The 2014 UK budget offered a radical vision of the future for pensions & savings, providing greater freedom and control than ever before possible.

In one of our emails yesterday, we read this philosophy: “He who expects the world gets nothing and he who expects nothing gets the world”. We thought it very apt for this budget.

As you are well aware, Savers have not had much to sing about in terms of incentives to save over the past few years, but this is is certainly the most saver friendly Budget we can remember.

Below is a high-level summary of some of the key aspects arising from Wednesday’s 2014 UK Budget.

Pensions

The government announced one of the most significant pensions liberalization reforms in living memory, greatly freeing up the options available for savers approaching retirement. These changes are great for both pension holders and the Government. Pensioners receiving defined-contribution pots will no longer have to buy an annuity at retirement, and income drawdown will be taxed at the marginal, rather than the punitive 55% potential charge. The Government in turn believes this will raise approx. £4 billion over the next 4 years!

From 27th March 2014

  • Flexible Drawdown: You only have to have guaranteed pension income of £12,000 before you can take all your pension savings out as cash (but subject of course to income tax at your highest rate)
  • Capped Income Drawdown: If you are in “income drawdown”, the maximum amount of income that you can withdraw will increase. For example a 65 year old with a pension pot of £100,000 will be able to take a maximum income of £8,850 per annum, an increase of £1,770 (subject to your pension fund being able to support such an unrealistically high level of income)
  • Smaller Pension Pots: If you are 60 plus and all your combined pensions are worth £30,000 or less you will be allowed to cash them in. 25% of the fund will be tax free and the balance liable to income tax at your highest rate.
  • Individual pension pots worth £10,000 or less can be drawn as a lump sum from the age of 60. Again, the first 25% will be tax free and the balance taxed as income at your highest rate. some restrictions apply.

Pensions from 6th April 2014

  • The Lifetime Allowance (LTA) reduces from £1.5 million to £1.25 million (please contact us if you are in any doubt about your options for Fixed Protection 2014 or Individual Protection)
  • Annual Allowance reduces from £50,000 gross to £40,000 gross. Again please contact us if you wish to utilize the higher allowance prior to 5th April 2014. (NB pension contributions paid by individuals obtain 20% income tax relief at source; so for example a £50,000 gross pension contribution will cost you £40,000).

Pensions from April 2015

  • Subject to further consultation, you will be able to take the whole of your pension as a lump sum, at the age of 55. The first 25% will be tax free and the balance will be subject to income tax at your highest rate.

 

New ISAs

In a major simplification for savers traditional cash and equity ISAs are to be replaced by an exciting new hybrid: the New Individual Savings Account (NISA). The most eye catching feature of the NISA is the significant increase in the annual allowance from a current £11,760 to £15,000 with equal limits for cash and stocks and shares. This nearly trebles the current limit for saving in Cash ISAs and increases the Stocks and Shares limit by nearly a third. The limits for Junior ISAs and Child Trust Funds will also rise from £3,720 to £4,000.

For the first time ever, you can transfer previous years’ funds from Stocks and Shares ISAs into Cash ISAs thereby offering complete flexibility over how you choose to save and invest, within the overall limit. To further increase investment choice, investment eligibility will be extended to peer‐to‐peer loans, and all restrictions around the maturity dates of securities (currently most have a minimum of 5 years to expiry) will be removed.

ISAs from 6th April 2014

  • The ISA allowance will increase to £11,880 on 6th April.

ISAs from 1st July 2014

• The ISA allowance will increase to £15,000.
• All restrictions will be removed on how the proceeds are split between cash and stocks and shares.
• You will be able to transfer from a stocks and shares ISA to a cash ISA.
• Cash held in a stocks and shares ISA will receive interest tax free.
• Junior ISA subscription limit will increase to £4,000.

Other Matters from the 2014 UK budget

Income Tax Allowance

From 6 April 2014, the personal allowance will rise to £10,000, as previously announced, and the higher rate threshold will rise by 1% to £41,865. There will be further increases to £10,500 and £42,285 respectively, in 2015‐16. This is a change from previous government practice of funding increases in the personal allowance by reducing the 40% threshold.

From 6th April 2015

  • The basic rate of income tax stays at 20%.
  • You won’t start paying 40% income tax until your income exceeds:

–  From 6th April 2014, £41,865.

–  From 6th April 2015, £42,285.

  • The starting rate for savings income (this is broadly all investment income except dividend income) will increase from £2,880 to £5,000, and the savings rate of income tax will reduce from 10% to zero %. This means anyone with a total income of less than £15,500 will not pay any tax on their savings.

Capital Gains Tax

As previously announced, the annual exemption will rise by £100 to £11,000 in 2014/15, and to £11,100 in 2015/16.

Inheritance Tax (IHT)

The nil-rate band will remain frozen at £325,000 until 2017/18.

Growth

The Office for Budgetary Responsibility has detected the green shoots of recovery. Estimates for the year have been upgraded from 2.4% to 2.7% – in line with mainstream economic forecasts. This has enabled the chancellor with further flexibility offers to the taxpayers, although the lack of any major tax announcements suggests a big store of powder is being kept dry for the election year of 2015.

As always if you have any questions please do not hesitate to contact us.

Angus Kirk

Financial Planner at Bridge Investments
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