As expected, the Budget omitted any fundamental reform to pension tax relief. However, as has been the case for virtually every other preceding Budget, it did include some surprises.
The two big ones for financial planners were the reduction of capital gains tax rates (from 28 per cent to 20 per cent for additional and higher rate taxpayers and from 18 per cent to 10 per cent for basic rate taxpayers) from 2016/17; and the introduction of the Lifetime Isa from 2017/18.
The latter, I believe, gives a glimpse of what the future for retirement savings might look like.
It has been widely rumoured the Chancellor is attracted to a taxed-exempt-exempt method of saving along the lines proposed by the Centre for Policy Studies. However, a combination of the extreme difficulty that the introduction of such a system would bring and the desire to avoid upsetting MPs or the public in the lead up to the EU referendum appears to have militated against any fundamental change at this stage.
Given the system of retirement saving operated to date has been one founded on an exempt exempt-taxed basis, most would agree that, at the very least, a move would require a lot more thinking. So although there is no fundamental change currently, many expect this issue to be revisited, possibly with the benefit of the experience of the Lifetime Isa – if not before then.
The announcement of the Lifetime Isa has caused some to question whether this is the beginning of the end for pensions. Well, it may signal the commencement of an experiment or it may signal the commencement of a parallel system to give the pension as we know it a run for its money.
This would, in effect, be leaving it to the consumer to decide without the Government having to do anything contentious. Interesting. Anyway, from next April choices will exist, assuming (as I think we safely can) that the pension has not been killed off by then.
The first choice for those with insufficient funds to adopt both routes would be between the Lifetime Isa and a pension. Both vehicles demonstrate some similarities (in relation to tax-free income and gains at fund level) but there are also serious differences in relation to tax relief on contributions (available for payments into pensions but not for Lifetime Isa contributions).
Then there is the Government bonus: a kind of front-end tax relief substitute in a “flat rate” kind of way characterised as a monetary addition to the investor’s “retirement fund”. This bonus is available for the Lifetime Isa, subject to reclaim of the “bonus element” of the investment fund. This bonus element would include the growth on the bonus invested to date and a penalty of (presumably) 5 per cent of that element on most encashments before age 60.
Obviously, encashment after a minimum holding period of 12 months to fund a deposit for the purchase of a first home worth up to £450,000 would not trigger a charge. There is also a stark difference in the taxation of the benefits: 75 per cent of the fund taxed from the pension and tax-free payments from the Lifetime Isa. Lastly, the pension is inheritance tax free and the Lifetime Isa is not.
There is also the Help to Buy Isa versus Lifetime Isa choice. Not quite as stirring as Batman versus Superman or even Arsenal versus Spurs (always a non-contest in the end of course) but important nonetheless.
In the meantime, the long-standing Isa versus pension choice remains. Capital gains tax and dividend change turns the spotlight onto the bonds versus collectives debate: one of the longest running in financial services. These changes should cause advisers to review best practice in relation to this most important of choices.
The £5,000 dividend allowance, continuing annual CGT exemption and reduced CGT rates should result in review and, if necessary, recalibration. If dividends from the portfolio in question are within the allowance, then this plus the CGT exemption plus lower tax on realised gains makes investing via unwrapped collectives fiscally appealing.
If your dividends in the portfolio exceed your allowance, what then? Well, that is where the tax deferment qualities of the bond might come in handy. And let us not forget onshore versus offshore bonds in this context.
The reduced CGT rates for 2016/17 may also have caused some to defer realising a capital gain on a disposal until after 5 April 2016.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn