Submitted by
Sestini & Co | on Wed, 03/18/2015 - 17:00 | In
Uncategorized A few thoughts on the key savings and pensions measures announced today:
ISA’s
The new help to buy ISA announced today provides an additional opportunity for tax-free savings with the added incentive of a bonus of up to £3,000 after 5 years provided the savings are used by a first-time buyer to purchase a property, as long as the property is worth up to £250,000 outside of London and £450,000 in London:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil…
Broadly, individuals can save up to £200 per month (with an initial investment of £1,000) to which the government will add a 25% bonus. It’s available to all first-time buyers from the age of 16 onwards.
Whilst the £3,000 bonus or £6,000 for a couple won’t in itself necessarily be a deal-clincher in terms of whether or not to buy a property, the total saving for a couple of £30,000 could either make the difference in being able to buy a property or in securing a better interest rate to make the purchase more affordable.
This also provides another interesting opportunity for parents or grandparents to make tax efficient gifts out of income to their children/grandchildren which combined with the existing reliefs – junior ISA’s and stakeholder pensions to name two of the most significant – could add up to a significant sum. Gifts out of excess current income are totally free of IHT and investment growth would be tax-free in the child’s hands.
Here is an illustration of how the tax reliefs and tax-free compound growth could look over 21 years assuming these reliefs all stayed in place at their current levels (naturally this is not a comment on or guarantee of investment performance or future tax changes):
| Age at year end |
Junior ISA |
Stakeholder pension |
Help to buy ISA |
Total saved |
With 2% PA investment growth |
With 4% PA investment growth |
Cost to parent/grandparent |
| 1 |
4,000 |
3,600 |
|
7,600 |
7,600 |
7,600 |
6,880 |
| 2 |
8,000 |
7,200 |
|
15,200 |
15,352 |
15,504 |
13,760 |
| 3 |
12,000 |
10,800 |
|
22,800 |
23,259 |
23,724 |
20,640 |
| 4 |
16,000 |
14,400 |
|
30,400 |
31,324 |
32,273 |
27,520 |
| 17 |
68,000 |
61,200 |
2,400 |
131,600 |
154,492 |
180,101 |
119,360 |
| 18 |
72,000 |
64,800 |
2,400 |
139,200 |
165,182 |
194,905 |
126,240 |
| 19 |
76,000 |
68,400 |
2,400 |
146,800 |
176,085 |
210,301 |
133,120 |
| 20 |
80,000 |
72,000 |
2,400 |
154,400 |
187,207 |
226,313 |
140,000 |
| 21 |
84,000 |
75,600 |
5,400 |
165,000 |
201,551 |
242,966 |
149,880 |
As you can see, the combination of tax reliefs and tax-free investment growth can be quite powerful.
Still on the ISA front, the introduction of greater flexibility in being able to draw funds from the ISA and reinvest in another must surely be welcomed by investors, their wealth managers and ISA providers alike. No more pre-5 April frenzy, more time to shop around for better deals.
Savings
The introduction of the £1,000 of tax free savings allowance (£500 for higher rate taxpayers):https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil… is an interesting one in light of the reduction in the pension lifetime allowance as it seems to encourage savings outside of pensions an ISA’s. This could also potentially reduce the demand for cash ISAs at least in the first few years, given that even at a 4% rate of interest, it requires £25,000 of savings to generate the £1,000 of interest.
As part of this change, there will no longer be automatic withholding tax on bank interest. presumably this will bring some basic rate taxpayers into Self Assessment just in time for the “Death of the Annual Tax Return” (of which more to come in a separate blog).
Pensions
Existing pensioners who have already bought an annuity will now be able to draw down from their fund in a similar manner to those who have not. This will more than ever require good, sensible financial advice, both to ensure sufficient funds remain invested in a suitable vehicle to provide an income for the future and in determining the cash fund available at some point after the annuity has been purchased. People looking to release funds from an annuity or an existing pension pot also need to be fully informed about the charges and risks in doing so.
This is also potentially a tax accelerator as any funds drawn down are subject to income tax so any acceleration of the income accelerates the corresponding tax payment. Freedom, but at what price?
In light of the greater and greater pension freedoms, the reduction of the lifetime allowance to £1,000,000 from £1.25m seems quite draconian and provides another layer of complexity given that existing pension funds will no doubt be offered some degree of protection. It’s interesting to note that the greater freedoms do provide an opportunity for the over 55’s to draw down their pension pots to avoid exceeding the new £1m limit. Any such withdrawals above the 25% tax free sum (now limited to £250,000) will be taxable at the individual’s marginal rate but won’t incur the 55% penalty. Planning using EIS and VCT reliefs may well come into play to offset this additional income tax…only time will tell the extent to which such planning erodes the savings made through this measure.
These are our opinions and not intended as advice so no action should be taken without seeking specific advice for your circumstances from a qualified professional.
If you would like to discuss any of the matters raised, please do not hesitate to leave a commment or contact us on 01761 241 861 or at info@sestiniandco.co.uk.
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