Part 1: Budget News in Detail – Good news for Saving and Pensions!
So, the Chancellor really is pulling out some unexpected and radical stops to aid the country’s financial “crisis” by incentivising savings via savings accounts, ISA’s and pensions.
Here, Lansdell & Rose take a look at these three areas of the budget in a little more detail:
ISA’s and NISA’s (the “N”ew ISA)
Read our December article for a background on ISA’s and how best to invest.
Essentially, ISA’s are a good choice for those investors with a low to medium approach to risk. And the tax breaks are reasonable. Recent changes in the 2014 Budget could make a NISA investment (The New ISA) a more attractive option.
So, what is the deal now? Simply, there is a limit of £11,520 that any individual can invest into an ISA, however, 50% of this limit is allocated for Stocks and Shares ISA’s. So, anyone perhaps with a low approach to risk, wanting to only invest in a cash ISA, would only be able to invest to the value of £5,760.
This barrier, however, will be lifted from July 2014 and the full allowance will be able to be held within a cash ISA. In addition to this, transfers from stock ISA’s to cash ISA’s will be allowed; another positive change as currently it is just a one-way street on transfers, from cash to stocks.
Overarching all of this, the limit has increased to £15,000. Plus, interest earned from a Stocks NISA is tax-free whereas an ISA is taxed at the basic rate.
Really, it is all good news.
Points to take away:
- Higher annual investment allowance – £15,000
- Full flexibility of split between cash and stocks and shares
- Full flexibility to transfer between cash and stocks and shares
A few extra tips and traps to consider when dabbling with ISA’s in the next year.
- Bank your gains with a NISA to maximise flexibility. If the market is looking dubious, switch any held in stocks to cash until things are looking brighter.
- Check any charges for transferring between types of NISA with your provider beforehand
- Remember, these changes take place from 1 July so if you are looking to invest before then (and often providers do have good rates at the start of a tax year so you don’t have to wait) a cash ISA is probably the safest bet. You will only be able to invest to a value of £5,940 in cash (or £11,570 combined) but after 1 July you can top it up to the £15,000 and the cash limit will be removed.
Indeed this budget has seen a radical change to the outlook on pensions. Even the Chancellor admitted this was the most significant of announcements in the last 100 years.
The essence of the change is around flexible drawdown from the age of 55 (age 57 in 2028 in line with the rules around the State Pension), which is sure to encourage people to start to re-invest into pensions, which the country is financially in need of, with the ever-increasing life expectancy.
At present there are specific restrictions designed to make sure that pensioners never run out of money by make it either impossible – or at least very undesirable – to draw more than a small pension over many decades in retirement – and the prospect of having to buy an annuity, where rates today are very, very low.
All that went out of the window during the Budget. Although the final details still need to be clarified, the principle is that at retirement, 25% of value of the fund can be drawn as a lump sum on a tax-free basis (as now), and the rest on an annual basis at whatever rate the pensioner chooses, with withdrawals subject to normal income tax, not to the punitive rates presently applicable to “over” drawings.
This increased flexibility in retirement is going to make the investment into a pensions for working age practice owners even more attractive – there are already really good tax advantages to pension savings, and this makes things even better.
And with a tax deductible amount of £40,000 per year relievable against profits (and the ability to access previous year’s unused allowances), we suspect that people will be investing more into pensions in years to come.
The final bit of good news relates to the rate that regular savings are taxed at.
For now it remains broadly the same. Savings income up to the value of £2,880 is taxed at 10% (2013/14 £2,790). However, for 15/16 the 10% rate is reduced to 0% AND the upper limit is increased to £5,000. A double bonus for low risk savers who like to stash their cash in a bank account for a rainy day.
In summary, pensions and ISA’s are a great way for tax efficient savings however it has been hard over the years to convince our clients that this is the case, especially with the bad press pensions have received. Hopefully, the increased flexibility will instil some faith in tax payers to start to reinvest for their future and at the same time aid the country’s economy.