The Budget 2016
Mostly, as individuals we either tune in to the budget or catch up with the news articles afterwards in an effort to see if the current party have delivered (or not!) and the effect the changes will have on us personally. Am I going to be better or worse off in the future? This is the question most of us are really interested in. Next we start taking guesses as to how long the party will remain in power on the back of the changes depending on the industry opinions afterwards.
As a firm, our interest focusses solely on the products we’re providing to our customers and any effect those changes have on the underlying customer at the end of the day. So as a defined contribution pensions provider, there were no real surprises, with the exception of the Lifetime ISA.
The ‘pension ISA’ was scrapped pre budget, but the new Lifetime ISA is a pension ISA in disguise isn’t it? Maybe, but there are subtle differences.
Coming to your shores in April 2017, the new Lifetime ISA (LISA) will open to individuals aged between 18-40. Contributions will benefit from a Government bonus of 25% up to a maximum of £4,000 each tax year. This bonus can be claimed until you reach the age of 50.
In simple terms, this means that for every £4 you save, the government will pay in £1 until you reach age 50.
‘LISA’ gives first time buyers the ability to withdraw funds, penalty-free to use towards the purchase of a property (worth up to £450,000 in value) otherwise you will need to wait until you are 60 to withdraw everything penalty free – so it’s a retirement product also. You will need to hold the LISA for a least a year before you buy your chosen property to avoid penalties or loss of ‘bonuses’ – amongst other rules you need to be aware of. Funds can also be accessed in the event of ill-health.
Isn’t it a back-door pension ISA really? Is this designed to be a short or long term investment? It’s all a bit grey…..
While there were none of the major tax relief overhauls premeditated, Steve Webb described it as a ‘Trojan Horse’ for pension tax relief changes. And we couldn’t agree more. So how does this affect pensions you say? Quite simply, in our opinion it unfortunately makes pensions less appealing.
Pensions have been fiddled with over the years so much that the faith behind them has been long lost. Auto enrolment was introduced to encourage saving for retirement through a pension; to ensure that in old age you have something to live off and don’t become a burden on the state. ‘LISA’ encourages saving in another wrapper and many people will opt for either/or, not necessarily both due to financial constraints. Doesn’t this possibly put auto-enrolment in danger? How many people will opt-out of auto enrolment and save instead into the Lifetime ISA? And, if it’s cashed-in to pay for your first-time property, have you then failed to make any provisions for a pension during this period of time? Can you then afford to live during retirement? Perhaps you’ll have to sell the home bought with this money in order to live during retirement instead?
That aside, there were a few tidy-ups of the pension legislation. In brief: • Remove the requirement that a serious ill-health lump sum can only be paid from an arrangement that has never been accessed • Replace the 45% tax charge on serious ill-health lump sums paid to individuals who have reached age 75 with tax at the individual’s marginal rate • Enable dependants with drawdown or flexi-access drawdown pension who would currently have to use all of this fund before age 23 or pay tax charges of up to 70% on any lump sum payment, to continue to access their funds as they wish after their 23rd birthday • Remove the rule on paying a charity lump sum death benefit out of drawdown pension funds and flexi-access drawdown funds where the member dies under the age of 75 because the equivalent tax-free payment may be made as another type of lump sum death benefit • Enable money purchase pensions in payment to be paid as a trivial commutation lump sum • Enable the full amount of dependants benefits to be paid as authorised payments where there are insufficient funds in a cash balance arrangement when the member dies
A win for the pensions guru’s and campaigners on these issues!