Budget 2016: How might the pension changes affect me?
On 16th March 2016, Chancellor George Osborne carried the iconic red briefcase into parliament to announce his 2016 Budget. So what pension changes have been announced?
In the past four years Budget announcements have meant some big changes made to pensions. From auto-enrolment to the launch of pension “freedoms” in April 2015, the U.K. government have made changes that are likely to affect many generations of retirees. And unsurprisingly, the 2016 Budget introduced some interesting options that may bring yet more changes to pensions. It also left some rumoured changes out.
Here are the highlights:
Pension tax relief is here to stay...for now
The Chancellor confirmed that the popular option for retirees to take a tax-free lump sum of up to 25% from their pension pot would remain, along with the current tax relief on money paid into pension pots.
This means, for the foreseeable future, pensions will remain in their current form. However, the government did not discuss their reaction to the responses they received from a recent pension consultation.
Does this mean that more changes could be on the horizon? Maybe. It’s easy to imagine that these changes could come in the future, possibly in exchange for an extension to the new Lifetime ISA. Which brings us to the next point:
Before the announcement, there were a lot of rumours about the possibility of George Osborne bringing in ‘ISA-style pensions’, and a radical overhaul of the way we pay tax on our pensions. In the end, Budget 2016 did not see these kind of changes to pensions, but it did introduce a new form of retirement saving: the Lifetime ISA.
How will a Lifetime ISA work?
A version of an Individual Savings Account (ISA), a Lifetime ISA is available to those aged 18 to 40 from April 2017 onwards. You will be allowed to save up to £4,000 a year in this specialised account, with a 25% bonus from the government meaning that for every £4 you save, the Government will contribute £1 too. Potentially, this could mean up to a £1,000 bonus from the government for saving £4,000 in a year. Contributions into this account will be allowed up until the age of 50. Importantly, this £4,000 per year is included within the overall total you are allowed to save into ISAs, with the Budget 2016 agreeing an overall increase to £20,000 from 2017.
This new type of ISA is designed to help people purchase a first home, and/or from age 60, to use in retirement. When the funds are used for either of these purposes, the whole amount, including the government bonus, can be withdrawn tax free. The total fund can also be withdrawn tax free if you are diagnosed with a terminal illness, regardless of your age.
If funds are withdrawn for any other purposes, this bonus will be lost. Instead, the government bonus element (and any investment returns on this) will need to be repaid, along with a 5% charge on the rest of the savings.
How does this affect my retirement plan?
It depends on your options. For those with low pension savings, or perhaps the self-employed, this could act as a nice bonus to save for retirement if you are not paying into a personal pension.
Whether it will be better to save into the new Lifetime ISA instead of into a pension will depend on your individual circumstances; such as the level of tax you’re paying during your working life and what level of tax you anticipate paying during your retirement.
One important thing to consider will be whether you are giving up employer pension contributions if you stop contributing to a pension in favour of the new Lifetime ISA.
But in all honesty, it’s perhaps too early to tell the exact benefits and risks of Lifetime ISAs. Between now and their launch in April 2017, the details are sure to be ironed out by the Chancellor and financial companies.
A 'pensions dashboard' for the digital age
It’s easy to lose track of all your pension pots when so many of us are changing jobs throughout our working life. Fortunately, the Budget 2016 took steps to address this. With the average person moving employers 11 times over their working life, this could mean they end up with 11 different private pension pots by the time they retire. That’s a lot to lose track of. The Chancellor proposed, therefore, that by 2019 a digital ‘pensions dashboard’ be designed, funded, and launched by the industry. For tech-savvy retirees, this can only be a good thing; meaning individuals will be able to view all their retirement savings in one place.
A way to help pay for advice – tax free!
Are you put off taking financial advice because of the cost? Well the Budget 2016 may contain some good news for you:
Starting from summer 2016, discussions are taking place over introducing a ‘Pensions Advice Allowance’ as a more tax efficient way to pay for financial advice. In the future, this could allow members of Defined Contribution pension schemes to withdraw up to £500 tax free from their scheme before the age of 55 to pay for financial advice. As it’s a tax free dip into your pension pot, it will reduce the worry of forking out of your pay packet for valuable advice.
The Money Advice Service is changing, and may be closed
The Money Advice Service will be restructured with the Pensions Advisory Service and Pension Wise to create two new bodies: a new pensions guidance body and a new, slimmed down money guidance body. How this will be done is still under discussion within the government.