Know all about the Impact on your Pension from Budget 2016

Source: theguardian.com

On March 16, 2016, Chancellor George Osborn carrying his iconic red briefcase presented Budget 2016 to the parliament announcing sweeping changes to the pension industry yet again. In the past 4 years, the UK government has made some major changes to the pension ranging from auto enrollment in employers pension contribution to introduction of tax freedom most recently. And the Budget 2016 was no different in announcing interesting options for millions of UK retirees.

Introduction of Lifetime ISAs (LISA) for people below 40

In order to enable the young people to save more, Osborn has come out with Lifetime ISAs. From George Osborn’s Budget 2016 speech, “My pension reforms have always been about giving people more freedom and more choice. So faced with the truth that young people aren’t saving enough, I am today providing a different answer to the same problem…. for those under 40, many of whom haven’t had such a good deal from the pension system, I am introducing a completely new flexible way for the next generation to save. It’s called the Lifetime ISA. Young people can put money in, get a government bonus, and use it either to buy their first home or save for their retirement.”

Main features of Lifetime ISA

1. UK citizens between 18-40 years of age can open a LISA and invest a maximum of £4,000  annually
2. The government will provide bonus £1,000 annually in that account, until the age of 50
3. For every, £4 added by you, the government adds £1 on top of it
4. The savings pool can be used to buy property worth £450,000 or for retirement at age 60
5. Withdrawal for any other purpose or before 60, would remove the government bonus and 5% penalty tax would be levied
6. LISA contribution would count towards annual ISA limit, which has been increased from £15,000 to £20,000 annually.

Lifetime ISA seems like a great alternative for young people who are looking to buy homes or find a saving method which is not taxed at retirement. However, it may interfere with the Workplace Pension Plan as low earners might not have sufficient money to make contribution to both. If you have surplus income, figuring out how much to invest in Workplace Pension and Lifetime ISA can be a challenge. It will depend on your age, actual income, marginal tax-rate slab as it will determine the pension-tax relief, income at retirement which will determine the tax on lump sum pension withdrawal, annual limits on LISA and Pensions and can be better advised by a personal wealth manager.

A reduction in Salary Sacrifice Benefits for the high income earners

Source: www.emtax.co.uk

With this measure, the chancellor is especially targeting the highly paid executives. Salary Sacrifice is a very popular scheme with the higher income earners, as it allows them to pay for benefits like insurance, company car, childcare, pension and others from pre-tax income and the reduction in income leads to lower taxes. In fact, the UK government has noted that there has been a 30% increase in Salary Sacrifice schemes since 2010 and it is hurting the government’s treasury. The employee gets an equivalent pension contribution from the employer in return for salary reduction. In this manner, not only the employee saves on taxes but also gets a 1% saving in National Insurance Contribution (NIC). However, the real benefit comes from the saving of 13.9% on employers NIC.

The government is mulling a reduction in these schemes because according to some experts the total removal of this scheme would add a staggering £1billion per annum in government’s kitty. Although, the government hasn’t stated clearly how it plans to reduce the benefits, it will become clear as specific measures are announced by April 2017.

A Pension advice allowance to encourage people to plan for pension

Source: www.ijcrcps.com

Are you putting off taking pension advice due to high cost? Chancellor Osborn has heard your predicament in Budget 2016. The government has realized that expert advice is important for pension planning and has introduced a tax free pension allowance of £500. This will allow members of Defined Contribution pension schemes to withdraw £500 tax free from their pension pot before the age of 55 to pay for financial advice. In fact, it would not be a bad idea to take advantage of the Budget 2016 to plan your investments for the year.

Introduction of a Pensions Dashboard for the tech savvy

Source: Getty Images

On an average, a UK citizen changes jobs 11 times till his/her retirement age. This would mean a person needs to keep a track of 11 different pension pots to know their final pension income at retirement. This problem has been addressed in the Budget 2016. In an era of smartphones and drones, the government has realized that the pension industry is due for a technological upgrade. The Chancellor have announced the setting up of a Digital Pension Dashboard by 2019 where a retiree can track his pension from all different sources and view his retirement savings at one place. However, the Chancellor has asked the pension industry to develop and fund this dashboard. At this point of time, it looks like a difficult task for the different companies to work together to make this operational by 2019. But let’s not lose our hope so early, as some of these services already exist in the market in one form or another.

How will the Budget impact the tax you pay?

Source: BBC

You will get some relief from the taxes this year, as the income tax slabs have been increased. The personal allowance (income level after which you start paying taxes) has been increased from £11,000 currently (starting 1^st April, 2016) to £11,500 from April, 2017. This change will help you reduce tax by £180 per year. The 20% tax slab will increase from the current £43,000 (since 1^st April, 2016) to £45,000 beginning April, 2017. The income slab for the 45% tax bracket remains unchanged at £150,000. The future holds more in terms of tax relief for the lower income tax payers. The Conservatives have promised to increase the slab for personal allowance to £12,500 and the slab for 20% tax rate to £50,000 by 2020-21.

Green signal to Budget 2016 from Pension perspective

Overall, the Budget 2016 was a positive from pension perspective. The positive changes like Pension Advice Allowance, Pensions Dashboard, increase in Income Tax Slabs and to some extent Lifetime ISAs are a cause to cheer about. Lifetime ISAs do have some conflicts with the Automatic Enrollment policy in Workplace Pension plan and only time will tell if LISA has complicated savings for people or benefited them. Reduction in Salary Sacrifice is the only negative and its impact can only be judged after the finer details are sorted out by April 2017. Do consult your wealth advisor in case you want to plan for it in advance.