I am indebted to Standard Life’s Technical Department for the following advice following today’s Budget:
Good news for drawdown users – and GAD rate overhaul means more to come
A 20% hike in pension drawdown limits has been confirmed. And there’s an added bonus, with the barrier to transferring protected pre-April 2011 drawdown cases removed and an overhaul of the GAD drawdown rates.
Alastair Black, Head of Income Solutions at Standard Life, comments:
“Standard Life has been leading the campaign for more flexibility around drawdown limits. We welcome the move back to 120%. And lifting the transfer ban is good for customers too. But we’re particularly delighted that the Government has answered our calls to get drawdown rates back to reality.”
Higher income limit
- The existing income limit will simply go up by 20% from the start of the client’s next drawdown year after 25 March 2013. It’ll happen automatically – there’s no need for a formal income review.
- This means some clients will have a year’s wait for the income hike. But advisers may be able to help give an immediate income boost, and supercharge the 20% increase when it does come, by triggering a review of the existing limit in the interim.
Transfer barrier lifted
- Until now, anyone transferring a pre-April 2011 drawdown pot with a protected 120% income limit dropped down to the 100% limit from the start of their new drawdown year. This created a real barrier to these transfers, effectively trapping many clients with their existing drawdown provider.
- The existing 120% income limit will now continue after a transfer until the scheduled 5 yearly review date, creating a level playing field for clients and their advisers. And this change is backdated – it applies to any transfers of protected pre-April 2011 drawdown funds made in a drawdown year starting after 25 March 2012.
Review of GAD rates
- GAD drawdown rates are supposed to mirror market annuity rates. But they don’t – increasing the pain for drawdown users in recent years.
- A review of the table has been kicked-off to get the rates back on track, potentially further boosting drawdown income limits from later this year.
More information? Please give me a call to discuss a review of your drawdown plan.
Pension allowances cut – but there’s still room for manoeuvre
It’s no surprise. From tax year 2014/15, the pension annual allowance drops to £40,000 with the lifetime allowance cut to £1.25M. But despite the rumours, there’s no change to pension tax relief. And the 2% of the population affected by these cuts have time to plan for them.
David Downie, Standard Life’s Technical Manager, comments:
“These cuts create a clear call to action for financial advice. Those HNW clients affected should use the advance notice to review their pension funding and start considering other saving vehicles for the future.”
- The drop to £40,000 applies to pension saving for the 2014/15 tax year. But many will see their contribution limits cut in a matter of weeks rather than in a year’s time.
- This is because the annual allowance test isn’t based on payments made in the tax year – it’s what’s paid in the pension input period (PIP) ending in the tax year that matters. So any PIP starting after 6th April 2013 suffers the reduced £40,000 allowance.
- Carry forward continues, but the new £40,000 allowance will soon start to eat into what can be paid. Payments for 2015/16 will have carry forward based on £50,000, £50,000 and £40,000.
- Make the most of the current rules while you can. Think carry forward from 2009/10 onwards based on a £50k allowance, 50% tax relief on payments made this tax year and protecting against the reduced LTA.
- The standard LTA will drop from the current £1.5M to £1.25M from 6 April 2014. But there will be two new options to lock into a higher LTA before then.
- Fixed protection 2014 gives a continued £1.5M LTA – but at the cost of giving up future ‘benefit accrual’ after 5 April 2014. There will also be an individual protection option, expected to give a personal LTA equal to the 2014 fund value for those with funds between £1.25M and £1.5M – without the need to stop pension saving. It’s expected that this will be available alongside the new fixed protection 2014 as a safety net.
- Consider using the new tax year, and what’s left of this one, for a final funding boost before locking into the higher allowance. And start thinking about alternatives to pensions for the future.
- But don’t throw the baby out with the bathwater. Giving up on pensions could mean missing out on employer pension payments. So if there’s no compensation for leaving a company pension scheme, staying in for 45% of something might be better than 100% of nothing.
More information? Happy to discuss – please give me a call.
“All systems go” for flat rate State Pension from 2016 – but further blow for DB
The new flat rate State Pension of £144 a week will start from April 2016, a year earlier than originally planned. Details will be confirmed in the Pensions Bill.
Jamie Jenkins, Head of Workplace Strategy at Standard Life says:
” A simpler State Pension will make it easier for people to see exactly what they will get from the State when they stop working. This greater clarity will make it easier for them to set targets for their own retirement savings, to top up the State Pension. And making it easier to plan for the future has to be a good thing.”
But related changes to DB schemes aren’t such positive news:
- 2016 is confirmed as the end date for DB contracting out. This will see both employer and employee NI going up, futher increasing the cost burden of maintaining benefits at current levels.
- Employers will have a controversial new power to unilaterally reduce benefits to compensate, but this might simply be the final nail in the coffin for some.
- And the scrapping of the proposed relief from smoothing returns is another blow for beleaguered employer sponsors.
Family tax breaks – find out what’s on offer for you and their families
The sandwich generation is being squeezed from both sides. They may be spending more time (and money) supporting elderly parents. And they may be facing a peak in costs if they have young children. If one parent is at home, household income is likely to be lower. Or with both parents working, there will be childcare costs to fund.
In February 2013, Standard Life’s annual survey on financial efficiency showed that more women than men were setting a budget, selling things online they no longer needed, or making the most of loyalty cards. But when it came to making the most of tax breaks (e.g. with an ISA or pension) more men than women were taking action.
Measures which support families in saving more overall are therefore welcomed. 2013 has seen a variety of government measures which affect families in this position, both in today’s Budget and also earlier in the year.
Childcare changes in 2015
Working families struggling to meet childcare costs will get a welcome £1,200 a year boost from the Government. The new scheme will open up tax relieved childcare for the 2 million families who are unable to access the current employer linked scheme.
From 2015 they will get 20% tax relief on savings used to purchase childcare vouchers up to a maximum of £6,000 for each child under 5 years old. And the savings could even be recycled into a pension contribution which could help to reduce the tax charge on child benefit – see below.
Keeping child benefit
A pension contribution is more than a tax efficient way of saving for retirement – it can also help to retain child benefit.
Child benefit is worth £1,752 every year for a family with 2 children. This is at threat if either parent has annual income in excess of £50,000. It will be lost altogether if this figures rises above £60,000. A pension contribution is one way to keep child benefit in the family. For example, for an individual on income of £60,000, a pension contribution will reduce this figure to £50,000 at a net cost of only £6,000 – and they’ll get the child benefit back.
Child Trust Funds and Junior ISAs
Following consultation announced in today’s budget, legislation is likely to be introduced in Finance Bill 2014 to allow existing Child Trust Funds to transfer into Junior ISAs (JISAs).
The maximum contribution that can be made to JISAs is £3,600 every year from birth to 18 and is a valuable allowance. If maximised, it could grow to around £85,000 (assuming growth of 3% a year) over the 18 years. And the child would be entitled to their fund at 18. Too much too soon? Certainly in the view of some parents. While it would be useful towards university costs, it could end up being used less wisely.
The lack of control over hard earned savings could be a worry for many parents, who may prefer to provide for their children’s future using an investment in trust.
Anti-avoidance – general measures and IHT specifics
The much heralded General Anti-Avoidance Rule (GAAR) will be introduced in Finance Bill 2013. It will cover a wide range of taxes, such as income tax, capital gains tax, inheritance tax (IHT) and corporation tax. It will add to existing measures against tax avoidance and focuses on marketed tax avoidance schemes.
Specific legislation will be brought in to counter some specialist IHT avoidance schemes.
- Only a debt that’s repaid out of the estate by the executors will be allowed as a deduction from the estate.
- If assets that attract IHT reliefs such as Business Property Relief or Woodlands Relief are bought with the borrowed money, any relief will be only be given on the repaid amount of the debt.
Source: Standard Life Technical