Pensions

More allowance cuts…

The annual allowance – the maximum total tax-efficient contribution that can be contributed to pension plans by you or on your behalf during the tax year – was cut from £50,000 to £40,000, but from 2014/15 rather than immediately. The move, but not the timing, had been widely leaked and will be a further obstacle to funding pensions if you are a higher earner or have left your pension planning until close to retirement. You could find the change means you suffer an unwelcome tax charge if you are a long-serving member of a final salary scheme and receive a promotion. If your pension entitlement during a tax year rises by £2,500 more than inflation, then you will be in annual allowance charge territory unless you can take advantage of the unchanged carry forward rules.

The annual allowance cut in 2014/15 will be accompanied by another cut in the lifetime allowance – maximum total tax-efficient value of pension benefits. This will fall from £1.5 million to £1.25 million, having been as high as £1.8 million only last year. Once again there will be ‘transitional protection’ that you can claim if you are affected. One version will effectively mean all contributions must stop, but another which might emerge after consultation would allow further contributions, effectively only in limited circumstances.

…but income drawdown rises…

One relatively good piece of news was that the Chancellor said he would restore to capped drawdown the 120% of HMRC/GAD rate limit (that is, approximately 120% of the market annuity rate) which existed until he reduced it in April 2011. Full details have yet to be published, but, because legislation is required, any change is unlikely to take effect before 6 April 2013. The increase will go some way towards countering the dramatic effect that falling long-term gilt yields have had on capped drawdown limits over recent years. However, you should remember that higher withdrawals increase the risk of capital erosion and a further reduction in income at subsequent reviews.

…and so do state pensions

While Mr Osborne applied the near ubiquitous 1% increase to most working age benefits for each of the next three years, he was more generous to pensioners:

  • The basic state pension will increase by 2.5% from next April, as expected. This is in line with the ‘triple lock’ introduced by the coalition Government, which requires the basic state pension to rise by the greater of: inflation (as now measured by the CPI); earnings growth; a flat 2.5%.
  •  All other state pensions will rise in line with CPI to September 2012 (2.2%).

Individual savings accounts: Small increases and, possibly, a valuable concession

The maximum investment in an ISA for 2013/14 will be £11,520, £240 up on the current year’s limit. The cash component ceiling will rise to £5,760 and the Junior ISA limit will increase to £3,720. The changes are in line with the September 2012 CPI and the requirement to have a figure divisible by £120 (so the monthly limit is a multiple of £10).

There was also an announcement that the Government would consult on allowing stocks and shares ISAs to include shares listed on the Alternative Investment Market (AIM) and similar specialist markets. This opens up the possibility of an IHT-free ISA, because many (but not all) of the shares listed on AIM qualify for 100% IHT business property relief once they have been held for two years.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

In summary: Advice becomes more important

“The richest need to bear their fair share – and they will” was the Chancellor’s promise to Andrew Marr in an interview on the weekend before the Autumn Statement. He has kept his word, although you may feel that he has stretched the definition of ‘rich’ well down the income scale. More than ever, if you want to save tax or provide protection for your family’s income and capital, you need independent advice: the Government is giving nothing away.

28th December 2012

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