This month Mitch Hopkinson, a winner of the Financial Adviser, a Financial Times publication, ‘UK Independent Financial Adviser of the Year’ award, looks at how the budget will affect you. Are you a bingo player or an aspiring Lamborghini owner?
There has been a lot to talk about with regard to the recent budget. If you have a pension, are thinking about investing in a pension, are near to retirement or taking your pension in the form of ‘drawdown’, then you should take note of the changes being proposed, as well as the changes occurring later this month.
The recent budget proposes wide-sweeping modifications to pensions in the UK. For many years, people have complained to their financial adviser that saving in to pensions was too restrictive for them and that having to buy an annuity (which was for many the only choice) at retirement just led them to feel that pensions were not ‘for them’. The main reason that people took this view was the feeling that it was more than likely that much of their pension fund would disappear when they died.
Now with the latest budget, these disadvantages have been set to one side, as the proposal is that sometime soon, retirees will have the ability to have access to all of their pension fund when they retire, without restriction.
When I say some time soon, this is because the actual final legislation is subject to consultation and so when it comes in, is still to be decided (probably as soon as 2015). However, it seems that the winds of change are blowing through pensions and as such the following changes will come in at the end of the month (27th March).
People who were thinking of taking all of their pension as an income (via flexible drawdown), will now be able to do this if they can prove guaranteed income from other sources of only £12,000, the previous level was £20,000. This is a big change and will mean that many individuals can decide to take as much of their pension as they like as income, subject to them paying the tax on this.
Those with small pension pots under £30,000 (previously £18,000), will be able to access all of their pension now.
In addition the levels of income that can be taken from existing capped drawdown plans will be increased from 120 per cent to 150 per cent. This is a welcome increase to retirees who have suffered over recent years with the fall in interest rates, coupled with the reduction in yields from low risk investments.
The long term position for pensions should be that they will become much more flexible, which should mean that their appeal will increase massively. I’ll now give a couple of examples to compare the current or what will be the historic position for the future.
Bob has retired and wants to pay his mortgage off. He would like to use his pension for this and keep his other assets intact. At the moment he can only use the tax free cash from his pension to do this, and he would then have to use the rest of his pension to create an income to pay the mortgage off over time. In the future, Bob could cash the sufficient amount from his remaining pension to pay down his mortgage. He will pay tax on the amount that he draws down, and here is the clever part for the government, because just as Bob has in effect brought his pension assets out of being doomed to pay an income for the rest of his life, the government will also benefit from the extra upfront tax that Bob pays for the privilege of getting his money now.
Sue retired a few years ago and at the time did not use all of her pensions as she had a good income from her previous employers scheme, so she felt she could leave her other personal pensions for the time-being. One of her grandsons has aspirations to become a vet, but owing to family circumstances he cannot afford the tuition fees. Ordinarily the situation might have ended there. However, with the ability to access her pension assets, Sue could choose to use these as a way to pay for her grandson’s ambition to become a vet!
So whatever your previous excuses for not paying enough into pensions I think now is a great time to make up for those past years and get contributing.
Enough on pensions, what else did the budget provide for savers? Well the amount that you can save in to an ISA is going up considerably to £15,000 from July 1st. In addition the ISA rules are becoming simpler in that you will be able to save the same amount in to both cash based and equity ISAs. The tax free allowance is going up to £10,500 which is going to take many people out of paying tax. However, as with all budgets there is a compromise in that many, many more people are falling in to the 40 per cent tax band as the rate at which this becomes payable is not increasing with inflation.
Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, one of the world’s largest independent advisers of specialist global financial solutions to international, local mass affluent, and high-net-worth clients, through a network of 70 offices across the world and more than 1,000 staff. It has in excess of 80,000 clients and $10bn under advisement.