass on my details.