One of the biggest beneficiaries of the pension freedoms introduced last year is set to be Her Majesty’s Revenue and Customs as savers rush to release £6bn from pension pots.

New figures from the Office for Budget Responsibility suggest the Treasury will net a windfall of £900m by April from tax paid by people accessing their pension savings in the first year of pension freedom – almost a third more than had previously been expected.

The pension rules changed last April meaning any direct contribution savers over the age of 55 could have unfettered access to their cash.

The Association of British Insurers (ABI) calculates that £3bn was paid out as lump sums to just over 213,000 people in the first nine months following the reforms and another £2.9bn was taken through income drawdown plans.

HMRC treats any income taken as if it were an annual income, pushing some savers into a higher income tax bracket when withdrawing large chunks.

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Professional Adviser

Some of the main headlines from last week’s Budget may have been about the Sugar Tax and the proposed change to Personal Independence Payments, but there was a lot more “under the hood” to take note of for taxpayers.

The Chancellor increased the higher rate income tax band from £42,375 to £45,000 and increased the personal allowance from £11,000 to £11,500 – a boost, according to George Osborne, for around 31m UK taxpayers. 

More surprising was the announcement that capital gains tax will reduce from 28% to 20% in April. However, this excludes residential property, which is where the majority of people make their largest gains. This is another blow to second home-owners and buy-to-let landlords, following the increases to stamp duty land tax announced in the last budget. Nevertheless, it will allow investors sitting on large gains in their portfolios to realise them at a lower rate.

The situation was a little more complex for the self-employed. Those operating limited companies will receive a benefit from lower rates of corporation tax. These will fall from their current level of 20% to 17% by 2020. The self-employed will also see an annual tax cut of over £130 following abolition of Class 2 National Insurance contributions, though changes are planned to class 4 contributions in order to ensure that benefits entitlement is retained.

The Chancellor also announced a raft of savings incentives. The ISA allowance will rise from £15,240 in the 2016/17 tax year to £20,000 in 2017/18 for all investors. The Junior ISA allowance will remain at its current level of £4,080. At the same time, the Chancellor also announce the launch of a ‘lifetime Isa’ for those aged between 18 and 40.

Up to £4,000 a year can be invested alongside an existing Isa (subject to the overall £20,00 limit) and investors will receive a 25% boost on their annual contribution from the Treasury up to the age of 50. The proceeds from the Lifetime ISA can be put towards a first home with a value of up to £450,000 or set aside for retirement from age 60. Investors can use the money for other purposes, but they will lose the government contribution and associated growth, plus be subject to a 5% surcharge. Many saw the death-knell for pensions in the new boost for Isas, but for the time being, they remained untouched.

Chancellor George Osborne has announced a raft of Budget 2016 measures to encourage saving for old age.

The annual ISA limit is to rise from £15,000 to £20,000, there will be a new “lifetime” Isa for the under-40s, with government putting in £1 for every £4 saved and there will be a new state-backed savings scheme for low-paid workers, worth up to £1,200 over four years.

The Money Advice Service, which has provided financial advice to consumers since 2010, is to also be abolished.

Meanwhile, some changes announced last year come into effect next month meaning UK savers will see radical change to the way their nest-eggs are taxed.

Anyone who earns interest on a savings or current account will no longer have 20% tax automatically deducted by their bank or building society.

They will instead be subject to a new Personal Savings Allowance (PSA), allowing them to earn up to £1000 a year tax-free.

As a result of the changes – announced in last year’s Budget – the government says that 95% of us will no longer have to pay any tax on savings.

In total, individuals will benefit by more than £1bn – the cost to the Treasury in 2016/17.

Basic rate taxpayers (20%) will be allowed an annual income of £1,000 in interest before they pay any tax. Those on the higher rate (40%) will have an allowance of £500 in interest.

Those on the top rate (45%) will have no allowance at all.

In the meantime those who earn less than £17,000 (including their savings income) will not have to pay any tax at all.

More info:

http://www.bbc.co.uk/news/uk-politics-35819797

http://www.bbc.co.uk/news/business-35799404

http://www.bbc.co.uk/news/business-35764028

There could be some welcome cheer for house buyers this Spring with signs that the mortgage market is opening up for borrowers with small deposits.

The range of mortgage products on offer is the widest for nearly eight years, with lenders increasingly willing to compete for riskier business.

According to Moneyfacts, the average two-year fixed-rate mortgage rate for buyers with a 10% deposit has fallen below 3%  for the first time since the Credit Crunch and there are now 845 products on the market for those seeking 90% loan-to-value.

The launch of schemes such as Help to Buy, which allows people to get on or move up the property ladder with deposits as low as 5%, has helped to boost competition between lenders at the low deposit end of the market.

More info:

 http://www.telegraph.co.uk/personal-banking/mortgages/mortgage-rates-for-borrowers-with-10pc-deposits-reach-all-time-l/

Low interest rates might be great news for borrowers but they can have a devastating effect on the long-term wealth of savers. Furthermore, when inflation runs in excess of interest rates, the buying power of your money will be eroded, even though the value of your capital might appear safe. You therefore need to keep a close eye on the amount of interest you are making on your hard-earned cash.

Nowhere is this more apparent than with cash Individual Savings Accounts (ISAs). Although interest rates on cash savings are generally low, there are numerous long-term fixed-rate cash ISAs that offer relatively attractive interest rates, so it’s worth shopping around to find the best deal. It is good practice to retain some cash in an easy-access deposit account to ensure you can cover unforeseen emergencies and short-term necessities, but there is no reason to tie up all your cash holdings in this type of account. Many ISA investors aim to leave their ISAs untouched for as long as possible in order to make the most of the benefits, and interest rates can be significantly higher for those who are willing to sacrifice some flexibility.

Life is hectic and it is all too easy to forget about your ISAs until the end of the tax year is looming. Rather than waiting until the eleventh hour, however, take the time to shop around now to find the best possible home for your money.

Chancellor George Osborne plans to mount an assault on pension tax relief for higher earners by introducing a lower, flat rate in the March Budget – according to reports.

Under the plans, the 40% and 45% rates of relief would be scrapped and replaced with a flat rate of between 25% and 33%.

In total, pension tax relief costs the Treasury £35 billion a year and a flat rate of 25% could raise about £6 billion.

Current pensions minister Ros Altmann has expressed support for a regime that leaves pensions income taxed because it stopped people withdrawing too much of their pension pots under the pension freedoms and a flat-rate of 25% would benefit lower earners paying a lower rate of income tax as it would effectively top up their pension contributions.

A rate that benefited people at the start of their careers would be consistent with Osborne’s comments in his Summer Budget speech, that ‘it’s time we looked at the other end of the age scale – at those starting to save for a pension’.

New Model Adviser

Nearly half of small businesses say they are not yet ready for pensions auto-enrolment with many firms complaining the additional burden is too great, according to a study.

The research, carried out by the Federation of Small Businesses, found that although smaller firms generally believe auto-enrolment will be good for their staff and that workers should save for the future, many are still unclear what they need to do, when they need to do it, and how much it will cost.

Three in four firms (76%) said auto-enrolment pensions put too much pressure on businesses like theirs.

Over the next two years more than a million small and micro businesses will need to set up a workplace pension for their employees under the Government’s automatic enrolment rules.

January sees the number of employers reaching their designated staging date – the date on which they need to start complying with auto-enrolment – rapidly ramp up with tens of thousands ‘staging’ each month in 2016 and 2017.

The FSB research found that firms which have already introduced a workplace pension reported average overall costs of £1436, with one in five business (19%) reporting costs upwards of £2000.

Although costs are likely to be higher for firms with more than 50 employees, the findings suggest that the smallest business could be underestimating the costs too.

When asked how they accommodated the cost of setting up a workplace pension, 70 per cent of businesses which had already done so said they absorbed the expense into general operating costs or accepted lower profits. However, a fifth (21%) said they had frozen or reduced wages in order to cover the cost of auto-enrolment.

Those firms yet to start auto-enrolment said they were more likely to be planning a wage freeze or cuts in response, with 30 per cent expecting to do so. This suggests that as the rollout reaches greater numbers of businesses, this could act as a further drag on pay growth as employers look to manage increasing costs.

http://www.fsb.org.uk/media-centre/press-releases/small-firms-under-pressure-with-auto-enrolment-surge

The Federal Reserve has increased interest rates in the US by 0.25% bringing some much needed Christmas cheer for savers and perhaps signalling to other national banks to follow suit.

In adjusting rates to 0.5% (from the historic low of 0.25%) the Fed said that the decision was based on the economy “expanding at a moderate pace”, with spending and investment increasing at “solid rates” and an improved housing sector.

In the UK, the question is thought to be when rather than if the Bank of England will raise rates.

Governor Mark Carney has remained tight lipped saying only that interest rates in the UK will remain ‘low for long’ and that any increase will be ‘limited and gradual’.

Historically, US and UK market interest rates, as measured by government bond yields, have moved in tandem and he UK’s economic recovery is said to be well on track, with solid growth and a strong labour market.

More coverage: 

The Guardian

FT

The UK state pension is one of the worst in the world, according to research comparing retirement provision among the globe’s wealthiest nations.

The report from the Organisation for Economic Co-operation and Development (OECD) found that Britain’s state pension pays out on average of 38% of what a recipient earned before they stopped work.

Across 34 countries, only Mexico and Chile are more miserly. Even the Government’s “triple lock” policy, which raises the state pension by whichever is highest of inflation, earnings growth or 2.5 per cent, fails to find favour with the OECD.

However, many countries around the world are struggling to maintain the value of state pensions, and the chances that any of them will be able to sustain current levels with people living longer are slim.

How are you placed? Do know what your pension will provide for you in retirement? Now may be the time to find out!

See how pension provision compares country to country:-

http://www.telegraph.co.uk/finance/personalfinance/pensions/12027972/Hands-off-our-pensions.html

Chancellor George Osborne’s revelation that he had found an extra £27bn of wriggle room for his Autumn Statement on Wednesday was good news for working families fearing a cut to Tax Credits and of modest benefit to state pensioners who will see a weekly rise of £3.35.

However, there was a sting in the tail for buy-to-let investors seeking to purchase property in England and Wales.

From 1 April 2016, higher rates of Stamp Duty Land Tax (SDLT) will be charged on purchases of “additional” residential properties (above £40,000), such as buy-to-let properties and second homes.

The higher rates will be 3 percentage points above the current SDLT rates, meaning a property purchase of £300,000 would face a top levy of 8 instead of 5%.

The rules will not apply in Scotland, however, further emphasising the disparity between the two markets.

The current rates came into force last April.

Update (16/12/2015):  Scotland’s Finance Secretary John Swinney has announced that property investors north of the border will also be subject to the extra 3%.

Delivering his budget, Mr Swinney said the supplement would be added to the purchase price of the property, on top of the existing Land and Buildings Transaction Tax (LBTT).

BBC News