Danny Cox, Chartered Financial Planner, Hargreaves Lansdown: “The higher personal allowance of £10,800 is another shot in the arm for pension freedoms, boosting the tax-free amount people can draw from their pensions. With careful planning, a couple could have £306,000 saved in pension and draw this tax-free over their lifetimes on top of their state pensions”.
Danny Cox, Chartered Financial Planner, Hargreaves Lansdown: “A tax cut on already miserably low interest rates is no big giveaway but welcome nonetheless. Despite this, savers should not turn their back on cash ISAs – the tax benefits of ISA build over time – and basic rate taxpayers could get dragged into the paying higher rate tax band and tax on their savings in the future.
Inheritance tax
Plans to review Deeds of Variation, used by beneficiaries to alter the direction of Will legacies to save inheritance tax. Danny Cox, Chartered Financial Planner, Hargreaves Lansdown: “Inheritance tax is one of the least popular taxes and catches an increasing number of people as house prices and stock markets rise. The abolition of Deeds of Variation should warn investors that there will be no second chances. Wills need to be right first time and then reviewed regularly as circumstances change.”
Pensions
Lifetime Allowance reduction:
Every individual has a set level of benefits they can draw from pension schemes in their lifetime without triggering certain tax charges. This measure is referred to as the Lifetime Allowance. This will reduce from £1.25 million in 2014/2015 to £1 million in 2016/17 but will be indexed from 2018. Tom McPhail, Head of Pensions Research, Hargreaves Lansdown: “Another cut to the Lifetime Allowance will bring increasing numbers of middle earners into paying punitive tax charges and added complexity into the system. A reversion to indexation of the LTA from 2018 is welcome but arguably the annual cap on contributions there is actually no need for an LTA at all.
The allowance reduction of £250,000 means a 40% tax payer will pay an extra £62,500 on that slice. The cost to a basic rate taxpayer in retirement will be £100,000.
Extending the pension freedoms
The Government has announced a consultation to extend the pension freedoms to existing pensioners, which would allow those who have already bought an annuity the option to cash in. Tom McPhail, Head of Pensions Research, Hargreaves Lansdown: “The new pension freedoms are already immensely popular and extending these to those already in retirement makes a lot of sense. The bird in the hand option of cashing in an annuity will be attractive to many. However there are significant practical obstacles to overcome before this option will be available and in most cases we would expect the guaranteed income an annuity provides to have a greater lifetime value than a cash payment now.” The Government claim that 5 million existing annuity holders will benefit from the freedom to exchange their annuity for a cash sum needs to be put into context. It is not at clear that such a scheme can be built and even if it is, it will only benefit a small minority. For most people it will probably make sense to retain their existing secure annuity income.”
ISA
New Flexible ISA
To allow free payments in and out of the ISA
Danny Cox, Chartered Financial Planner, Hargreaves Lansdown;“This moves the cash ISA to more like a bank account, providing investors with far greater flexibility. This is unlikely to be helpful to those with stocks and shares ISAs who will be taking a much longer term view.”
New Help to Buy ISA
A new form of ISA where the Government will add in £50 for every £200 saved towards a deposit for a first property. Maximum Government bonus of £3,000 for those who save £12,000. Danny Cox, Chartered Financial Planner, Hargreaves Lansdown; “It’s good to see a scheme which encourages people to save, and after the pension freedoms and Pensioner Bonds, it was high time there were more savings incentives for younger people. However omitting a stocks and shares option leaves a big hole for longer term savers who want to invest to get a better return than that available on cash.”
Economics
Budget 2015: economics view- As expected, this was primarily a Budget about politics rather than economics. Nevertheless, George Osborne took the opportunity to highlight the relative strength of the UK economy, and the risks of handing control back to Labour.
The economy is sure to be a key battleground in May’s election, and there is plenty of evidence to suggest it is on the right track. Figures released today show the employment rate (73.3%) is now the highest since records began. There are now 30.94m people in work, a rise of 617,000 over the last 12 months, while the jobless total is 1.86m, the lowest since mid-2008 and almost half a million down on a year ago. Earnings growth slowed slightly last month, but real wages are still growing strongly, helped by record low inflation.
Growth and borrowing projections
At 2.6%, GDP growth in 2014 was strong compared to developed-world peers – as George Osborne pointed out, this is the fastest growth in the G7 (though the IMF forecast that we will be overtaken by the US this year). Mr Osborne revealed today that the Office for Budget Responsibility has upgraded its projections for economic growth, and reduced its forecast for the budget deficit. The OBR now projects GDP growth of 2.5% this year (up from 2.4% forecast in the Autumn Statement) and 2.3% next year (up from 2.2%). The chancellor was also keen to point out that the national debt would be lower at end of this parliament than at start – one of his original targets. However, cutting the deficit has proved far more difficult than originally expected. The coalition once aimed to reduce the deficit to £40bn by 2015, but the latest figure is almost £100bn.
Measures announced today
Lower inflation and higher employment means less welfare spending, and lower inflation means significantly lower debt servicing costs. However, George Osborne today confirmed this extra money would go to reducing debt rather than pre-election giveaways.
However, it appears spending cuts in the next Parliament under a Conservative government will be less severe than previously thought, and certainly significantly less than the £70bn predicted by Ed Balls in a recent speech. Spending is set to fall to year 2000 levels by 2019, countering Labour’s claim that Osborne would cut spending to 1930s levels. The biggest change in plans comes at the end of the next Parliament, with a £7bn surplus forecast 2019/20, as against the £23bn previously forecast. This represents a significant loosening in the government’s purse strings at the end of the period.
