Quick Budget Update – Pensions, NISAs, Allowances

pension changes in budget

Enjoy a sunset in your retirement years

Personal Allowances

Personal allowances are fixed for 2014/15 at £10,000, the level promised in the Coalition Agreement. However, the recent Budget announced that there will be a further (above inflation) increase to £10,500 for 2015/16, in line with the allowance currently available to taxpayers aged 65 to 74.

Those aged 75 and over will continue to receive a personal allowance of £10,660. Please note that if adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 over £100,000. This gives an effective rate of 60% on income between £100,000 and £120,000 for 2014/15.  Contact us for planning advice to avoid this 60% rate.

The Nicer ISA

In order to encourage savers, the current £11,520 ISA limit is to be significantly increased to £15,000 from 1 July 2014. Furthermore, the current 50% cash ISA limit of £5,760 is to be abolished so that any combination of cash and stocks and shares can be held within the ISA wrapper up to the overall £15,000 limit. These products will be termed “New ISAs” or NISAs. The Junior ISA limit will increase to £4,000 from 1 July 2014.

Flexible Pensions

Announced in the Chancellor’s 2014 Budget, significant changes are being proposed which will make it easier to access your pension fund pot if you have a defined contribution (money purchase) pension scheme.  As a general rule, 25% of the pension fund can be taken as a tax free lump sum at age 55, although this age will be increased in future to be 10 years before State Pension age (age 57 in 2028).  Remember also that the requirement to buy an annuity at age 75 had already been abolished with the introduction of “flexible drawdown” pensions that are currently available.

From 27 March 2014, the Government have increased the maximum amount you can take out each year from a capped drawdown arrangement, from 120% to 150% of an equivalent annuity.  For example, if the equivalent annuity rate is 6%, up to 9% of the fund can now be drawn down each year.  This is in response to concerns about low annuity rates which are linked to savings rates.

The Government has published a consultation document to consider proposals to make the drawdown rules even more flexible from April 2015.  This would allow you to withdraw more than the current 25% of the fund limit, subject to a tax charge. This charge would be at your marginal tax rate instead of the current penal 55% charge on the fund.

The other significant change being consulted on is the proposal to reduce the current guaranteed pension income limit of £20,000 to just £12,000 a year. Those with this level of guaranteed pension income will be able to draw as much or as little as they wish from their pension fund each year without the 150% of equivalent annuity rule applying.

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