This was George Osborne’s eighth Budget and fortunately for the industry it didn’t produce the shock waves of Budget 2014 which introduced ‘Pension Freedoms’, and nor did we see any changes to the current pension legislation other than a little welcome clarity in a couple of areas of pension flexibility.
The Chancellor announced that this Budget was for the next generation and was about stability, with a key area of interest being the introduction of the Lifetime ISA which aims to encourage those aged under 40 to save. This doesn’t go live until April 2017 but it will be interesting to see the impact it might have on pension saving amongst this age group and also on automatic enrolment opt outs.
The Lifetime ISA will be available from 6th April 2017 for savers aged between 18 and 40. Any savings made into the plan before age 50 is attained will attract a 25% bonus from the government – provided the funds are used to either purchase a first home or withdrawn after 60 i.e. for retirement. As with all ISAs, funds can be withdrawn without a tax charge.
The maximum contribution will be £4,000 a year with the total maximum contribution to the plan over a lifetime being £128,000 – a government bonus of £32,000 can then be added provided the funds are withdrawn for either of the above events.
Contributions to the Lifetime ISA must be within, and not in addition to, the overall ISA limit (£20,000 from 2017/18).
Individuals can contribute into a Lifetime ISA alongside a Cash ISA, a Stocks and Shares ISA and an Innovative Finance ISA in one tax year provided they remain within the £20,000 pa limit.
Contributions may continue after age 50 BUT the government bonus will only be applied to contributions made up to the saver’s 50th birthday, i.e. the bonus will be added to the fund at 50 but will be lost if the funds are withdrawn before the saver’s 60th birthday or before their first time property purchase.
It will also be possible to transfer funds from other ISAs to the Lifetime ISA (this includes from the Help to Buy ISA).
Savers can withdraw their funds at any time but will not receive the government bonus and will incur a 5% charge if the withdrawal is not for the purchase of their first property or after they turn 60 (unless they are diagnosed with terminal ill health as per current pensions legislation). The government is also considering whether other specific lifetime events may allow funds to be withdrawn without the loss of the bonus.
A further area of consideration is around whether the saver can ‘borrow’ funds but then fully repay them to benefit from the maximum bonus in the future.
More details on these areas and the final rules are expected in the Autumn following consultation with industry.
This appears to be one of the pension changes the Chancellor had been looking to make, eased in under ISA rules and initially to run alongside the current pension system. For young savers with one eye on a potential property purchase this may be the preferred option to the more traditional route of pension saving. It will be interesting to see whether similar flexibilities are offered to pension plans in the coming years and also whether the opt out rate amongst young people who have been auto enrolled increases as they reach the point where they need to contribute to their pension.
Instead of a Pension ISA, it appears George has created an ISA Pension, and with a 25% bonus on contributions it looks suspiciously like the flat rate of contribution on pensions Osborne favours. Having paved the way for reform in a way that will cause less uproar than originally thought, a braver Osborne with a successful referendum campaign under his belt, might return to this in his autumn statement or next year. We might have seen the long term future of pensions in today’s budget, until the next one. The pensions industry is already reacting with hostility to it, and concerns are being raised about its effect on auto-enrolment opt outs.
From April 2017 the Lifetime ISA brings a further opportunity for those with surplus income and/or capital to move money to the next generation tax efficiently. If using surplus income to gift to children or grandchildren these gifts will automatically fall outside of your estate if proven to be surplus. For surplus capital you could use your annual £3,000 gift allowances each year to move monies to family member, again, free of inheritance tax.
Capital gains tax rates.
This was the other area that we think will have an immediate potential impact on our clients. For individuals, trusts and personal representatives who pay Capital Gains Tax (CGT) the rates of CGT will reduce from 6th April 2016. The 18% rate of CGT will reduce to 10% and the 28% rate to 20%, except in relation to gains accruing on the disposal of residential property (that do not qualify for private residence relief), and carried interest. The reduced rates apply to relevant gains accruing on or after 6th April 2016.
The government wants to create a strong enterprise and investment culture. Cutting the rates of CGT for most assets is intended to support companies to access the capital they need to expand and create jobs. Retaining the 28% and 18% rates for residential property is intended to provide an incentive for individuals to invest in companies over property. CGT within trusts is also cut to 20% for most assets, other than residential property.
This change is likely to result in further analysis of investment bonds and their continued efficiency for clients against a General Investment account. While bonds still hold a place in the market they cannot use a nnual capital gains tax allowances whereas the General Investment account can.
If you would like further details on any of the subjects above please do not hesitate to contact us.
Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 16th March 2016. You are recommended to seek competent professional advice before taking any action.