This summary is not intended as a full review of the 2014 budget, as I am sure you will read the wider details in the newspapers and online. This is, instead, a summary highlighting the key changes that affect pensions, savings and investments.
ISA Allowance Increases to £15,000
A New ISA (NISA) will be introduced on 1st July 2014 with a £15,000 limit and complete flexibility as to whether this limit is used as a cash ISA or a stocks and shares ISA, or a combination of both. There will be no separate cash and stocks and shares ISA limits. The Government will also raise the limit for Junior ISAs and Child Trust Funds from £3,720 to £4,000.
The current ISA allowance for 2013/2014 is £11,520 and it was scheduled to increase to £11,880 from 6th April 2014.
Radical Changes to Retirement Income Options
A number of changes are being introduced in April 2015, but there will be a consultation period between now and then, before the changes are brought into legislation.
From April 2015, it will be possible to access defined contribution pensions (e.g. personal pensions and SIPPs) without any restriction applying to income levels. Providing the pension plan changes the scheme rules to enable this, you can continue to take the 25% tax free lump sum as under the current rules, but it will now be possible to drawdown the rest of the fund in any way you choose, which will include the ability to take the whole fund as a lump sum.
Under current rules, the two main options are income drawdown (usually subject to an annual income limit) and annuity purchase. Under the new rules, there are very few reasons why anyone would purchase an annuity and drawdown will no longer have any limits.
All of the pension you withdraw after the 25% tax free lump sum has been withdrawn will be taxable and therefore withdrawing the whole fund as one lump sum may not be particularly attractive. The withdrawal will be taxed as income at the highest marginal rate. For example, on a pension pot of £100,000, you could withdraw £25,000 tax free and the remaining £75,000 will be added to other income in the tax year and taxed accordingly. If you are a higher rate taxpayer through other sources of income, the whole £75,000 fund would be taxed at 40%.
This change will have a very negative impact on the annuity industry and this has been reflected in significant falls in the share price of specialist annuity providers and a drop in the share prices of Aviva and Legal & General, amongst other UK insurers.
The Budget Report also mentions that the Government feels that the flat 55% tax charge on death under the drawdown rules is unfair and that they are looking to review this, which is a further welcome change.
Another significant change is that the Government are considering making it impossible for anyone in a public sector final salary scheme to transfer their defined benefits to a defined contribution scheme. The rationale for this is that the Government feel that the new flexible rules for defined contribution schemes may result in lots of public sector workers wanting to transfer their benefits. If this were to happen en masse, it would result in a huge cost to the public purse to pay out the transfer values.
In the interim period between now and 6th April 2015 the following changes are being introduced:
• Minimum secure income requirement for flexible drawdown reducing from £20,000 per annum to £12,000 per annum.
• Increase in the capped drawdown limit from 120% to 150%.
• Increase in the size of a single pension pot that can be taken as a lump sum from £2,000 to £10,000.
• Increase the overall size of pension savings that can be taken as a lump sum (trivial commutation) from £18,000 to £30,000.
10% Starting Rate of Income Tax for Savings Abolished
Currently, the first £2,790 of savings income above the tax free personal allowance is taxed at a starting rate of 10%. From April 2015, the 10% savings rate will be reduced to 0%. The Government will also increase the band of savings income that is subject to the 0% rate to £5,000.
National Savings & Investments Pensioner Bonds Introduced
NS&I will launch a choice of fixed rate savings bonds for people aged over 65 from January 2015. Interest on the bonds will be taxed as savings income and the budget report gives an example of a 1 year bond paying 2.8% per annum gross and a 3 year bond paying 4% per annum gross. The maximum limit will be £10,000 per bond, but further details will be released in the Autumn Statement.
Maximum inflows of £10bn will be allowed into these bonds and therefore we will be advising all clients to consider these bonds where appropriate for their savings nearer the time but ensuring there is enough time to get the applications in before the product is withdrawn.
Increase in Premium Bonds Allowance to £40,000
The cap on investments in premium bonds will be lifted from £30,000 to £40,000 per person from 1st June 2014. It will then be lifted again to £50,000 in 2015/2016. Two £1,000,000 prizes per month will be introduced from August rather than the current one.
Increase in the Personal Allowance
The personal allowance will be increased from April 2014 to £10,000 and then again in April 2015 to £10,500.