The Budget earlier this week included several surprise announcements to encourage saving, as well as some major reforms to pensions. If you’ve been reading the papers or watching the news and want to understand exactly what the changes mean for you, below is a summary of the main points, along with our immediate thoughts.
ISAs are NISA!
From July 2014, ISAs will become New ISAs or NISAs! The main changes are two fold;
» The previously announced investment allowance for 2014/15 will increase from July 2014, from £11,880 to £15,000 per person. If you decide to invest in your ISA from 6 April before the increase is implemented, you can still top up with the further amount when the new limit is introduced.
» The previously confusing investment restrictions on ISAs of allowing up to a maximum of 50% of the allowance to be invested in a cash ISA and the balance invested in a stocks and share ISA are to be removed, giving investors total flexibility in how they allocate between cash and Stocks and Shares within ISAs.
From July, NISAs will allow Stock and Shares ISAs to be transferred into Cash ISAs whereas currently only Cash ISAs can be transferred to Stocks and Shares ISAs.
The Budget announcement also seems to suggest that transfers from Stocks and Shares to Cash ISAs can also apply for ISAs taken out in previous tax years from July 2014 although further clarification on this needed.
The limits for investment into Junior ISAs and Child Trust Funds for 2013/14 will also increase from July 2014 from £3,840 to £4,000. The Chancellor has also previously announced that from April 2015, Child Trust Funds can be transferred to Junior ISAs to give greater investment options for parents saving for children.
National Savings: increased investment limit for Premium Bonds and new Pensioners Bond
The maximum investment limit for Premium Bonds is to be increased to £40,000 from the current £30,000 from June 2014, the first increase since 2003. The limit will again be increased to £50,000 for the tax year 2015/16. Premiums Bonds offer capital security but in effect you are gambling the interest you would otherwise earn by holding funds on cash deposit, for a prize in the monthly draw. The maximum prize is £1m and the Chancellor also announced today he would double the award of the maximum prize from one £1m prize per month, to two. This change will be effective from August 2014.
A new Pensioners Bond is to be launched by National Savings from January 2015 offering two fixed rates of interest, announced today as being 2.8% gross for one year and 4% gross for three years. These rates will surely change according to interest rates nearer to the time of launch but the point of the Chancellors announcement was that these rates being offered are significantly better than rates currently offered on equivalent fixed rate bonds from banks and building societies. There is however a maximum investment limit of only £10,000 per person and the interest will be taxable in the normal way. Their appeal is therefore likely to be limited.
Capped drawdown on pensions, which allows a maximum income to be drawn from pensions, is to increase from 120% to 150% of the single persons annuity rate. This increase in the maximum income level will give greater flexibility and aid to pensioners relying on other sources of savings to top up their income levels whilst interest rates are at historic low levels. However, the ability to draw greater amounts of income from a pension fund should also considered carefully as it increases the possibility of reducing the pension at a greater rate particularly if the underlying investment returns do not match the rate of drawdown.
Flexible drawdown as an option, was also given a boost with the qualifying condition of having a minimum guaranteed pension income of £20,000 gross per annum reduced to just £12,000 gross per annum. This reduction in the entry will give savers with pension funds an increased option to flex the income they draw from their pension pots during retirement years according to needs and investment returns. The state pension qualifies as guaranteed pension income as well as other pension sources such as pensions in payment from final salary schemes and annuities.
From 27th March 2014, the size of small individual pension pots that can be taken as a lump sum regardless of total pension wealth will increase from £2,000 to £10,000. From the same date, the number of small pots that can be taken as lump sums will increase from two to three. Separately, from 27th March 2014, the amount of total pension wealth that may be taken as a trivial commutation lump sum will be increased from £18,000 to £30,000.
Finally, the Chancellor issued a new consultation document, Freedom and Choice in Pensions. The consultation aims to take views from the pensions and savings industry as to how pensions need to be modernised, recognising that the purchase of an annuity is not the right retirement solution for everyone. The government wants to make the system for how pension income is drawn from defined contribution (or money purchase) pension saving simpler with greater choice. To achieve this, they are proposing that from April 2015, everyone will be entitled to flexibility of access to their money purchase pension savings, drawing as much or little as they wish after the minimum age of 55 years. Any amount withdrawn will be treated as income and taxed in the normal way (after the payment of the tax free lump sum).
This compares to the current position, where unless you qualify for flexible drawdown, drawing an unlimited amount from your pension savings would incur a tax charge of 55% no matter what rate of income tax you pay, with a further 15% penalty levied on the pension scheme. In essence, therefore, the changes covered above to capped drawdown and flexible drawdown are envisaged to be a transitory measure leading to greater freedom on drawing pension benefits for all from April 2015.
These suggested changes are very welcome and further details will be released once the consultation period has ended in June. One small sting for the young however, is that the same consultation document also announces a proposed increase in the minimum age when pension benefits can be drawn from 55 to 57 years, which will be effective from 2028.
If you have any queries about the Budget announcement or would like to discuss your specific circumstances, please contact a member of the PK Partnership team.