The 2014 Budget was well received by a group much ignored in recent years – savers.
Here, we look at what these changes mean in reality, with commentary provided by Tony Harris, MD of our long-term IFA partner, Contractor Financials.
Major changes to pensions
Individuals with pensions are to be trusted more in how they handle their investments, with major changes to the way pension funds can be accessed.
“Osborne has embraced the notion that savers can be trusted to make sensible choices in their retirement and do not need to be shackled with countless penalties and restrictions regarding how they access their post retirement funds.”
For contractors who have contributed to ‘defined contribution’ money purchase pensions from their previous employers, from next year you will no longer have to transfer your fund into a personal pension or be forced down the rigid annuity route.
Instead, you can still take out 25% of your pension fund tax-free (as per the current rules), buy an annuity if you wish, transfer to a personal pension ‘drawdown’ arrangement, or take out further funds from your pension (subject to income tax).
Previously, you would be charged a hefty 55% tax rate on further cash taken out of your pension pot, but now – these additional drawdowns will be subject to standard levels of tax (20% or 40%, depending on which tax band thresholds you fall under).
Tax relief on Pension Contributions
Before every Budget, most of the large accountancy firms predict cuts to the current tax reliefs on pension contributions. The annual allowance will fall from £50,000 to £40,000 from April 6th 2014 (this was pre-announced), and the lifetime allowance will drop from £1.5m to £1.2m from the same date.
Fortunately, for savers, the Chancellor decided not to erode these tax reliefs, which remain one of the few remaining tax breaks available to contractors.
Harris said that while he has promoted the benefits of investing in pensions for many years now, “the rigid nature of how you access the funds in retirement has undeniably been a turn off for some contractors.”
Read our dedicated guide to find out more about investing in a contractor pension.
The Chancellor also announced major changes to Individual Savings Accounts (ISAs).
From 1st July 2014, a new type of ISA will be born, replacing the current Stocks and Cash ISAs.
Currently, you can only invest £5,760 per year (2013/14) in cash. From 1st July, you will be able to invest up to £15,000 per year into the new ISAs, and any money you make will be completely tax-free.
Harris said: “This will help first time buyers saving for a deposit who don’t want to risk the volatility in a stocks and shares ISA but who want to be able to save more each year to fund their purchase.”
The changes are also good news for people who want to transfer their Stocks and Shares ISAs into Cash ISAs, without penalties. Although this has been possible with Junior ISAs under the current rules, the new flexibility will now apply to Adult ISAs too.
“This is ground breaking as those nearing the date when they want to release their savings for whatever reason, can transfer funds to the relatively low risk wrapper of a cash ISA and relax in the knowledge that any short term fluctuation in the markets will no longer affect their investment.”
If you’d like an independent expert to help with any questions you may have about pensions or ISAs, simply fill in this form, and a member of the Contractor Financials team will get back to you shortly.