Archive for the ‘Personal Planning’ Category

Plans to allow pensioners to sell annuities abandoned

Sunday, November 13th, 2016

The government has announced that it is shelving plans to allow pensioners to sell their annuities for a lump sum.

Many experts had predicted that those who sold their annuities would be likely to get a poor deal and the government has decided not to take forward the plans to introduce a secondary annuities market because the consumer protections required could undermine the market’s development.

It has become clear that creating the conditions to allow a competitive market to emerge could not be balanced with sufficient consumer protections.

The Economic Secretary to the Treasury, Simon Kirby, said:

‘Allowing consumers to sell on their annuity income was always dependent on balancing the creation of an effective market with making sure consumers are properly protected.

It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited.

Pursuing this policy in these circumstances would put consumers at risk – this is something that I am not prepared to do.

The government has always been clear that for the majority of people keeping their annuity incomes will be their best option, estimating that only 5% of people who currently hold an annuity would take advantage of this reform.’

Internet link: GOV.UK news

Government urged to delay the launch of Lifetime ISA

Tuesday, September 6th, 2016

The government is being urged by both pension providers and banks to delay the April 2017 launch of the new Lifetime ISA as they are warning that they will not be ready to offer the savings product by this time.

A new Lifetime ISA introduces a new type of savings account for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year and receive a 25% bonus from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.

Further details of the new account, which is expected to be available from 2017, are as follows:

  • Any savings an individual puts into the account before their 50th birthday will receive an added 25% bonus from the government.
  • There is no maximum monthly contribution and up to £4,000 a year can be saved into a Lifetime ISA.
  • The savings and bonus can be used towards a deposit on a first home worth up to £450,000 across the country.
  • Accounts are limited to one per person rather than one per home, so two first time buyers can both receive a bonus when buying together.
  • Where an individual already has a Help to Buy ISA they will be able to transfer those savings into the Lifetime ISA in 2017, or continue saving into both. However only the bonus from one account can be used to buy a house.
  • Where the funds are withdrawn at any time before the account holder is aged 60 they will lose the government bonus (and any interest or growth on this) and will also have to pay a 5% charge.
  • After the account holder’s 60th birthday they will be able to take all the savings tax-free.

In the article published by This is Money pension providers Aegon and Standard Life have stated that they have delayed their plans until final details regarding the Lifetime ISA are released.

The Financial Conduct Authority (FCA) is yet to consult on the initiative. Steven Cameron, Pensions Director at Aegon, stated that a consultation is ‘likely to take three months’ to carry out.

Meanwhile, a spokesperson for Standard Life said: ‘As we want the Lifetime ISA to be a success, we would prefer that its launch is delayed until providers receive more detail on the product and how it is to be implemented.’

The Treasury is expected to confirm full details in the autumn.

Internet link: Article

March is here which means your year end is fast approaching….

Tuesday, March 1st, 2016

If your company has a 31 March year end, you only have a few weeks to consider available planning options that may save you tax for the current financial year 2015-16. There are also a number of practical matters that should be considered. They include:

Directors

• Are there any monies owed to the company by directors?
• If the amounts owed exceed £10,000 has interest been charged on any balances owing? If not, beneficial interest will need to be declared on form P11D for 2015-16.

Dividends

• Is the correct paperwork in place: dividend vouchers and board minutes?
• Have dividends been paid out of distributable reserves?
• Have all dividends voted been paid or credited to a loan account?

• Are you prepared for the Dividend Changes coming? Click here to learn more

Salaries

• Were any outstanding salaries or bonuses claimed in the 2014-15 accounts paid within 9 months of the year end? If not, the deduction for corporation tax will be disallowed.
• Have bonuses been considered for 2015-16? Would it be prudent to defer voting bonuses to assist with personal tax planning issues? For example, reducing taxable income for 2015-16 may save tax allowances if the intended bonus increased total income above the critical £100,000 ceiling.

Company car users

• Have steps been taken to recover the full cost of any private fuel paid to company car users during 2015-16? This needs to be completed by 5 April 2016 to avoid possibly significant car fuel benefit charges for the employee and NIC Class 1a contributions for the company.

Pension contributions

• Make sure that any company contributions for 2015-16 clear the company bank account before the yearend.

Deferring significant costs or fixed asset investment

• Consider deferring or bringing forward, significant revenue costs (for example allowable repairs to plant or other equipment).
• Consider deferring or bringing forward, significant capital costs (for example equipment or commercial vehicles).

Losses

• Consider tax strategies to take advantage of past or current year losses.

 

Get In Touch

This list is by no means conclusive, but if there is anything that you’d like to discuss further then do not hesitate to contact us on 01782 566101 if you would like to set-up a planning meeting.

The sooner the better – the clock is ticking…

State Pension ‘top up’ scheme

Thursday, November 5th, 2015

A new scheme is being launched offering anyone reaching State Pension age before 6 April 2016 a chance to increase their State Pension by up to £25 a week.

People are eligible if they are entitled to a UK State Pension and have already reached their State Pension age or reach it before 6 April 2016. This includes men born before 6 April 1951 and women born before 6 April 1953.

The scheme will remain open for 18 months and those who think they can benefit will be able to buy additional State Pension, worth up to £1,300 a year. In most cases, surviving spouses and civil partners will be able to inherit at least 50% of the extra pension.

Minister for Pensions, Baroness Altmann said:

‘This government’s commitment is to provide security for working people at every stage of their lives, and that includes giving people the chance to enjoy a financially secure retirement. We have already committed to protecting pensioner incomes with the triple lock – uprating the basic State Pension by at least 2.5% each year of this Parliament. The new State Pension, coming in from April 2016, will ensure a simpler, more sustainable State Pension for the pensioners of tomorrow.

Top up is an opportunity for people already retired, or reaching State Pension age before April 2016, to boost their later life income. It won’t be right for everybody and it’s important to seek guidance or advice to check if it’s the right option for you. But it could be particularly attractive for those who haven’t had the chance to build significant amounts of State Pension, particularly many women and people who have been self-employed.’

Anyone who thinks they might benefit should seek advice and can use the online calculator to help them find out more. More information on State Pension top up and how to apply is available at www.gov.uk/statepensiontopup.

Auto enrolment ‘engagement’ and calculation tool

Wednesday, September 9th, 2015

The Pensions Regulator (‘TPR’) has announced that following consultation they will develop a basic automatic enrolment tool. The basic tool should be available to download from TPR’s website by the end of 2015.

TPR consulted earlier this year on proposals to develop a basic tool to support those employers who use HMRC’s Basic PAYE Tools (BPT) to carry out their payroll function. HMRC’s BPT are used by many small employers to calculate PAYE, national insurance contributions and statutory payments such as Statutory Maternity Pay but has no pension function.

According to the TPR approximately 200,000 small and micro employers who use BPT are due to stage over the next two and half years and TPR’s experience indicates that using appropriate software either through payroll or pension provider systems helps employers to comply with their duties.

The majority of consultation responses were supportive of the TPR’s proposal, although some payroll firms and pension schemes were against the regulator developing a new tool.

Executive Director for Automatic Enrolment Charles Counsell said:

‘We will continue to recommend that BPT users consider using software with integrated automatic enrolment functionality, but by developing this basic contribution calculation tool we aim to ensure that BPT users have access to the help they need to support compliance.

The decision to develop a basic tool is recognition that significant numbers of BPT users will not seek a more integrated solution and will attempt manual calculations. This is another example of how The Pensions Regulator seeks to develop new ways to ensure we are meeting the needs of the diverse group of employers due to stage in the coming years.’

TPR has also issued the third edition of ‘Automatic enrolment: Commentary and analysis’, which reports on the impact of automatic enrolment and the increasing participation in workplace pension schemes. The commentary states:

  • By March 2015, over 5.2 million workers had been successfully automatically enrolled since the reforms began in 2012, an increase of more than 2.2 million workers from 2014, and 4.2 million from 2013.
  • Automatic enrolment is helping to turn around the decade-long decline in pension provision, with 59% of all employees now active members of a pension scheme, compared with just 47% in 2012. This increase suggests that pension saving is now becoming the norm.
  • The pensions landscape has been transformed as the majority of people are enrolled into defined contribution schemes. We have witnessed the growth in master trusts – 94% of employers who chose a trust-based scheme opted for a master trust.
  • We now expect that significantly more employers will be subject to automatic enrolment duties than originally anticipated, mainly due to an increase in the number of new companies that have started up, and fewer going out of business than was forecast. We have revised the staging profile accordingly, so that it reflects the 1.8 million employers we expect to help through the automatic enrolment process from now until 2018.

If you would like help with your payroll or advice on Pensions Auto Enrolment please contact us.

Summer Budget Summary

Monday, July 13th, 2015

In this post we focus on tax changes announced in the Summer 2015 Budget which outlined the tax plans of the new Conservative government to be introduced over the next 5 years.

 

New “National Living Wage” Tax Credit Changes

The most radical announcement by the Chancellor on 8th July was a significant reduction in the amount the government plans to spend on tax credits and other State benefits. At the same time he announced that there would a new national living wage to be paid by employers, rising to £9 an hour by 2020. This strategy combined with the increase in the personal allowance to £11,000 for 2016/17, and eventually £12,500, means that employees will keep more of what they earn but the tax credits received to top up their income will be significantly reduced.

Employers will need to assess the impact of this change on the profitability of their business and we can help you consider this in more detail as there are other factors such the increase in the employment allowance to £3,000 next year and the planned reductions in the corporation tax rate that may also be relevant to your business.

 

Corporation Tax Rate to be cut to 18%

The current UK corporation tax rate of 20% is the lowest rate in the G20, the 20 major trading nations. This rate continues to apply until 2017 when it has been announced that the rate will be reduced to 19% and then 18% in 2020.

This appears to make trading via a limited company more attractive but note that there are significant changes to the taxation of dividends that take effect from 6 April 2016.

 

Changes to Taxation Dividends

The Chancellor has announced that from 6 April 2016 there will no longer be a notional tax credit associated with dividends received and the following rates will apply after a £5,000 tax free dividend allowance:

Basic rate taxpayers – 7 ½%
Higher rate taxpayers – 32 ½%
Additional rate taxpayers – 38.1%

This will mean that from 2016/17 individuals will be able to receive up to £17,000 tax free:

Personal allowance £11,000
Tax free interest £1,000
Tax free dividends £5,000

 

Impact of Changes to Dividend Taxation on Family Companies

A common strategy that we often advise to family company director/shareholders is that they extract profits from their company by way of dividends instead of paying themselves a salary. This is because there are no national insurance contributions on dividend payments and where the dividend income falls within the basic rate band (up to £42,385 for 2015/16) there is currently no income tax on dividends.

Where both husband and wife are directors and shareholders they will be able to pay themselves a salary of £11,000 each and then dividends of £5,000 each tax free. However the next £27,000 of dividends up to the new £43,000 higher rate threshold would be taxed at 7 ½ % resulting in income tax of £2,025 each being payable for 2016/17. Under the current rules there would be no tax on such dividends up to £42,385.

This measure has been introduced to counter tax-motivated incorporation to level the playing field between trading via a company versus an unincorporated business.

Note that dividends received in excess of the £43,000 higher rate threshold will be taxed at 32.5 % but without a notional credit thus increasing the effective rate from the current 25% to 32.5%.

 

 

Annual Investment Allowance set permanently at £200,000

The annual investment allowance (AIA) was due to be reduced from the current temporary level of £500,000 to just £25,000 from 1 January 2016.

The Chancellor has bowed to pressure from industry to stop tinkering with this allowance for expenditure on plant and machinery and set it at a permanent level so that businesses can plan their capital expenditure. He has decided on £200,000 for the new limit and businesses should consider bringing forward expenditure to before 1 January 2016 to benefit from the current higher allowance.

 

 

Buy to Let Landlords – Interest Relief to be Restricted to Basic Rate

The Chancellor announced that the amount of income tax relief landlords can get on residential property finance costs (such as mortgage interest) will be restricted to the basic rate of tax.

To give landlords time to adjust, the change will be phased in gradually over 4 years:

2017/18 – the deduction will be restricted to 75% of finance costs, with 25% being available as a basic rate tax reduction.

2018/19 – 50% finance costs deduction and 50% given as a basic rate tax reduction

2019/20 – 25% finance costs deduction and 75% given as a basic rate tax reduction

From 2020/21 – all financing costs incurred by a landlord will be given as a basic rate tax reduction.

 

Rent a Room Limited increased to £7,500

The current £4,250 limit for tax free rental income from lodgers is to be increased to £7,500 from 6 April 2016. The relief is only available where individuals rent out a room in their main residence and the allowance includes heating and other services provided to the lodger.

 

Pension Tax Relief Restricted for Higher Earners

As mentioned in the Conservative party manifesto, tax relief for pension contributions is to be restricted for those with income in excess of £150,000 a year. We were told that this is intended to fund the increase in the inheritance allowance for passing on the family home.

The current £40,000 pension annual allowance will be reduced by £1 for every £2 of income in excess of £150,000 down to a minimum of £10,000 at £210,000 of income. So, for example, where an individual has income of £170,000 in 2016/17, the £40,000 annual allowance would be reduced to £30,000.

Note also that, as already announced, the pension lifetime allowance is due to be reduced from £1.25 million to £1 million from 6 April 2016 with transitional protection for those with pension savings in excess of the new limit.

The Chancellor also announced in the July Budget that there would be a further review of pension savings and pensions taxation.

Contact us if you need advice on pension planning and how the new pension rules will impact on you personally.

 

Inheritance Tax and the Family Home

As mentioned last month the Chancellor has confirmed the introduction of an additional inheritance allowance that will be available in addition to the current £325,000 nil rate band which will, when fully phased in, allow a couple to pass on the family home tax free up to a value of £1,000,000. The additional allowance, which will also be transferrable to the surviving spouse, will start at £100,000 for 2017/18. The allowance will then increase to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21.

Unfortunately the Chancellor also announced that the inheritance tax nil rate band will be frozen at £325,000 until 6 April 2021.

The main residence nil band is subject to a taper where the amount being left is more than £2,000,000 with £1 of the family home allowance being lost for every £2 of estate value over £2,000,000. This clawback is based on the value of the estate before reliefs such as business property relief and agricultural property relief and may result in some additional complications and redrafting of Wills.

If this change is likely to affect your family circumstances you may wish to arrange a meeting with us to consider the impact on your Will and your family’s inheritance tax position.

 

Changes Affecting Non-Domiciled Taxpayers

The Chancellor announced a number of important changes to the tax treatment of individuals who are resident but not domiciled in the UK. Such individuals currently benefit from a number of tax advantages such as exemption from UK inheritance tax (IHT) on assets situated outside the UK and in some cases only being taxed on overseas income and gains if those amounts are remitted to the UK.

From April 2017, IHT will be payable on all UK residential property owned by non-domiciles, regardless of their residence status for tax purposes, including property held indirectly through an offshore structure.

From April 2017, individuals who are born in the UK to parents who are domiciled here, will no longer be able to claim non-domicile status whilst they are resident in the UK.

The government will also legislate so that from April 2017 anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed to be domiciled in the UK for all tax purposes. This is being reduced from the current 17 year deemed domicile rule for IHT.

Annual Investment Allowance

Thursday, April 30th, 2015

The most generous tax allowance presently available to businesses that encourages direct investment in new plant, equipment and commercial vehicles, is the Annual Investment Allowance (AIA).

If you buy qualifying assets you can write off the expenditure against your taxable profits in the same accounting period. The present limit to this allowance is generous, £500,000.

The AIA is due to reduce from 1 January 2016, and unless Parliament set a new limit from that date, it will revert to a paltry £25,000.

Consequently, business readers who are contemplating an investment in new plant and equipment should take this AIA into account when making a decision to invest.

Entrepreneurs that stand to gain the greater advantage are the self-employed: sole traders, partnerships and LLPs, who may be faced with income charges at the 40% or 45% rates in the tax year 2015-16.

For incorporated businesses and self-employed traders paying tax at the standard rate of income tax, the tax savings will be limited to 20% of qualifying expenditure.

Certainly, we do not advise making investment decisions based solely on any tax advantages that may flow from the investment. Due regard should be taken of the effects on profitability, cash flow and future business growth.

If you would like to discuss how this relief could benefit your business, we would be happy to discuss your options. Planning for large investments is key. Do not make decisions without considering all the effects. Please call if you would like to discuss these matters in more detail.

April – Monthly Round Up

Tuesday, April 7th, 2015

Budget 2015

George Osborne presented the final Budget of this Parliament on Wednesday 18 March 2015.

In his speech the Chancellor reported ‘on a Britain that is growing, creating jobs and paying its way’.

Towards the end of 2014 the government issued many proposed clauses of Finance Bill 2015 together with updates on consultations. Due to the dissolution of Parliament on 30 March some measures have been legislated for in the week commencing 23 March, whilst others will be enacted by a Finance Bill in the next Parliament (depending on the result of the General Election).

The Budget proposed further measures, some of which may only come to fruition if the Conservative Party is in power in the next Parliament.

The articles which follow summarise some of the key changes.

Internet link: GOV.UK Budget

Personal tax rates and allowances

For those born after 5 April 1938 the personal allowance will be increased to £10,600. For those born before 6 April 1938 the personal allowance remains at £10,660.

The reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 will continue. The reduction is £1 for every £2 of income above £100,000. So for 2015/16 there is no personal allowance where adjusted net income exceeds £121,200.

Tax bands and rates for 2015/16

The basic rate of tax is currently 20%. The band of income taxable at this rate is being decreased from £31,865 to £31,785 so that the threshold at which the 40% band applies will rise from £41,865 to £42,385 for those who are entitled to the full basic personal allowance.

The additional rate of tax of 45% is payable on taxable income above £150,000.

Dividend income is taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. Where income exceeds £150,000, dividends are taxed at 37.5%.

Starting rate of tax for savings income

From 6 April 2015, the maximum amount of an eligible individual’s savings income that can qualify for the starting rate of tax for savings will be increased from £2,880 to £5,000, and this starting rate will be reduced from 10% to 0%. These rates are not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

This will increase the number of savers who are not required to pay tax on savings income, such as bank or building society interest. Eligible savers can register to receive their interest gross using a form R85.

Internet link: GOV.UK Budget

Proposed personal allowances to come

The Chancellor announced that the personal allowance will be increased to £10,800 in 2016/17 and to £11,000 in 2017/18. The Transferable Tax Allowance will also rise in line with the personal allowance, being 10% of the personal allowance for the year.

The higher rate threshold will rise in line with the personal allowance, taking it to £42,700 in 2016/17 and £43,300 in 2017/18 for those entitled to the full personal allowance.

Personal Savings Allowance

The Chancellor announced that legislation will be introduced in a future Finance Bill to apply a Personal Savings Allowance to income such as bank and building society interest from 6 April 2016.

The Personal Savings Allowance will apply for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year. The Personal Savings Allowance will not be available for additional rate taxpayers.

These changes will have effect from 6 April 2016 and the Personal Savings Allowance will be in addition to the tax advantages currently available to savers from Individual Savings Accounts.

The Personal Savings Allowance will provide basic and higher rate taxpayers with a tax saving of up to £200 each year.

Internet link: GOV.UK News

Help to Buy ISA

The government has announced the introduction of a new type of ISA, the Help to Buy ISA, which will provide a tax free savings account for first time buyers wishing to save for a home.

The scheme will provide a government bonus to each person who has saved into a Help to Buy ISA at the point they use their savings to purchase their first home. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings.

Help to Buy ISAs will be subject to eligibility rules and limits:

  • An individual will only be eligible for one account throughout the lifetime of the scheme and it is only available to first time buyers.
  • Interest received on the account will be tax free.
  • Savings will be limited to a monthly maximum of £200 with an opportunity to deposit an additional £1,000 when the account is first opened.
  • The government will provide a 25% bonus on the total amount saved including interest, capped at a maximum of £3,000 which is tax free.
  • The bonus will be paid when the first home is purchased.
  • The bonus can only be put towards a first home located in the UK with a purchase value of £450,000 or less in London and £250,000 or less in the rest of the UK.
  • The government bonus can be claimed at any time, subject to a minimum bonus amount of £400.
  • The accounts are limited to one per person rather than one per home so those buying together can both receive a bonus.
  • As is currently the case it will only be possible for an individual to subscribe to one cash ISA per year. It will not be possible for an account holder to subscribe to a Help to Buy ISA with one provider and another cash ISA with a different provider.
  • Once an account is opened there is no limit on how long an individual can save into it and no time limit on when they can use their bonus.

The government intends the Help to Buy ISA scheme to be available from autumn 2015 and investors will be able to open a Help to Buy ISA for a period of four years.

Internet link: GOV.UK factsheet

Pension freedoms for those with annuities

The Chancellor has announced a new flexibility for people who have already purchased an annuity. From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity for a capital sum.

Individuals will then have the freedom to take that capital as a lump sum, or place it into drawdown to use the proceeds more gradually.

Income tax at the individual’s marginal rate will be payable in the year of access to the proceeds.

The proposal will not give the annuity holder the right to sell their annuity back to their original provider. The government has begun a consultation on the measures that are needed to establish a market to buy and sell annuities and who should be permitted to purchase the annuity income.

The government recognises that for most people retaining their annuity will be the right choice. However, individuals may want to sell an annuity, for instance to pay off debts or to purchase a more flexible pension income product.

We will keep you informed of developments.

Internet link: GOV.UK News

National Minimum Wage rises

The National Minimum Wage (NMW) is a minimum amount per hour that most workers in the UK are entitled to be paid. NMW rates increases come into effect on 1 October 2015:

From 1 October 2015:

  • the adult rate will increase by 20 pence to £6.70 per hour
  • the rate for 18 to 20 year olds will increase by 17 pence to £5.30 per hour
  • the rate for 16 to 17 year olds will increase by 8 pence to £3.87 per hour
  • the apprentice rate will increase by 57 pence to £3.30 per hour

Penalties

Penalties may be levied on employers where HMRC believe underpayments have occurred and HMRC ‘name and shame’ non-compliant employers.

If you have any queries on the NMW please get in touch.

Internet links: GOV.UK News

Some of the Budget changes March 2015

Thursday, April 2nd, 2015

Following last week’s Budget, the government has published the Finance Bill 2015. The bill implements tax changes announced at Budget 2014, Autumn Statement 2014 and Budget 2015.

It includes action by the government to support hardworking families keep more of their hard-earned money by:

  • increasing the personal allowance by an extra £400 to £11,000 from April 2017 so that a typical rate taxpayer will be £905 better off compared to 2010, and an individual on the National Minimum Wage working up to 30 hours a week will not pay any income tax
  • exempting children from Air Passenger Duty so that, taken together with measures introduced in Finance Act 2014, a family of four flying to Australia will save £194

The bill also contains key policies to make the UK more competitive for business, such as:

  • supporting investment in the crucial UK oil and gas industry through cutting the Supplementary Charge by 12%, cutting the Petroleum Revenue Tax from 50% to 35% and introducing two new allowances
  • increasing the tax credits available for large and small businesses investing in research and development
  • a new tax relief to promote the production of children’s TV in the UK, and further support for high-end TV and film tax.

Finally, the bill legislates to create a fairer tax system, by clamping down on tax avoidance and ensuring that banks contribute their fair share. This includes:

  • introducing a new Diverted Profits Tax of 25%, aimed at multi-national companies that artificially shift their profits offshore to avoid paying UK tax
  • putting a stop to unfair tax avoidance – raising nearly £2.5 billion by 2019/20 to support the economic recovery
  • increasing the bank levy and introducing new rules for banks – raising nearly £8 billion over the next 5 years

David Gauke, Financial Secretary to the Treasury, said:

The government is committed to supporting hardworking families and backing business. That is why we are making it easier for them to keep more of their hard earned money and access the help they need to grow.

The legislation published today builds on our efforts to create a stable tax system that supports our long-term economic plan.”

The measures contained in the bill were announced by the Chancellor at Budget 2014, Autumn Statement 2014 or Budget 2015.

Pension freedoms to be extended to annuitants

Monday, March 23rd, 2015

The Chancellor has announced that the government will extend its pension freedoms to around 5 million people who have already bought an annuity.

From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract.

Pensioners will then have the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms announced in Budget 2014. They can either take it as a lump sum, or place it into drawdown to use the proceeds more gradually.

The new flexibilities build on the radical reforms announced in last year’s Budget, and due to come into effect on 6 April, which allow people to make their own, informed choice about what they do with their savings in retirement. This could include being able to draw down from their defined contribution pension pots a bit at a time or taking their pension as a lump sum.

Chancellor of the Exchequer George Osborne has said:

“There are 5 million pensioners who are locked into annuities they have already bought. They should have the same freedoms as we have given everyone else.

For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose – the same freedom we are offering those approaching retirement in April this year.

So I am going to change the law to let that happen, and make sure we have the right guidance in place.

People who’ve worked hard and saved hard all their lives should be trusted with their own pension.”

Currently people wanting to sell their annuity income to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this charge, so people are taxed only at their marginal rate.

To ensure people are in a position to make an informed decision, the government will be working with the Financial Conduct Authority (FCA) to introduce appropriate guidance and other consumer protection measures.

For the great majority of customers, selling an annuity will not be the right decision. However individuals may want to sell an annuity for instance to provide a lump sum for relatives or dependants; pay off debts; in response to a change in circumstances for example getting divorced or remarried; or to purchase a more flexible pension income product instead.

On Wednesday, 18 March, the government will launch a consultation on the measures that are needed to establish a market to sell and buy annuities.