Now the Conservatives have claimed victory, what can we expect with regards to pensions, tax and financial planning?
Although we are only just into the first full tax year living with the radical changes to the rules on pension drawdown and death benefits we can expect more change, with a special focus on trying to manage (read: reduce) the £20bn-plus net tax cost of pensions.
Stage one, the reduction of the lifetime allowance, was announced in the Budget but did not make the pre-election Finance Act.
The lifetime allowance is set to fall to £1m from 2016/17, with another raft of transitional protections introduced. There is scope now for some people near or over that limit to top up ahead of this change and then claim the latest protection for their fund. This change, it is thought, is likely to be incorporated in a second Finance Bill this year.
Meanwhile, in their manifesto, the Conservatives said they would reduce the annual allowance for pension contributions for those with incomes of over £150,000 by £1 for each £2 of excess income, down to a minimum allowance of £10,000 at incomes of £210,000 and above. On the basis of earlier changes to the annual allowance, contributions made before any government announcement will not be affected, so high earners may want to consider further contributions as soon as possible. Other ideas, such as flat-rate relief, merging the pension and Isa, and reducing or removing tax-free cash together with limitation or removal of the national insurance exemption on pension contributions have all been mentioned by various think-tanks. Further developments certainly cannot be ruled out.
When it comes to working out what other tax and financial planning changes we can expect to see we need to consider announcements made in the Budget but not yet legislated for as well as plans set out in the manifesto.
So what did not make the cut from the Budget in the pre-election Finance Bill?
The personal savings allowance
From 2016/17 this measure would give basic rate taxpayers an allowance of £1,000 for savings income (basically interest but also offshore investment bond gains). Higher rate taxpayers would receive an allowance of £500 – worth the same £200 saving in tax – but additional rate taxpayers get nothing. The main planning point is to consider, when making deposits (or realising offshore investment bond gains), when the income/gains will arise.
Pension annuity sales
This controversial idea is currently out for consultation but with the Conservatives back in power it should now become a reality from 2016/17.
Let’s also take a look at the commitments made in the Conservative manifesto. Alongside the plans for pensions described above it proposed many measures directly or indirectly affecting financial planning, including:
By 2020/21, the personal allowance would rise to £12,500 (cf £10,600) and the higher rate threshold would rise to £50,000 (cf £42,385). In practice, the Finance Act 2015 has legislated for personal allowance increases for 2016/17 (£10,800) and 2017/18 (£11,000). Osborne promised higher rate taxpayers would benefit fully from the increase, taking the higher rate threshold up to £42,700 in 2016/17 and £43,300 in 2017/18. Of course, the Chancellor could change this but the implications are that income tax reductions will be modest until 2018/19.
Main residence inheritance tax allowance
The annual allowance cut was designed to finance a main residence IHT exemption of £175,000, transferable between spouses and civil partners and phased out at the rate of £1 for each £2 of estate value over £2m. The effect for a couple is to give a total IHT exemption of up to £1m (2 x [£325,000 nil rate band + £175,000 main residence exemption]), assuming they own a home worth at least £350,000. It is unclear how this would operate if the home had to be sold because of a need for long-term care.
The Conservatives said they would further increase the tax on non-domiciled individuals (increases came into effect this year) but gave no numbers.
Anti-evasion and anti-avoidance
Like the other main parties, the Conservatives pledged to raise a considerable sum (£5bn a year by 2017/18) from anti-evasion and anti-avoidance measures. Also in line with the other parties, however, they gave very little indication how this would be achieved.
Annual investment allowance
This is currently due to fall from £500,000 to £25,000 from 1 January 2016. The Conservatives promise to set a “new, significantly higher, permanent level for the annual investment allowance” but, following the line Osborne adopted in the Budget, do not say what this would be.
So are we in for an extended period of pensions, tax and financial planning calm? It seems not. And let’s not forget our new pensions minister, who is bound to want to impose some of her own ideas on the wonderful world of pensions and retirement planning. There is also the recently announced second Budget on 8 July to look forward to…
Tony Wickenden is joint managing director at Technical Connection