ON December 5 George Osborne unveiled the government’s latest plans for spending and taxes. Of course, there’s been endless analyses of his speech’s content, but how will affect your pocket?
I’m going to focus on the key areas that are most likely to directly impact you – namely pensions, savings and general taxation.
When it comes to your pension, there’s good news and bad news. First, the good news. If you have retired and have taken an income in the form of drawdown from your pension, you’ve probably been affected by the reduction in GAD rates, which went down from a maximum of 120 per cent to 100 per cent. This has been disastrous for most people who are in full income drawdown. What this now means is that anyone who receives their pension income (in this way) could well be in for an increase in the amount that can be drawn down.
I recommend that you take the time to contact your financial adviser and ask for an update on your future options. This type of retirement planning requires regular review meetings, so you should ensure that this is on the agenda for your next meeting with your adviser.
And now for the bad news: you need to check that you are not going to be affected by the alteration of the LTA (Lifetime Allowance). From the 2014-2015 tax year, this level drops from £1.5m to £1.25m. This seems like a vast amount to have in your pension, but it is likely to hit a lot more people than it seems on face value. This is because many people who are in final salary pension schemes might also be affected. If you consider that your retirement income from this type of pension may be above, say £50,000, you should take steps now to ensure that you are aware of the tax consequences that may result in this change. This is something that can be affected by early planning. It will affect more and more people as the affect will bite over time. Indeed, those with money purchase pension pots approaching, say £750,000, should also take advice now to see if this will affect them. And also to see what steps can be taken to legally mitigate a future tax problem.
Furthermore, if you’re planning on making large pension contributions you should get them made now, before you lose the opportunity. Once again, the Chancellor considers that the reduction to the maximum of £40,000 per annum from the 2014/2015 tax year will not affect many people, apparently the average annual pension contribution (according to the Chancellor’s speech) is just under£6,000.
Let’s move on to ISAs. There’s some good news here in that the overall level is going up to £11,520 from next April. In addition (depending upon consultation), it could be that your ISA will also be able to invest in much smaller companies than is currently allowed. George Osborne’s Autumn Statement also contained some good news for retired people, in that the state pension will continue to rise. This is helpful as retired folk have faced a nasty headwind of falling returns on their cash savings and increases to necessary spending such as fuel bills and petrol costs. On this final note there is more good news as the planned increase in fuel duty for January will not now go ahead. In addition, the nil rate band at which tax becomes payable will reach £9,440 next April. The coalition aim is to get this to the magic £10,000 by the end of their term in government. A key planning opportunity is that if you have savings in your own name and are paying tax, whilst your spouse does not pay tax, these savings should be shifted to the non tax paying spouse to ensure that you maximise the returns. This seems on the face of it a simple tip, but you’d be surprised by how many people do not do this. If you fall in to this category, make the change now, if not you are literally throwing your money away in unnecessary tax.
Those receiving child benefit will continue to feel a squeeze, some people will effectively lose this by an extra tax that bites soon, and for those who continue to receive it, it will not keep pace with inflation, rising only by one percent (from April 2014), from its currently frozen level.
Similarly, higher rate tax payers continue to suffer, as the effective rate for higher rate tax will not keep pace with inflation. This will mean that those currently on the margin of this tax will gradually see more of their income leak into the higher rate. So, the key message here is ensure that you plan to make use of all of your available allowances to keep your income below this level.
Most people can achieve this by making a sacrifice of their bonus or some of their salaries and asking their employer to make the payment for them in to their pension. By doing this, most people will benefit not only from the tax relief but also from the extra savings that their employer might add in to their pension too. Again, if you have this option available to you, you really should ensure that you use it.
And finally, inheritance tax. This has been pretty much left alone, except the nil rate band will increase slightly rising to £329,000 in 2015/2016 (it is currently at £325,000).
Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, the world’s largest independent financial advisory firm.