Chancellor George Osborne MP’s 2014 Budget delivered a number of surprise changes to the pensions and savings environment which the UK’s financial advisers need to be aware of.
In the coming days, a series of changes will be made to the rules regarding pension drawdown. From March 27 2014, clients with capped drawdown policies will be able to access 150% of the Government Actuaries Department (GAD) rate each year, up from 120%. Flexible drawdown, where they have access to as much or as little of their pension fund as they wish, will be available to those with retirement income of £12,000 per year or more, down from the existing £20,000.
From April 2015, what you might call the ‘do it yourself drawdown’ option will become much more attractive. Essentially, all clients with defined contribution pension schemes will be able to access as much or as little of their pension funds as they wish once they reach the permitted age for taking benefits. It is actually theoretically possible to take your entire pension fund as cash at the moment, however if more than 25% of the fund is taken as a lump sum, the excess over and above the 25% figure is subject to a punitive tax of 55%. Under the new rules, 25% of the fund can still be taken as a tax-free lump sum, with the remainder taxed at the client’s marginal rate of income tax.
“No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity,” said Mr Osborne.
These changes will inevitably lead to fewer clients purchasing annuities and traditional drawdown products. Furthermore, Mr Osborne also announced that he was making funds available to product providers and consumer groups to facilitate the delivery of free financial advice for all regarding retirement income options. Together, these two changes could have a major impact on financial advisers who currently charge fees for providing advice on retirement income options.
Pension benefits can currently be taken from age 55 to age 77, however it was also announced in the Budget that the minimum age will rise to 57 from 2028.
The tax-free savings regime is also changing. The existing ISA regime will apply for the first three months of the new tax year, which starts on April 6 2014. Investors will be able to invest £11,880 in ISAs during this period, of which the entire amount can be invested in stocks & shares, or alternatively up to half the allowance (£5,940) can be placed in a cash ISA, with the remainder in a stocks & shares ISA.
However, from July 1 2014, New Individual Savings Accounts (NISAs) will be introduced. These will allow tax-free investment of up to £15,000 in cash, stocks & shares or a combination of the two. For the first time, the full amount can be invested in cash, and monies held in stocks & shares ISAs will be able to be transferred into cash. Indeed, the terms ‘cash ISA’ and ‘stocks & shares ISA’ will no longer exist. Although cash and stocks & shares will still be the areas in which clients invest, all tax-free savings vehicles will be known simply as NISAs.
Plans were also announced to allow ISA investment in a wider range of investment bonds, and in peer-to-peer lending companies.