Peter Mutch, Corporate Services Director, looks at the impact George Osborne's Autumn Statement will have.
There were no surprises in George Osborne's Autumn Statement to match the seismic pension changes in his last Budget. However, he did pull one rabbit out of the hat for savers in the shape of new inheritability of ISAs for married couples. He also confirmed how pension wealth can be cascaded down the generations.
ISA savers will benefit from two positive changes:
- The annual allowance will increase to £15,240 from £15,000 from April 2015. There was NO mention of a lifetime cap for savers; and
- Spouses and civil partners will now be able to inherit their deceased partner's ISA fund and retain the tax advantages of the wrapper. There will be no impact on the spouse's/civil partner's own ISA annual allowance.
ISA accounts left to a spouse or civil partner will of course continue to pass IHT free as before - the transfer itself being covered by the spousal exemption. The big difference is that the continuing returns on a deceased partner's savings will be tax free.
The combined value of a surviving partner's ISA account will ultimately be included in their own estate for IHT. Those near to, or already over, age 55 may want to consider moving these savings into a pension, potentially allowing the pension fund to be passed on to their children and grandchildren tax free.
The confirmation of the new DC pension death benefit regime puts the final icing on the cake for next April's world of ‘freedom & choice'.
- On death before 75, any death benefit will be paid tax free within the Lifetime Allowance (LTA). In a change from the original proposals, this will now apply to survivors' annuities and pension guarantee payments as well as inherited drawdown pots;
- On death at 75+, death benefits will be taxed as the recipient's income, when they draw the funds. For 2015/16 only, non-drawdown lump sums will be taxed at a flat rate of 45% - but income tax will apply to all post-75 death benefits from 2016/17 onwards;
- The old tax distinction between opened and unopened pots is gone. Within the LTA, the sole determinant of tax treatment will be the deceased's age at death; and
- Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the drawdown wrapper and decide when (or if) they draw down on it.
These changes transform the wealth transfer planning equation. This places flexible pensions at the heart of inheritance planning going forward, opening up exciting new advice opportunities.
On the flip side, as widely expected, those accessing the new freedoms will pay the price of a reduced £10k ‘money purchase' Annual Allowance and no future carry forward.
- This sends a clear message to maximise pension funding before accessing the new flexibility; and
- The exemptions for existing capped drawdown users, and those only drawing tax-free cash after April, position advice as the map to navigate this tax minefield to keep options open.
Other Pension News
- State pensions: The new single-tier State pension from April 2016 will be at least £151.25, with the final figure being confirmed next Autumn. Meantime, the Basic State pension will be increased by 2.5% (to £112.90 for a single person) from April 2015 under the ‘triple-lock' guarantee.
- Age 75: Following informal consultation, there will be no change to the 75 upper age limit for tax relief on pension contributions by individuals.
- Means-testing: Fears that the new pension flexibility could lead to a lifetime's pension savings being deemed immediately available in means-testing assessments have been quashed. Assessments will be based on the annuity income the pot could provide, with higher income only being assessed if it's actually taken from the pot.
U-turn on IHT Settlement Nil Rate Bands
The Government has confirmed that it has scrapped plans to introduce the IHT settlement nil rate band and replace it with new rules to be announced in next week's Finance Bill. The replacement rules will still seek to prevent tax avoidance through the use of multiple trusts.
The settlement nil rate band rules would have seen each settlor have just one nil rate band which they could allocate across all relevant property trusts that they've created. Trusts created before 7 June 2014 would have remained subject to the old relevant property rules, leaving two sets of complex rules operating in parallel.
The result could have saddled those with trusts where the purpose is to accept the payment of death benefits, such as from life assurance contracts and pensions, with the burden of tax compliance and reporting, even where no inheritance tax is due.
Minor changes were made to allowances and thresholds for the new tax year:
- The personal allowance will rise to £10,600 in 2015/16 for those born after 5 April 1938. This is an additional £100 on what had been previously announced. At the same time, the level at which income tax becomes payable at higher rates will rise in line with inflation to £42,385 (from £41,865), meaning that higher rate taxpayers with incomes below £100,000 will also be better off by £224 - a little less pressure on the ‘squeezed middles';
- Age related allowances will remain at £10,660 for those born before 6 April 1938; and
- From the 2015/16 tax year, a spouse or civil partner who doesn't have income to fully use up their personal allowance will be able to transfer up to £1,060 to their partner, provided that the partner is a basic rate taxpayer.
Peter Mutch, Corporate Services Director