Philip Hammond’s first Autumn Statement on Wednesday didn’t contain any major tax or pensions changes that have any immediate impact on you. There was welcome news that pension tax relief remains untouched (at least for now) and it could be the perfect time to maximise funding and secure higher rate tax relief.
The key points from the statement were as follows:
Reduced Money Purchase Annual Allowance (MPAA)
The Chancellor announced just one cut to pension allowances this being that the MPAA is set to be cut from £10,000 to £4,000 from April 2017. This only affects those clients who have accessed their pension under the new pension flexibilities and continue to pay into their pension and relates to the maximum allowable pension contribution without suffering a tax charge.
For most this won’t be an issue. Just taking the tax free cash out of a pension, without drawing an income, doesn’t trigger the reduced annual allowance and anyone who was already in capped drawdown before 6 April 2015, and doesn’t exceed their ‘capped’ income limit, will also retain a £40k allowance. For many clients the first time they dip into their pensions will be the day they stop work so a drop in their annual allowance is of no significance. But some may wish to phase their retirement, perhaps by cutting their working hours, and may still wish to continue funding their pension. Remember also that if you have already accessed your pension flexibly you could be tripped up by auto-enrolment whereby you are automatically included in your employer’s pension scheme.
Some older pension schemes may only offer Uncrystallised Pension Funds Lump Sums (UFPLS), where each withdrawal is fixed as 25% tax free cash and 75% taxable income. This will automatically trigger the cut to the £4k allowance. Being in a modern flexible pension which offers the full range of flexible income options will help by allowing just tax free cash to be taken and retaining the higher allowance.
Salary sacrifice remains a tax efficient choice for pension savers
There will be no changes to the funding of pensions via salary sacrifice. This is good news for pension savers including all those who have chosen salary sacrifice as part of their auto-enrolment arrangements.
Salary sacrifice allows employees to boost their pension pots through savings in employer and employee National Insurance following an agreed reduction in pay.
Remedy for bond gain pain
Investment bond owners who unwittingly face a large tax charge as a result of surrendering part of their bond will have a remedy from 6th April 2017.
Many bonds are set up with multiple identical segments for flexibility on encashment, allowing each segment to be cashed in independently. But a large surrender can also be taken from all the segments which may lead to an unexpected chargeable gain which bears no resemblance to the actual investment performance.
As more bond providers adopt the ‘ABI best practice’ on surrenders, the number of cases slipping through the net and requiring rectification should be minimal. However, savers who find themselves in these circumstances will be able to apply to HMRC to have the gain recalculated on a ‘just and reasonable’ basis. Further detail on how this will work is expected in Finance Bill 2017.
Professional advice should continue to be given on the most appropriate way to withdraw funds.
IHT residence nil rate band
From April next year clients may be entitled to an extra £100k IHT nil rate band where the family home passes to direct descendants on death. (A full article on this subject will be issued next week).
Lifetime ISA introduction
As detailed in a recent article, under 40s will from April 2017 have a new savings option which can help them to get a foothold on the property. Up to £4,000 a year can be paid into the Lifetime ISA and receive a 25% Government bonus. First time house buyers can access their fund tax free prior to age 60.
£20k ISA Allowance
The ISA savings allowance is set to receive an above inflation increase. Savers will be able to enjoy an additional £4,760 of tax free savings.
Corporation Tax cut
The rate of Corporation Tax will be cut from 20% to 19% from 1st April 2017, with a further cut to 17% to follow in April 2020. Business owners may want to consider accelerated pension funding ahead of any rate cut to reduce profits which would otherwise by taxed at the higher rate.
Pension triple lock
The Government increases the State Pension each April by the higher of growth in average earnings, the Consumer Price Index (CPI) and 2.5%. This will remain in place at least until 2020 but presumably at that time the mechanism will be unlocked.
It was announced that a consultation will be held on ways to tackle pension scams including cold-calling.. The Treasury states that cold callers targeted 11 million pensioners last year and estimate that around £19 million had been lost to pension scams between the introduction of pension freedoms in April 2015 and March 2016.
2017/18 income tax rates and bands confirmed
The increase in the personal allowance in 2017/18 is confirmed as £11,500 and the higher rate threshold will rise to £45,000. Increases are planned to £12,500 and £50,000 respectively by 2020.