Budget 2015 - what it means for you
The Chancellor's final budget before the
election didn't contain anything which will have an immediate impact however pension freedom and choice will go ahead as
expected, turning conventional wisdom on how to take retirement income on its
head and placing advice firmly at the heart of successful use of the new
flexibility. And further changes in the pipeline will be of interest from
autumn 2015 onwards, although these will be in the gift of the new Government.
Pensions
Flexibility: For those with a modern, flexible DC pension, freedom and choice will be a reality from 6 April.
Annuities: From 2016/17, it is proposed that access to the new flexibility will be extended to annuitants by allowing them to sell their annuities - if their provider allows them to. The lump sum received can be held within the DC pension environment for flexible access, used to buy a flexible annuity or taken as a taxable lump sum. Consultation is already underway on the fine detail of these proposals. It remains to be seen whether this freedom will be extended to those already locked into a DB pension income that doesn't best meet their needs.
Allowances: Also from 2016/17, the pension lifetime allowance (LTA) will be cut to £1M. It's proposed that this allowance will be indexed in line with CPI from 2018/19, to help maintain its real value going forward. Government estimate this will affect around 4% of pension savers. A new transitional protection option will be introduced to allow savers already above the reduced £1M LTA to lock into a higher allowance. There are no plans to revisit the pension annual allowance.
Recalibrate for flexibility: Only modern, flexible DC pensions will support the new freedoms fully. Most older pensions won't and therefore a review of your pensions should now be considered to make sure they provide the flexibility you and your love ones need. It could make good sense to move to a modern pension that does.
Review death nominations: Non-dependants can only inherit a drawdown pot if they've been nominated to do so. Existing nominations won't do this. And they're likely to distinguish between the treatment of uncrystallised and crystallised rights, which is no longer appropriate from 6 April, so a revisit of death benefit nominations to ensure accumulated pension wealth goes to the right person in the right form.
Do it now: Flexibility isn't just about retirement. It's about keeping your options open in every eventually. Consolidation now will eliminate the risk of death occurring whilst holding the wrong pension, where inheritable drawdown isn't available.
Reforecast LTA position: Pension funding plans needs to factor in the likely cut in the LTA to £1M from 2016. And you do not need to be close to it now to potentially be affected. If you are within 10 years of retirement, a reforecast of fund projections can be requested to assess if your savings plans need to change.
Personal allowances & Personal Savings Allowance
Personal Allowance
The personal allowance and higher rate threshold for 2015/16 will remain at £10,600 and £42,385 respectively, as announced last December.
But there are promised increases to both in the next two tax years.
2016/17:
- Personal Allowance increases to £10,800
- Higher rate threshold increases to £42,700
Basic rate taxpayers will be better off by £40. Higher rate taxpayers will be £103 better off.
2017/18:
- Personal Allowance increases £11,000
- Higher rate threshold increases to £43,300
Basic rate taxpayers will be better off by a further £40. Higher rate taxpayers will be a further £160 better off.
Personal Savings Allowance
As announced last year, from April, the savings rate of income tax will drop to zero (from 10%) and the savings rate band will increase to £5,000 (from £2,880). This is a boost to those with low earnings but with a higher level of savings income, as savings income can be received tax free.
But those with higher levels of earned income above £15,600 won't benefit from the savings rate band at all.
However, from April 2016 a proposed new ‘Personal Savings Allowance' will benefit both basic rate and higher rate taxpayers, irrespective of their level of earned income.
The allowance will be:
- Basic rate taxpayers: £1,000. So those with total income below £16,800 won't have to pay tax on any of their savings.
And those with higher incomes, but less than £42,700 will still benefit from £1,000 of tax free savings.
- Higher rate taxpayers: £500. Those with total income above £42,700 will be limited to a tax free allowance of £500.
- Additional rate taxpayers won't benefit from the new allowance.
And in another positive note, savers will see interest paid gross, with no deduction of 20% tax at source by their bank or building society from April 2016.
ISAs
Fully flexible ISAs
There are planned changes for ISAs on the horizon. From autumn 2015 savers with Cash ISAs will be able to dip into their savings and replace them without it counting towards their annual subscription limits. The new contributions would have to be paid within the same tax year as the withdrawal for it not to be counted. These new flexible funding rules are not intended to apply to stocks and shares ISA.
Help to Buy ISA
First time home buyers looking to save for their deposit could get tax relief on their savings under the proposed Help to Buy ISA from autumn 2015.
The scheme will provide 25% tax relief on savings up to £12,000. So someone saving the full £12,000 would see the government add a further £3,000 to their savings, giving them £15,000 towards the purchase of their first home. This tax relief isn't given at the point of saving in the same way as a pension contribution, but is instead added when the saver buys the home.
The new scheme will be a form of Cash ISA and, in line with current rules, it won't be possible to subscribe to two separate Cash ISAs (Cash & Help to Buy) in the same tax year.
Savings will be limited to a maximum single initial premium of £1,000 and regular savings of £200 each month. And to get the Government bonus, property values can be no more than £250,000 (£450,000 for properties in London).
IHT: Deeds of Variation in the spotlight
The flexibility a Deed of Variation may be under threat after the Chancellor announced a consultation on their use in IHT avoidance. The consultation is due to report its findings in Autumn 2015. It's another measure that scrutinises what clients do with their money after death following the measures tackling pilot trusts announced in the 2014 Autumn Statement and tweaked in the forthcoming Finance Bill.
Currently, a will can be changed after an individual's death, through a legal process known as a Deed of Variation. Often this is combined with the efficient use of exemptions or the nil rate band so the end result also gives an IHT saving. This can be used up to two years after death.
If you are thinking about using this flexibility with an inheritance, and are within the two year window, you may wish to consider acting now. This would give you greater certainty about your tax position. This measure also highlights the need for your wills to be drafted during life with an eye on tax efficiency post-death. After Autumn 2015, the useful ‘eraser' of a deed of variation may not be as effective as before.
This article is not intended to be acted on as individual advice and you should consult us before making any decisions.
Pensions
Flexibility: For those with a modern, flexible DC pension, freedom and choice will be a reality from 6 April.
Annuities: From 2016/17, it is proposed that access to the new flexibility will be extended to annuitants by allowing them to sell their annuities - if their provider allows them to. The lump sum received can be held within the DC pension environment for flexible access, used to buy a flexible annuity or taken as a taxable lump sum. Consultation is already underway on the fine detail of these proposals. It remains to be seen whether this freedom will be extended to those already locked into a DB pension income that doesn't best meet their needs.
Allowances: Also from 2016/17, the pension lifetime allowance (LTA) will be cut to £1M. It's proposed that this allowance will be indexed in line with CPI from 2018/19, to help maintain its real value going forward. Government estimate this will affect around 4% of pension savers. A new transitional protection option will be introduced to allow savers already above the reduced £1M LTA to lock into a higher allowance. There are no plans to revisit the pension annual allowance.
Recalibrate for flexibility: Only modern, flexible DC pensions will support the new freedoms fully. Most older pensions won't and therefore a review of your pensions should now be considered to make sure they provide the flexibility you and your love ones need. It could make good sense to move to a modern pension that does.
Review death nominations: Non-dependants can only inherit a drawdown pot if they've been nominated to do so. Existing nominations won't do this. And they're likely to distinguish between the treatment of uncrystallised and crystallised rights, which is no longer appropriate from 6 April, so a revisit of death benefit nominations to ensure accumulated pension wealth goes to the right person in the right form.
Do it now: Flexibility isn't just about retirement. It's about keeping your options open in every eventually. Consolidation now will eliminate the risk of death occurring whilst holding the wrong pension, where inheritable drawdown isn't available.
Reforecast LTA position: Pension funding plans needs to factor in the likely cut in the LTA to £1M from 2016. And you do not need to be close to it now to potentially be affected. If you are within 10 years of retirement, a reforecast of fund projections can be requested to assess if your savings plans need to change.
Personal allowances & Personal Savings Allowance
Personal Allowance
The personal allowance and higher rate threshold for 2015/16 will remain at £10,600 and £42,385 respectively, as announced last December.
But there are promised increases to both in the next two tax years.
2016/17:
- Personal Allowance increases to £10,800
- Higher rate threshold increases to £42,700
Basic rate taxpayers will be better off by £40. Higher rate taxpayers will be £103 better off.
2017/18:
- Personal Allowance increases £11,000
- Higher rate threshold increases to £43,300
Basic rate taxpayers will be better off by a further £40. Higher rate taxpayers will be a further £160 better off.
Personal Savings Allowance
As announced last year, from April, the savings rate of income tax will drop to zero (from 10%) and the savings rate band will increase to £5,000 (from £2,880). This is a boost to those with low earnings but with a higher level of savings income, as savings income can be received tax free.
But those with higher levels of earned income above £15,600 won't benefit from the savings rate band at all.
However, from April 2016 a proposed new ‘Personal Savings Allowance' will benefit both basic rate and higher rate taxpayers, irrespective of their level of earned income.
The allowance will be:
- Basic rate taxpayers: £1,000. So those with total income below £16,800 won't have to pay tax on any of their savings.
And those with higher incomes, but less than £42,700 will still benefit from £1,000 of tax free savings.
- Higher rate taxpayers: £500. Those with total income above £42,700 will be limited to a tax free allowance of £500.
- Additional rate taxpayers won't benefit from the new allowance.
And in another positive note, savers will see interest paid gross, with no deduction of 20% tax at source by their bank or building society from April 2016.
ISAs
Fully flexible ISAs
There are planned changes for ISAs on the horizon. From autumn 2015 savers with Cash ISAs will be able to dip into their savings and replace them without it counting towards their annual subscription limits. The new contributions would have to be paid within the same tax year as the withdrawal for it not to be counted. These new flexible funding rules are not intended to apply to stocks and shares ISA.
Help to Buy ISA
First time home buyers looking to save for their deposit could get tax relief on their savings under the proposed Help to Buy ISA from autumn 2015.
The scheme will provide 25% tax relief on savings up to £12,000. So someone saving the full £12,000 would see the government add a further £3,000 to their savings, giving them £15,000 towards the purchase of their first home. This tax relief isn't given at the point of saving in the same way as a pension contribution, but is instead added when the saver buys the home.
The new scheme will be a form of Cash ISA and, in line with current rules, it won't be possible to subscribe to two separate Cash ISAs (Cash & Help to Buy) in the same tax year.
Savings will be limited to a maximum single initial premium of £1,000 and regular savings of £200 each month. And to get the Government bonus, property values can be no more than £250,000 (£450,000 for properties in London).
IHT: Deeds of Variation in the spotlight
The flexibility a Deed of Variation may be under threat after the Chancellor announced a consultation on their use in IHT avoidance. The consultation is due to report its findings in Autumn 2015. It's another measure that scrutinises what clients do with their money after death following the measures tackling pilot trusts announced in the 2014 Autumn Statement and tweaked in the forthcoming Finance Bill.
Currently, a will can be changed after an individual's death, through a legal process known as a Deed of Variation. Often this is combined with the efficient use of exemptions or the nil rate band so the end result also gives an IHT saving. This can be used up to two years after death.
If you are thinking about using this flexibility with an inheritance, and are within the two year window, you may wish to consider acting now. This would give you greater certainty about your tax position. This measure also highlights the need for your wills to be drafted during life with an eye on tax efficiency post-death. After Autumn 2015, the useful ‘eraser' of a deed of variation may not be as effective as before.
This article is not intended to be acted on as individual advice and you should consult us before making any decisions.