Q. I have an interest-only mortgage, which I intend to repay by using the funds held in my ISA and the tax-free cash from my pension once I reach age 55. However, I read an article recently that stated that the government is set to restrict the amount that can be held within an ISA and will reduce the amount of tax-free cash that can be taken at retirement. Is this correct?
A. You are correct that one of the broadsheets carried an article recently suggesting that the government has consulted a number of interested parties, including the senior executives of several financial services firms, regarding the possible introduction of a limit on the amount of savings that can be held within an ISA. The government is also alleged to be undertaking a “discrete” consultation regarding the possible reduction to the amount of tax-free cash that can be taken from a pension at retirement.
Whilst the current annual ISA allowance is £11,520, it has been reported that the government is concerned that we may begin to see “ISA millionaires” (due to the amount of investment growth achieved by long-term savers within their tax-efficient wrappers) and is keen therefore to restrict the amount of funds that can be held in an ISA. However, it is unclear how any such limit would be imposed and policed.
Similarly, it has been reported that the government believes the current pension taxation legislation (that permits a person to take up 25% of their pension savings as tax-free cash once they reach the minimum retirement age of 55) is overly generous and represents an easy target for increasing tax revenues. It has been reported that the government is contemplating reducing the maximum percentage of pension savings that can be taken as tax-free cash to 20%, or even imposing a cap on the value of the funds that can be withdrawn in a tax-efficient manner.
However, in both instances, no policy statement has been published or leaked to date and no minister has stated that such a policy is imminent (and it tends to be the case these days that such policies are leaked ahead of their formal announcement). That said it is not beyond the realms of possibilities that such measures may be being contemplated by the Chancellor, George Osborne, ahead of his Autumn Statement on 4 December.
If you have any concerns regarding the rumours suggesting that the government may restrict the amount of savings that may be held in a tax-efficient wrapper and/or that they may reduce the amount of tax-free cash that may be taken at retirement, I recommend that you seek advice from a chartered financial planner as soon as possible. Such an adviser ought to be able to assist you in reviewing your current financial circumstances, understanding your objectives and assessing whether your existing arrangements are the most suitable in order to fulfil those objectives.
Q. I am a shareholder and the HR Director of my business. I am in the final stages of ensuring that the business complies with its obligations under the auto enrolment regime, which is going to result in a significant increase to our payroll costs. You can imagine my concern therefore when one of my peers stated this week that the minimum contribution rate is set to rise to 15%. Is this correct?
A. No.
There has been a reasonable amount of debate in the press recently regarding the minimum level of pension contributions that are to be made to a qualifying workplace pension scheme and, in particular, whether they are likely to produce the level of retirement income savers expect.
Many commentators have pointed to overseas examples, such as Australia, who went through a similar “auto enrolment” pensions experiment as long ago as 1987 and where membership is now compulsory and minimum contribution levels have been increased on several occasions.
I suspect that your contemporary may have caught sight of some of this press coverage and confused its commentary for policy announcements. In particular, the National Association of Pension Funds received a significant amount of coverage recently when its Chief Executive, Joanne Segars, called on the government to increase minimum contribution levels to 15% of salary. Ms Segars argued that the statutory minimum of 8% will fail to deliver “a sufficient pension for savers” and called upon the government to set those contribution levels on an upward trajectory.
However, despite calls from a number of quarters for the government to increase minimum contribution levels (particularly on the part of employers), there are no plans afoot (at least not that have been announced) to increase minimum contributions beyond the levels at which they will be when the auto enrolment project is completed in 2018. That said I have to agree with the majority of industry figures who are suggesting that the current minimum contribution levels will fail to produce an adequate pension – and certainly will not meet people’s expectations.
I would not be surprised therefore if the minimum contribution levels are reviewed and increased once the roll out of auto enrolment is completed in 2018.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
