Detailed analysis of The Budget, and how it affects you
What a thought-provoking Budget! I think the Budget has stunned most of my sector; we always get some predictions but I don’t believe anyone saw this coming. The Government have definitely listened to the voices of pensioners who endlessly say to us that they have been hit by the low interest rates both with savings and annuities.
In the future, being able to take your pension fund as a lump sum is an interesting idea, and the Government intend to consult on how this is best achieved prior to the target date of April 2015. Initially this will apply to defined contribution schemes (where you build up a fund) but may also apply to private company final salary schemes in the future. It is unlikely to apply to Public Sector schemes and, indeed, it is likely to introduce legislation to stop transfers out from this type of scheme to avoid a drain on the tax payer.
I agree a new way of taking our pensions was needed but to allow people to take the whole amount out (with the majority of it being taxed at your highest marginal rate) does worry me and I do wonder how they are going to manage it.
I always think that the introduction of the Personal Pension was the beginning of our freedom of choice in how we fund our retirement. Many people though have not taken paying into a pension seriously – the average size of a pension fund is £36,800 (Association of British Insurers) so how do the government think that people will be responsible when withdrawing their funds? So I think how this works in practice will be interesting. But it does benefit those paying into a pension.
One of the biggest concerns, especially if you have left paying into a pension until later on, is whether you build up enough to make it worth your while. This will not be a concern in the future. Pensions are a very tax-efficient medium that many have put off investing in due to the complexity of how the benefits are taken and I feel that this proposed legislation will lead many to look again at them with fresh eyes.
In fact from next week, there is an immediate change to the amounts you can take out of your pensions at the right time: You can now take the whole of a ‘small pot’ maximum £10,000 (was £2,000); or all your pension funds as long as they are less than £30,000 (up from £18,000 – ‘triviality’); or as much as you like under ‘Flexible Drawdown’, which applies if you have a secured income from elsewhere of at least £12,000pa (reduced from £20,000pa).
If you are in ‘Capped Drawdown’ the maximum income will increase to 150% of ‘GAD’ from 120%. (Please note that all the above is subject to certain criteria and taxation).
If the proposed flexibility is introduced next year, most of these are expected to no longer be an issue. NB. A number of technical terms have been used in this paragraph for the sake of brevity for which I apologise. Please do not hesitate to contact either myself or your own adviser for further clarification.
The Pensioner Bond is also good news, though the exact rates won’t be set until January 2015 but will be based on current estimates of 2.8% for a one year and 4% for a 3yr bond. This has to be good news together with increasing the Premium Bond allocation to £40,000 this June and to £50,000 next year.
The new ISA (wonderfully called the NISA) is more generous and flexible than before. Being able to transfer your investment either way from Stocks and Share ISAs to cash and simplifying the allowance to a straight £15,000 makes it easier for us to advise and also easier for the layman to understand plus easier for all concerned to choose the level of risk placed on their investments.
It was also announced that people who retire with defined contribution schemes will receive free face-to-face advice. This probably comes after a recent FCA report highlighted that 60% of people buy their annuity from their current provider and that 80% could have secured a higher income if they shopped around. We would always recommend seeking advice and I feel the need has never been greater.
Please note that the above is our understanding of the budget and many of the details are to be consulted on and need to be confirmed.