| Real Life Strategies for Building Wealth

2015 budget

Editor’s note: Today is budget day in the UK and I hope my readers from the US will forgive the very British targeted post; we Brits still get excited on budget day hoping and wishing that the budget will bring some good news. Today’s budget – budget 2015 – is celebrated by beer lovers for lowering the tax on beer by 1 pence per pint (okay sounds like a joke but it isn’t; except for the celebrating part) and tinkering with the horserace betting levy. Apart from that, the budget had some news for retirees. Tonight, my friend Ryan Smith discusses some of these: he is part of the content development team at My Retirement Options, guiding retirees through a changing pension market.

George Osborne’s final budget speech before the 2015 general election had a number of announcements that will affect pensioners across the UK.

Following on from last year’s speech, Osborne this year announced proposals to allow pensioners to cash in their annuities, in order to take advantage of the new freedoms, as well as cutting inheritance tax.

There was also a less than favourable cut to the lifetime allowance of tax free pension savings.

Here’s the biggest announcements for the budget 2015 that will affect retirees.

Last year’s announcements

The biggest announcement in the 2014 Budget speech was the radical overhaul to the pensions market.

The government were to lift the restrictions on income drawdown, allowing all retirees to access their pension savings as they desired. This completely negated the previous requirement for retirees to purchase an annuity – an insurance contract that used the buyer’s pension savings to guarantee a retirement income, often for life; the annuity market suffered accordingly.

As these pension freedoms come into effect on 6 April 2015, even more changes have been announced in this year’s budget in relation to the freedoms.

Cashing in your annuity

One the big announcements for this year is that the government will be extending the pension freedoms to approximately 5 million people who have previously purchased an annuity product.

The restrictions on buying and selling existing annuities will be lifted by the government in 2016. This will allow those pensioners who previously opted in to an annuity contract, the opportunity to sell the income they receive without unwinding the original contract.

This will then allow pensioners to use this money as they please: as a cash lump sum, or invested to be used under flexible income drawdown rules, that has its restrictions lifted in April.

At present, those looking to sell their annuity income to willing buyers face a massive 55% tax charge, increasing to 70% in some cases. The government will remove this charge, taxing people purely at their nominal income rate instead.

George Osborne is quoted as saying:

“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.”

Inheritance tax cuts

At present, there is a 40% tax to be paid on the inheritance of an estate above the value of £325,000; this can be transferred between married couples up to a value of £650, 000.

Today, a nil tax band was announced worth £175,000 per person on a family home, or other main residence. This can again be combined with a spouse up to the value of £350,000. The caveat on this is that it can only be counted on inheritance of a property by a direct descendent of the deceased: children, step children or adopted children.

This ties in with desires from the Conservative government to cut the inheritance tax payments required on homes valued at £1 million, by combining the current £650,000 limit with the new £350,000 relief.

Those with estates reaching this value will no longer have to fear their beneficiaries paying huge tax bills on their death: a situation that may be out of their control and is currently a major cause for concern as house prices increase, particularly in London and the South East.

Lifetime Pension Allowance Slashed

In a move affecting the bigger pension savers out there, the government is set to cut the lifetime allowance on tax-free pension savings.

The current lifetime allowance of £1.25 million will be slashed by 20%, to £1 million. This will apparently affect fewer than 4% of the market approaching retirement, while saving around £600million a year.

The limit was first introduced in 2006 and has already seen reductions over the years: last April saw a reduction from £1.5 million, following a reduction from £1.8 million in 2011.

This is one of the announcements that will likely be met with derision from savers, particularly as the idea was dismissed by George Osborne previously. When the same plan was outlined by Labour in order to cut the cost of tuition fees, Osborne described the suggestion as “neither progressive nor fair so we won’t do it”, before claiming that it would penalise moderately paid public sector workers such as doctors, dentists and civil servants.

Nigel Green, chief executive of the deVere Group already has some choice words on this policy:

“This move is a slap in the face for those who have worked hard and saved hard, prudently putting money aside all their lives, in order to be able to enjoy their desired retirement. It is a nothing short of a dangerous cap on aspiration.”

Just 50 days away from the 2015 General Election, and George Osborne has well and truly laid his cards on the table, in a bid to attract re-election votes for the Conservative party. While there are a number of benefits to pensioners, there is also a major negative, particularly to those who have worked hard to secure a financially stable future.

Has George Osborne done enough to help secure another 4 years for the Conservatives? We’ll find out exactly the impact these announcements have had in the coming months, in the wake of the Election.

photo credit: A man and his coracle on the Teifi River, near Cardigan via photopin (license)