BLOG The Autumn Statement in brief from SIFAJanuary 1, 2017 1:48 pm
The new Chancellor’s Autumn Statement was brief, and Philip Hammond made clear that this will be his last. He does not favour the idea of flagging up in advance changes which are likely to be formalised in the Spring Budget. Nevertheless, the Statement provided food for thought.
Only one change was announced in relation to pensions, and this relates to contribution limits. The current annual contribution allowance is £40,000, but this reduces to £10,000 in cases where the pension holder has begun drawing down income (as opposed to tax-free cash) from a “money purchase” pension. This £10,000 limit is now to be reduced to £4,000, the aim being to reduce the impact on the Treasury of people recycling pension money and claiming tax relief on the same money twice.
In the words of ex-pensions Minister Steve Webb. “As soon as someone draws a pound of taxable cash using the “pension freedoms”, the amount they can save in a money purchase pension would be slashed from £40,000 to £4,000″.
It has been suggested that this may be a half-way house to a complete bar on recycling, by reducing the limit to nil.
Looking further ahead, more significant pension changes seem likely. Mr Hammond commented that pension tax relief is one of the most expensive of all reliefs, and that two-thirds of the benefit goes to higher and additional-rate taxpayers. This is at variance with the Government’s aim to focus resources where there is most need.
A reduction in the availability of higher-rate tax relief may therefore be on the cards in the longer term and, as ever, best advice must be to take advantage of current levels of tax relief while they are available.
The cost of State pensions is another concern to the Government, and the Chancellor hinted that the current “triple lock”, whereby State pensions are guaranteed to increase each year by whichever is the highest of average earnings, the rate of inflation, and 2.5% may not be affordable after 2020.
The Government continues to introduce new variants of ISAs (Individual Savings Accounts). Last year saw the Innovative Finance ISA, which permits investment in peer-to-peer lending schemes. These by definition are higher risk than either cash ISAs or stocks and shares ISAs but may provide a higher return than cash ISAs.
Next, in July 2015, came the ‘Help to Buy’ ISA, through which first time buyers who save up to £200 a month towards their first home can receive a £50 bonus from the Treasury for every £200 they save, up to a maximum of £3,000.
Now, the Chancellor has confirmed that, despite widespread misgivings, the Government is to press ahead with the introduction in April 2017 of what has been described as a ‘souped-up Help to Buy ISA’, the Lifetime ISA, or ‘LISA’.
This was conceived by George Osborne with the main objective of encouraging non-pension savings for retirement and at the same time assisting young people with the financing of home purchase.
Savers between the ages of 18 and 40 stand to receive a 25% bonus from the Government on contributions up to £4,000 p.a. and can use some or all of the money to buy their first home, or withdraw the money for other purposes (such as retirement provision) as from the age of 60. The major caveat is that if money is withdrawn before the age of 60 other than for financing the purchase of a home, not only will the 25% be forfeit but a 5% penalty will be incurred.
Criticism has centred not only on the potential confusion between LISAs and Help to Buy ISAs, but also on the fact that for many people ISAs will be less attractive than pension savings, because they will miss out on both employer contributions and tax and National Insurance relief. Unusually, the financial watchdog, the Financial Conduct Authority, has gone so far as to issue a warning that LISAs will be an unsuitable investment for most savers.
It is to be hoped that the adverse publicity attaching to LISAs will not discourage people from investing in standard ISAs which remain one of the principal planks for personal financial planning.
The main news on the tax front is the crackdown on employees’ perks through ‘salary sacrifice’. This enables salary to be paid in a form which legitimately avoids incurring employers’ and employees’ National Insurance contributions. For a higher rate taxpayer, this could mean an increase of 18% in the value of the remuneration.
Salary sacrifice allows employees to boost their pension pots by arranging with their employers that part of their salary should be paid as additional contributions to their pension plans.
The Chancellor announced that salary sacrifice will continue to be permitted in relation to pension contributions and pension advice, childcare, cycle to work schemes and ultra-low emission cars.
However, with effect from April 2017, other employee benefits, such as car purchase, parking, school fees, gym membership, travel insurance and smart phones, will cease to benefit and employees will be in the same position as if they had paid out of taxed income.
Existing arrangements will be protected until April 2018, or 2021 in the case of cars, accommodation and school fees.
Transferring pension benefits
Based on low interest rates, current transfer values make it attractive for members of company ‘defined benefit’ (‘DB’) pension schemes to transfer into some form of personal pension and thus become able to exercise the ‘pension freedoms’, enjoying greater flexibility in accessing funds and potential savings in inheritance tax. But there are complex issues involved on which specialist advice is needed.
Two main factors may favour staying in the occupational scheme. First, the level of pension provided will be predictable, whereas the value of a personal pension fund will fluctuate according to the value of the underlying investments.
Secondly, death benefits, whose value may be unaffected by the withdrawal of lump sum cash, but whose importance will vary according to the personal family circumstances of each scheme member.
No responsibility can be accepted for the accuracy of the information in this article and no action should be taken in reliance on it without advice. Please remember that past performance is not necessarily a guide to future returns. The value of units and the income from them may fall as well as rise. Investers may not get back the amount originally invested.