BLOG: A Budget for savers
What we knew
As anticipated, the new tax year will bring a reduction in the lifetime pension allowance, the tax free wrapper on your savings pot, from £1.5m to £1.25m, and a fall in the amount you can contribute annually to your pension from £50,000 to £40,000, hurting high earners. It was also predicted that the ISA allowance would see a small increase. Let’s start with the good news.
The good news
The personal ISA allowance has jumped to £15,000, an increase of over £2,000 and savers will now be able to transfer money between cash and stock ISAs as they see fit. In addition, the Chancellor announced the biggest changes to pensions since 1921. Osborne’s move to scrap the cap on income drawdown, with the first 25% tax-free, provides a real alternative to annuities and proves the government trusts British savers to manage their own savings. We believe these changes will further encourage people to save for retirement, which can only be good for the UK as each subsequent generation reaches the end of their working lives.
Another welcome lifeline for savers with small pension pots came in the form of changes to trivial commutation. Savers with pension pots of less than £30,000 can now take this out as cash, helping retirees get the best value for their pension.
Less good news
However, it is disappointing that the lifetime pension allowance will still reduce from £1.5m to £1.25m and we encourage people to take advantage of current allowances so they don’t breach the lifetime pensions allowance as their pot grows. We would still recommend investors investigate locking into ‘fixed protection’ to shield themselves from the lifetime allowance change to avoid tax. For example, a 50 year-old with £700,000 in pension savings would breach the £1.25m limit aged 60, even with no further contributions and assuming 6% annual investment growth.
Overall it is an exciting announcement for savers and those looking ahead to retirement. Potentially they will have more choice, greater access to tax free savings and more income when retired. The changes create huge opportunities for the UK to save and think differently about getting ready for retirement.
David Macmillan is managing director at life and pensions provider Aegon UK