Budget Commentary 2016 – ‘the drift from pensions to ISAs in the workplace’

The Chancellor of the Exchequer, George Osborne, has today delivered this year’s Budget Report.

There was much media hype ahead of the annual Budget Report over plans to drastically change the pension tax relief system. The proposals were abandoned after a report from a Government source that ‘now isn’t the right time, with uncertainty in the global economy and reforms such as auto-enrolment still bedding in, to turn things on their head.’

However, there were a few surprise announcements. See below for our Budget Commentary.

Lifetime ISA
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year, and receive a 25% bonus from the government. This means an individual can save a maximum of £4,000 a year with a £1,000 from the government meaning total savings of £5,000 a year. Monies saved, including the government bonus, from the Lifetime ISA can be used to buy a first home at any time from 12 months after the account opening, and be withdrawn from age 60 tax free.

Jonathan Watts-Lay, Director WEALTH at work, comments; “This is great news for young savers who want flexibility and access as they no longer have to choose between saving for their first home, or retirement. I can see many employers will come under pressure from employees as they may rather have employer pension contributions diverted to the Lifetime ISA so they can benefit from increased flexibility. This is the start of the drift from pensions to ISAs in the workplace.”

Restructure of Government bodies
The government will restructure the statutory financial guidance providers – the Money Advice Service, The Pensions Advisory Service and Pension Wise – to ensure that individuals can access the help they need to make effective financial decisions. The new delivery model will direct more funding to the front line. It will include; a new pensions guidance body, to make sure that consumers can get all their pensions questions answered in one place, at all stages of their lives.

Jonathan Watts-Lay, Director WEALTH at work comments; “I strongly support any initiative which supports individuals in understanding their retirement income options. However, individuals need to remember that a holistic approach is necessary at retirement so many will still need to take regulated financial advice.”

Termination payments
Currently the first £30,000 of a redundancy or termination payment is paid free of tax and National Insurance. The excess above £30,000 is subject to income tax on the employee but free from National Insurance. From April 2018 the payment above £30,000 will be subject to employer’s National Insurance.

Jonathan Watts-Lay, Director WEALTH at work comments; “Until such time as the Government introduces changes to salary sacrifice, paying the excess above £30,000 could be National Insurance efficient for the employer if paid into the pension scheme. This may lead to changes in the way termination payments are paid.”

Capital Gains Tax
From April 2016 the Capital Gains Tax (CGT) for basic rate tax payers will reduce from 18% to 10% and the higher rate of CGT will fall from 28% to 20%. These reductions will not apply to the gains on residential property.

Jonathan Watts-Lay, Director WEALTH at work comments; “These cuts will really make a difference to employees with share schemes such as Save As You Earn schemes as they reduce the tax on gains. This will further incentivise employees to join company share schemes and to promote ownership in the companies they work for.”

Benefit in kind
In line with FAMR’s recommendations the government will increase the tax and NICs relief available for employer-arranged pension advice from £150 to £500 from April 2017. This will ensure that the first £500 of any advice received is eligible for the relief.

Additionally, the government is to consult on introducing a Pension Advice Allowance. This will allow people to withdraw £500 tax free before the age of 55 from their defined contribution pension to redeem against the cost of financial advice – the exact age at which people can do this will be determined by consultation. It is also to consult on amending the definition of regulated advice in the existing Regulated Activities Order 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.

Jonathan Watts-Lay, Director WEALTH at work comments; “I welcome any incentive which gives more employees access to financial advice, particularly when considering retirement income. Poorly thought out decisions can be very costly, so taking full regulated advice could save employees money in the long run and also provided added protection.”