Just at the point that millions of under forties have started pension saving for the first time, the Chancellor has set up a rival product which risks causing mass confusion. Young savers who opt out of pensions in favour of a Lifetime ISA lose the contribution from their employer and the chance to build a tax free lump sum from a pension pot - how will they know which is right for them?
Young workers have had some of the lowest opt-out rates when they have been enrolled into workplace pensions, yet the Chancellor's desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement.
For a defined benefit perspective Royal London Consulting Actuaries give their view on the 2016 Budget.
Here’s our summary of the proposed changes with links to Treasury or HM Revenue and Customs documents if you would like more detail.
1.83 and 1.85 of HM Treasury - Budget 2016
The personal allowance will increase to £11,000 from 6 April 2016 and £11,500 from 6 April 2017. The point at which the higher rate of income tax will apply will increase to £43,000 from 6 April 2016 and £45,000 from 6 April 2017.
From April 2017, those over 18 and under 40 will be able to open a new Lifetime ISA. This will allow up to £4,000 of savings each year to which the Government will add a 25% bonus. Contributions will be made with the individual’s own cash. This additional bonus will be payable up to a maximum of £1,000 for each year between the ages of 18 and 50. The money in a Lifetime ISA can be used to:
Individuals will be able to withdraw money before age 60 for other purposes however the Government’s element of the fund, including any interest or growth on the bonus will be returned to the Government. In addition there will be a 5% charge.
The maximum that can be paid into a Lifetime ISA will therefore be £128,000 with a maximum bonus of £32,000.
1.104 of HM Treasury - Budget 2016
From 6 April 2016 the maximum that can be paid into an ISA is £15,240. From 6 April 2017 this will increase to £20,000.
Any contributions to a Lifetime ISA will form part of the overall £20,000 limit from 6 April 2017.
1.113 of HM Treasury - Budget 2016
The Government is to introduce a new Help to Save scheme for individuals on low incomes. The scheme will be open to individuals in receipt of Universal Credit with minimum weekly household earnings equivalent to 16 hours at the National Living Wage, or those in receipt of Working Tax Credit. It will work by providing a 50% government bonus on up to £50 of monthly savings. The bonus will be paid after two years with an option to save for a further two years, meaning individuals can save up to £2,400 and benefit from government bonuses worth up to £1,200. Individuals will be able to use the funds in any way they wish.
There were no changes announced to the annual allowance. This will remain at £40,000 for tax year 2016/17 with the introduction of the tapered annual allowance from 6 April 2016 for higher earners. The money purchase annual allowance also remains at £10,000.
2.55 of HM Treasury - Budget 2016
As expected, the lifetime allowance will reduce from £1.25 million to £1 million from 6 April 2016.
2.53 of HM Treasury - Budget 2016
There were a number of smaller announcements made to support the April 2015 pension changes.
These changes will be effective when the Finance Bill 2016 receives Royal Assent.
2.59 of HM Treasury - Budget 2016
As announced in the Autumn Statement 2015, from 6 April 2016 the Government will reduce significantly the number of calculations that need to take place to determine whether a dependant’s scheme pension exceeds the authorised limit. Following consultation there are further reductions to the number of calculations that need to be carried out.
2.60 of HM Treasury - Budget 2016
The pensions tax rules on bridging pensions will be aligned with DWP legislation following the introduction of the single tier state pension from 6 April 2016.
2.61 of HM Treasury - Budget 2016
The Government will ensure the industry designs, funds and launches a pensions dashboard (a digital interface where an individual can view all their retirement savings in one place) by 2019.
2.63 of HM Treasury - Budget 2016
As announced in the Autumn Statement 2015, the Government will legislate to ensure a charge to IHT does not arise when a pension scheme member designates funds for drawdown but does not draw all of their funds before death. This will be backdated to apply to deaths on or after 6 April 2011.
2.227 of HM Treasury - Budget 2016
It is proposed that from 6 April 2017 the tax and National Insurance relief for employer arranged pensions advice will increase from £150 to £500 for each employee.
The Government will consult on introducing a pensions advice allowance over summer 2016. This will allow individuals to withdraw £500 tax free before the age of 55 from their defined contribution pension to help with the cost of financial advice. A consultation to decide the exact age at which individuals can do this will take place.
The Government will also consult on amending the definition of regulated advice to bring it in line with that of the Markets in Financial Instruments Directive – this would mean that regulated advice is based upon a personal recommendation.
1.147 of HM Treasury - Budget 2016
The Government is considering what range of benefits salary exchange can be used for. It is intended though that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from income tax and National Insurance relief when provided through salary exchange.
1.166 of HM Treasury - Budget 2016
From April 2018, Class 2 National Insurance contributions are to be abolished. This will allow millions of self-employed individuals to keep more of their money and invest it back into growing their business.
As previously trailed in the press no changes were announced to pensions tax relief. A summary of responses to the consultation on pensions tax relief has been published.
Published 16 March 2016
The information provided is based on our current understanding of the Budget 2016 and associated documents and may be subject to alteration as a result of changes in legislation or practice.