With greater flexibility being introduced from April and continued availability of tax relief on contributions at an individual’s highest marginal rate of income tax, pensions continue to be an attractive means of building up savings for retirement.
The maximum that can be accrued in pensions during a person’s lifetime is, however, set to reduce in 2016/17 to £1,000,000. Whilst the majority of us will be well within this limit, individuals with uncrystallised pension funds in excess of £1,000,000 should seek advice as it is possible to apply for protection based on the amount already accrued.
The Annual Allowance which limits the total of employer / employee contributions and any payments from a third party into an individual’s pension arrangements is to remain at £40,000 for 2015/16. The allowance will reduce to £10,000 for those who have accessed their pensions ‘flexibly’ under the new, post April regime.
Care should therefore be taken where individuals are looking to access their pensions flexibly, but are perhaps still working and accruing pension benefits, for example, under a defined benefit arrangement.
Death benefits from money purchase pensions are to be improved from April with the removal of the 55% tax charge currently payable on lump sum death benefits payable from income drawdown arrangements. Further details regarding the changes to pension death benefits were contained in our October 2014 article.
With the new flexibility comes choice and careful consideration should be given to the various options both pre and post retirement.
Unlike pension contributions, ISAs don’t attract tax relief on the initial investment. However, the proceeds are available tax free, making them a flexible alternative means of saving both pre and post retirement.
The ISA allowance will increase in 2015/16 to £15,240. As is the case currently, this can be made up entirely of cash, investments or a combination of the two.
From 6th April, 2015 it will be possible for the tax free status of existing ISAs to be retained on death where the funds are passed to a spouse or civil partner. This will be beneficial where large amounts have been built up in ISAs by couples over the years, where previously the tax efficient status would have been lost on first death.
Personal Savings Allowance
From 6th April 2016 people with earnings of less than £42,700 will be entitled to a tax free savings allowance of £1,000. This means that first £1,000 of savings income (e.g. bank/building society interest) will be tax free. Higher rate taxpayers will be entitled to a £500 tax free allowance but those paying additional rate tax (i.e. with earnings over £150,000) will not receive a tax free allowance.
It is proposed that from April, 2016 bank/building society interest will be paid gross, with the onus being on the individual to declare interest exceeding £1,000 and pay any tax due.
The maximum benefit of the new allowance, based on the basic rate of income tax at 20% and the higher rate of 40%, is £200.
There were no significant changes to Inheritance Tax (IHT) in the Chancellor’s budget, although certain areas such as the use of multiple trusts and deeds of variation are to be reviewed by the government, further reinforcing the need for careful forward planning.
The Nil Rate Band is to remain frozen at £325,000 (£650,000 collectively for married couples / civil partners) meaning that as asset prices increase, more and more people are becoming affected by IHT.
There are a variety of allowances and reliefs available for the purposes of mitigating the potential liability to IHT on death. Contact Springfield Financial Services Ltd for further information.