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Tony Mudd: Take care advising clients who want full pension withdrawal

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Half an hour in to George Osborne’s recent Budget speech, the most remarkable factor, almost unique, in recent times, was the absence of leaked material. Perhaps this would be yet another bland Budget, few changes, fewer implications and perhaps most importantly of all, little in the way of Budget commentary drafting.

There were, of course, some interesting announcements before we got to the main event, including changes to the savings rate band, the new Isa annual allowance and transfer rules, and changes to VCT and EIS investing.

Budget 2014 personal taxation changes

  • A reduction in the saving tax rate from 10 per cent to 0 per cent and an increase in the savings rate band to £5,000, both from 2015/16
  • Minor tweaks to personal allowances for 2014/15 and 2015/16 and changes to the transferrable tax allowance for married couples for 2015/16 – albeit for middle earners largely tax neutral
  • The annual investment allowance being doubled to £500,000 from April 2014, to 31 December 2015 will be of real interest to businesses, subject to commercial considerations, who are able to make qualifying expenditure during this period or bring such expenditure forward
  • Changes to VCTs and EIS and SEIS, which continue their remarkable journey from being on the periphery to being mainstream tax and investment solutions. Probably the most significant of the changes relates to VCTs and EISs benefiting from Renewables Obligation Certificates and Renewable Heat Incentives, principally solar. SEIS will now be made permanent which is a welcome, if not entirely unexpected, announcement
  • The reform of Isas with a new £15,000 annual contribution limit and the ability to transfer in both directions between stocks and shares and cash.

Then the “bombshell” that had my pension colleagues as excited as I’ve seen them since … well, actually ever. 

In summary, the Budget removed virtually all restrictions on how retirees can access their defined contribution pension pots. While specialist annuity providers may not have greeted the proposals with much enthusiasm it was a stroke pure genius.

In one move, the Chancellor fixed what was perceived as a broken annuity market,  made pensions a considerably more attractive investment vehicle and in so doing will make individuals less reliant on the state and has opened up greater possibility for product development in the later life market. 

Not only that but he has achieved all of this with the Treasury, in the short term at least, being a net beneficiary, to assist with the deficit.

Over-simplifying reality

A lot has been written about the death of annuities and while it would be easy to point out that compulsory annuitisation has already been abolished and that this did not destroy the annuity market, this would be an over-simplification of reality.

However, I would also dismiss those commentators who have said annuities will still be the product choice of many. 

If the average pension pot is £30,000, do we really expect people will buy an annuity with £22,500 or even that it is in their interest to do so.

The annuity market will survive although in a much smaller form. It will refocus, redevelop, innovate and have to work harder for client’s money.

Statement Webb will regret

One final thought. The pension minister’s now infamous statement made the day after the Budget that individuals would be at liberty to use their pension pot to buy a Lamborghini (second hand I assume on £30,000) and then rely on the state is something I believe he will live to regret.

Advisers may now find themselves in some difficultly steering a path between the need to avoid patronising their clients who may wish to withdraw greater funds than is sensible and those who will take such action but return saying “you shouldn’t have let me do that”. 

The FCA and indeed PI Insurers will certainly be looking at this area with interest.

Tony Mudd is divisional director of tax and technical support at St James’s Place

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  1. Well said Tony, this Pandora’s Box is now wide open.

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