Q. I am a higher rate taxpayer and a regular saver. I was pleased to read last week’s answer regarding the increase to the amount of interest I can earn on my savings before I have to pay tax on that interest. However, did the budget have any impact upon my ability to make tax-free savings?
A. Yes.
At present, an individual can save a maximum of £11,520 into an ISA during the tax year (i.e. from 6 April 2013 to 5 April 2014). This allowance can be invested entirely into a stocks and shares ISA or a combination of a stocks and shares ISA and a cash ISA. However, the maximum amount a person can save into a cash ISA in the current tax year (that ends on Saturday) is £5,760 (i.e. 50% of the annual ISA allowance).
During his recent budget, the Chancellor of the Exchequer, George Osborne, announced that he is set to simplify the tax-efficient savings regime by introducing a new form of tax-efficient savings account with effect from 1 July 2014. “New Individual Savings Accounts” or “Nisas” (though they have been dubbed “Super ISAs” by the press) will enable individuals to save up to £15,000 per year in a tax-efficient manner.
There are a number of differences between Nisas and the current ISA regime. Most notably, an individual will be able to invest the entirety of their savings (up to the £15,000 per year allowance) in cash, meaning that the annual allowance for tax-efficient cash savings will almost treble.
Furthermore, savers will be able to transfer their money easily between stocks and shares and a cash/deposit account, enabling savers to seek the very best return on their savings and providing them with the ability to de-risk their savings as they approach retirement or in the event that they anticipate a fall in the stock markets (at present, cash ISAs can be transferred into a stocks and shares ISA, but savings cannot be transferred from a stocks and shares ISA to a cash ISA). Peer-to-peer lending (not currently available under an ISA) will also be permitted in a Nisa.
The Chancellor announced also that the annual limit on investments into a Junior ISA – a similar, long-term, tax-efficient savings account for children – will rise from £3,720 to £4,000 per year.
Q. I was a county councillor for one term and, as such, accrued a small pension benefit within the Local Government Pension Scheme. I had intended to transfer this into my SIPP (primarily to avoid me having to keep in touch with the LGPS/remember I have the benefit). However, a former colleague has suggested that the government has banned such pension transfers. Is this correct?
A. Yes. During his recent budget, George Osborne announced that the government will ban public sector workers – who are members of defined benefit pension schemes (i.e. final salary or career average salary schemes) – from transferring their accrued pension benefits to a defined contribution (often known as “money purchase”) pension. The government is considering imposing a similar ban upon members of private sector defined benefit pension schemes.
The ban – which will be set out in forthcoming legislation – has been introduced as a consequence of the changes the Chancellor made to pensions taxation and, in particular, his relaxation of the pension drawdown rules.
Because those changes mean that a pensioner will soon be able to access their money purchase pension savings in a manner that they deem appropriate for them, subject to paying income tax at their marginal rate, the government foresaw that a significant number of members of defined benefit schemes may wish to transfer their benefits to a money purchase scheme at or shortly before retirement so that they have greater flexibility in how they access those benefits.
This would have significant cost implications for the government and taxpayers, as the majority of public sector pension schemes are unfunded. The government is concerned also that this could mean that many people are disadvantaged, losing the certainty that a defined benefit pension provides and assuming the increased risk associated with defined contribution schemes.
Consequently, the government will prohibit members of public sector pension schemes transferring their accrued benefits from their public sector scheme to a money purchase arrangement “except in very limited circumstances” and only when the scheme member can demonstrate that “the risks and issues around doing so can be shown to be manageable”.
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
