Financial planning issues from the PBR
The Chancellorís Pre Budget Report seems to be a case of Gordon giveth in April and Gordon taketh away in December. Some good news for the future of tax free savings was tempered by a turnaround on pensions.
As IFAs we have summarised the changes and how they affect contractors and sub-contractors.
The best news to come from the Pre Budget Report (PBR) is undoubtedly the decision to remove the deadline for Individual Savings Accounts (ISAs) beyond the original end date of 2010. These tax efficient investments will now become a permanent feature on the savings landscape as the Government desperately tries to encourage us to rediscover our savings habit after a decade of unprecedented spending and borrowing.
The current distinction between mini and maxi ISAs will be removed and in a major turnaround, there will now be the ability to transfer existing cash ISAs into a stock market based investment ISA without affecting the annual allowance.
This represents a huge opportunity for investors to reinvigorate cash deposits that will otherwise only be attracting the current, relatively low level of interest rates. Instead of having to remain in cash even though priorities may have changed, savers will now be able to transfer funds into an investment backed ISA and get them properly working towards longer term capital growth.
With a massive £190 billion already invested by 16 million tax savvy savers it looks as if the ISAs popularity will continue to grow given the ever decreasing number of other tax breaks available. Itís a case of use it or lose it however, as the allowance cannot be carried over from one tax year to the next.
On a separate but associated point, the PBR contained a promise that the Government's new Child Trust Fund investments will also be allowed to roll over into ISAs on maturity when the child reaches 18.
Alternatively secured pension (ASP)
As part of the new pensions simplification regime that came into force on April 6, the authorities for the first time opened the door for investors to pass pension monies down through the generations. No longer was it compulsory to buy an annuity at age 75.
Changes to the rules regarding ASPs will include the following:
- At present there is no minimum amount that needs to be drawn from a memberís or dependantís ASP fund. A new lower income limit of 65 per cent of the annual amount of a comparable annuity will be introduced.
- The upper income limit will also be increased to 90 per cent from 70 per cent of the comparable annuity.
The most important change as a result of the Pre Budget Report is that any transfer of lump sum death benefits will incur potential tax charges of up to 70 per cent. ASPs will no longer hold the same attraction in terms of the potential to pass on retirement funds to dependants and as such, are now really only suitable for the individuals who the Chancellor originally intended to benefit from ASP - namely those whose religion prevents annuity purchase.
A small piece of good news for those who are still attracted to ASP is the fact that scheme administrators will now be able to nominate a charity to receive any ASP fund remaining on a pensioner's death if there is no member nomination is in place.
Pension Term Assurance
The ability to benefit from tax relief on life insurance was massively enhanced under the pension simplification changes in April. This was great news for anyone whose pension fund was unlikely to reach the new lifetime pensions allowance and as advisers we have been discussing this option with 100s of clients since the new rules came into effect. In reality the taxman has been offering to subsidise contractors' protection premiums.
The life insurance industry estimates that at least 40,000 consumers whose policies were in the pipeline will not now be eligible for tax relief.
It now appears increasing likely that dispensations currently available to sub-contractors or contractors using a variety of composite companies and other pooled trading arrangements are to be lost.
This has thrown the spotlight onto retirement planning as a HMRC endorsed tax saving tool and we expect contractors to be hastily revisiting their pension policies with a view to reducing tax in a way that the Chancellor cannot challenge.
With income tax relief of up to 40 per cent and the ability to avoid employers and employees National Insurance, pensions could end up being one of the few remaining tax breaks in a contractors' arsenal in 2007. Any increased savings effort should be coupled with a review of the pension vehicle used to ensure that fund performance is sufficiently good and that charging structures are competitive.
So all in all the PBR has thrown a spanner in the works for several fledgling financial planning avenues that contractors and sub-contractors had begun to exploit. The pension changes are, in effect, largely a return to the situation that existed prior to April 6 but the impression cannot be avoided that policy is too often being made on the hoof.
As advisers, our game of cat and mouse with the tax authorities continues. As one road closes another invariably opens up and the new ISA flexibility will certainly help freelancers shelter increasingly large sums away from the ever greedier attention of HMRC.
The Editor © Hardhatter 2006