Financial Planning Matters… a monthly insight with Pearson Solicitors and Financial Advisers.
Richard Eastwood offers an insight on what the Budget 2016 means for your pension.
SPRING IS just around the corner, the daffodils are blooming… and on 16 March 2016, Chancellor George Osborne carried that iconic red briefcase into parliament to announce his 2016 Budget. So what pension changes have been announced?
In the past four years Budget announcements have meant some big changes made to pensions, from auto-enrolment to the launch of pension “freedoms” in April 2015.
Unsurprisingly, the 2016 Budget introduced some interesting options that may bring yet more changes, and it also left some rumoured changes out. Here are some highlights:
Pension tax relief is here to stay…for now
The Chancellor confirmed the popular option for retirees to take a tax-free lump sum of up to 25 per cent from their pension pot would remain, along with the current tax relief on money paid into pension pots.
Does this mean more changes could be on the horizon? Maybe, It’s easy to imagine changes could come in the future, possibly in exchange for an extension to the new Lifetime ISA.
Introducing the Lifetime ISA
Before the announcement, there were a lot of rumours about the possibility ‘ISA-style pensions’ and a radical overhaul of the way we pay tax on our pensions. In the end, Budget 2016 did not see these kind of changes but it did introduce a new form of retirement saving: the Lifetime ISA.
How will a Lifetime ISA work?
A Lifetime ISA is available to those aged 18 to 40 from April 2017 onwards. You will be allowed to save up to £4,000 a year, with a 25 per cent bonus from the government. Contributions into this account will be allowed up until the age of 50.
Importantly, this £4,000 per year is included in the overall total you are allowed to save into ISAs, with the Budget 2016 agreeing an overall increase to £20,000 from 2017.
This new type of ISA is designed to help people purchase a first home, and/or from age 60, to use in retirement. When the funds are used for either of these purposes, the whole amount, including the government bonus, can be withdrawn tax free.
The total fund can also be withdrawn tax free if you are diagnosed with a terminal illness, regardless of your age.
If funds are withdrawn for any other purposes, this bonus will be lost. Instead, the government bonus element (and any investment returns on this) will need to be repaid, along with a 5 per cent charge on the rest of the savings.
A ‘pensions dashboard’ for the digital age
It’s easy to lose track of all your pension pots when so many of us are changing jobs throughout our working life.
With the average person moving employers 11 times, this could mean they end up with 11 different private pension pots by the time they retire. That can be a lot to lose track of.
The Chancellor proposed that by 2019 a digital ‘pensions dashboard’ be designed, funded, and launched by the industry. For tech-savvy retirees, this can only be a good thing; meaning individuals will be able to view all their retirement savings in one place.
A way to help pay for advice – tax free!
Are you put off taking financial advice because of the cost? Well the Budget 2016 may contain some good news.
Over summer 2016, discussions will take place over introducing a ‘Pensions Advice Allowance’ as a more tax efficient way to pay for financial advice.
In the future, this could allow members of Defined Contribution pension schemes to withdraw up to £500 tax free from their scheme before the age of 55 to pay for financial advice. It will reduce the worry of forking out of your pay packet for valuable advice.
The Money Advice Service is changing, and may be closed
The Money Advice Service will be restructured with the Pensions Advisory Service and Pension Wise to create two new bodies: a pensions guidance body and a slimmed down money guidance body. How this will be done is still under discussion.