As you will know by now, the Chancellor has announced a package of measures designed to help all savers at every stage of their lives.

As you may already be aware, the Chancellor announced earlier today in his Budget speech, a radical reform of the ISA system. To reflect the significance of this reform ISAs will be known as New ISAs (NISAs).  The overall annual subscription limit for a NISA will be £15,000 – the biggest increase ever to ISA subscription limits. It will be a simpler product such that this full amount can be held in a cash NISA, a stocks and shares NISA or any combination of the two. This will mean that for the first time ever, savers will be permitted to transfer savings previously held in a stocks and shares ISA to a cash NISA without losing their tax-advantaged wrapper. To extend support to savers of all ages, the annual subscription limits for Child Trust Funds and Junior ISAs will be increased to £4,000.

 

These changes will come into effect on 1 July 2014. On this data all existing ISAs will become NISAs. In the interim period, between the start of the 2014-15 tax year and 1 July, the maximum amount to be permitted in an ISA will be £11,880 (up to £5,940 in cash) and in a Child Trust Fund or Junior ISA will be £3,840, as announced at Autumn Statement 2013. Then from 1 July savers will be able to deposit additional funds up to the new limits.

 

Other changes to ISA announced today relate to changes and extensions of the list of qualifying investments. From 1 July 2014, all restrictions on the maturity dates of securities permitted to be brought into a NISA, along with other ‘cash-like’ tests, will be removed as a consequence of the equalisation of the cash and overall subscription limits. Core capital deferred shares (issued by building societies) will become NISA eligible.

 

Peer-to-peer loans will also become NISA qualifying investments. Because their inclusion in NISA will require detailed technical changes to the NISA rules and processes and by the peer-to-peer industry, the  Government will consult informally on these changes before launching a public consultation later this year. The Government will continue to explore further extending the list of qualifying to include debt securities offered via crowdfunding platforms.

 

The increase in the ISA limit to £15,000 is expected to benefit around 6.4 million ISA holders who are currently constrained by either the annual cash or overall ISA subscription limit. The other changes to ISA, including the ability to move funds between stocks and shares and cash ISAs, will make NISAs a more flexible product for all.

 

 

To target low-income savers, the Chancellor announced major changes to the starting rate of savings income tax. From April 2015, the starting rate of savings income tax will be lowered from ten per cent to zero per cent and the band to which it applies will be extended to £5,000 from £2,880 (in 2014-15). This change is targeted at low earners, and 1.5 million people are expected to gain. Of those people, over one million, all of whom have incomes of less than £15,500 (unless born before 6 April 1938, in which case will have an income of less than £15,660) will no longer pay any tax on their savings income. This second group of people, no longer liable for tax on their savings income, will newly be able to register with their bank or building society for their interest to be paid gross by filling out an R85 form online or on paper. The rest of the expected gainers will have to fill in an R40 form and return it to their local tax office in order to reclaim some of the tax deducted at source from their interest.

 

The Chancellor also announced non-tax changes to the savings landscape. National Saving and Investments (NS&I) has been charged with helping to supporting savers by in January 2015 launching a choice of fixed-rate, market leading savings bonds for people aged over 65 or over. These will provide certainty and a good return for those who have saved all their lives and now most rely on their savings for income. Interest on the bonds will be taxed in line with all other savings income, at the individual’s marginal rate. For the purposes of costing this measure, the central assumption made at this Budget is that NS&I will launch a one year bond paying 2.8% gross/AER and a three year bond paying 4.0% gross/AER, with an investment limit of £10,000 per bond. Inflows will be capped at £10 billion. Precise details will be confirmed at Autumn Statement, to take account of prevailing market conditions at that time. The Chancellor has also announced that NS&I will increase the Premium Bond investment limit from £30,000 to £40,000 from 1 June 2014/15, and to £50,000 in 2015/16. NS&I will also increase the number of £1 million Premium Bond prizes from one to two a month, from the August 2014 prize draw. In order to deliver these measures, NS&I’s net financing target for 2014-15 will be £13 billion, within a range of £11 billion to £15 billion.

 

The landscape of retirement is changing – people are living longer and have more varied needs in retirement. And the way people save for the pension and ensure security of their income in retirement has also changed – through auto-enrolment in the work place, and through the Single Tier state pension and the triple lock. The government thinks these changes make a strong case for giving people greater freedom and choice over how they access their pension from retirement.

 

The Chancellor announced in his Budget statement a radical set of reforms which will allow people more choice over how they access their defined contribution pension savings. From April 2015, we propose to change the tax rules to allow people to access their defined contribution pension savings as they wish at the point of retirement, subject to their marginal rate of income tax.

 

The government has today published a consultation document that sets out more detail on the measures to increase freedom and choice available to individuals when they come to access their defined contribution pension savings, and seeks views on the best way to implement these changes. The consultation can be found here: https://www.gov.uk/government/consultations/freedom-and-choice-in-pensions

 

What this means is if people still want an annuity they will be able to purchase one. Equally, those who do not want to purchase an annuity or withdraw their money in one go, but would prefer to keep it invested and access it over time, will be able to drawdown their pensions as they wish.

 

To support people in making decisions that suit their evolving personal needs, the government will introduce a new guarantee that everyone with a defined contribution pension will be offered free and impartial face to face guidance on their financial choices when they retire. The government will introduce a new guarantee – via a duty on pension providers and trust-based schemes - that everyone with a defined contribution pension will be offered free and impartial face to face guidance on their financial choices when they retire from April 2015. The key elements of this guidance are:

 

 

More details on how we see this guarantee working can be found in the consultation document.

 

In order to pave the way for this more radical reform, from 27 March the current rules on how people access their pension will be changed:

The Freedom & Choice in Pensions consultation will run until Wednesday 11 June. We are keen to hear your views on these proposals and will be having a full programme of engagement to ensure that everyone has the opportunity to offer their views as we take this radical programme of reform forward.

 

We’ll be very happy to talk through the changes and any questions or queries you may have when we meet tomorrow -  but of course if you have any urgent issues or concerns then give one of us a call.

 

e-mail: peter.smith@tisa.uk.com