Budget 2015: Flexibility and simplicity for savers
The Chancellor began his Budget today by stating that he would take action to support savers and pensioners. Some of the most attention-grabbing announcements were directed at those who are saving for their futures and others who have already retired.
Before George Osborne stood up, True Potential had called on the Government to strip away complexity that puts people off from saving and to extend the excellent pension freedoms to those who are saddled with an annuity that they no longer want. On both of these measures, the Budget delivered.
Freedom for annuities
From 2016, pensioners will be able to sell their annuity and benefit from the pension freedoms due to take effect next month. Those who have already bought an annuity will be able to cash it in. The 55% tax rate has been abolished, meaning pensioners will pay at their marginal rate of income tax.
The Chancellor argued that these people have saved all their lives, often without help from anyone else. We agree that they should be trusted with their own money.
New ISA flexibility and innovation
A new fully flexible ISA will be introduced this autumn. This will mean that savers can withdraw money from their ISA and put it back without losing their annual allowance. This increased simplicity makes ISAs an even more accessible and easy-to-understand savings product.
Removing these unnecessary complications and barriers to saving is sensible and we welcome this move. ISAs will also be extended to allow more types of investment.
New ‘Help to Buy’ ISA
A new ‘Help to Buy’ ISA will be available from this autumn. First-time buyers who are building their deposit will get a 25% top-up in the form of tax relief from the Government. Savers can make an initial deposit of up to £1,000, followed by monthly deposits of £200. For every £200 saved, the Government will add £50, up to a maximum of £3,000.
As ISAs are personal, a couple will be able to save £24,000 together for a house and get a £6,000 boost from the Government. The Chancellor has announced this initiative will be open for four years.
New Personal Savings Allowance
There will also be a new Personal Savings Allowance from April 2016. This will mean that, for basic rate taxpayers, the first £1,000 of interest earned on personal savings will be tax-free.
This lets savers retain more of the benefits of doing the right thing andremoves the burden of paying tax on money earned only to pay tax again when it is saved. With the Personal Savings Allowance, 17 million people will see the tax on their savings abolished.
Pension Lifetime Allowance reduced
The Chancellor also changed the rules on the individual pension lifetime allowance. From 2016, it will be reduced from £1.25 million to £1 million. From 2018, the lifetime allowance will be index-linked and the current pension annual allowance of £40,000 remains unchanged.
Savers may need to exercise caution here, because someone who has built up a £1 million pension pot and then takes a 25% tax-free lump sum would be left with £750,000. Based on today’s rates, that would offer an annual income of approximately £21,000 – below the aspirations of 10,000 savers who have told us that they will need more to give them a comfortable retirement.
For those who breach the lifetime allowance, a 55% tax charge applies.
Digital tax accounts
The Chancellor is abolishing the annual tax return. This will be phased out by 2020 and replaced by a new ‘real time’ digital tax account accessible from a computer, tablet or smartphone. George Osborne called it a “revolutionary simplification of tax collection”.
Businesses and individuals will be able to link their own accounting software and their bank accounts to the digital tax account, removing the need to submit an end-of-year return and paying an annual tax bill in one go. Plus, people will be able to pay their tax at any point throughout the year.
When we launched the True Potential Wealth Platform four years ago, one of our aspirations was to integrate the information with investors’ personal tax liabiltiies. With this announcement, we move one step closer to realising that goal.
We’re pleased to see the Chancellor rewarding savers in his final Budget before May’s general election. ISAs continue to evolve into more attractive savings vehicles and the new freedoms for those with annuities are welcome. Mr. Osborne has built on his excellent 2014 Budget and has begun to realise the importance of closing the savings gap in the UK.
One thing is clear, whoever wins in May, savers will continue to need good financial advice to make the most of their savings and investments, and reach their financial goals. To echo the Chancellor “We choose the future”.
This article is based on True Potential LLP’s interpretation of the 2015 Budget Statement published on the 18/03/15. It is a broad summary and cannot cover every nuance, you should not take or refrain from taking any action based solely on this article.