Here we are at session number 53 , and we’re going to be talking about one of the most radical budgets in history from a personal finance perspective. Last week I said that I wasn’t expecting anything too radical in the budget, but if it turned out I was wrong and that there was some good stuff to talk about, then I might, possibly, devote this week’s show to it.

Well it turned out that after 45 minutes of fairly boring, self-congratulatory stuff about the state of the economy and the jobs markets, the Chancellor proceeded to make sweeping changes to the at-retirement pensions market and also introduce some good news for savers. There’s lots to talk about…

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But first…

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Introduction

I was tempted to put out this session late last week, as a kind of bonus, but I wanted to give time for the dust to settle and get my head around all that the announcements mean. Plus I wasn’t all that well last week so the extra effort might have finished me off!

Let’s waste no time with preamble and dive straight into what you need to know about what was announced last week.

Oh, by the way. The only link you need to remember is the one for this week’s show notes, and they are at meaningfulmoney.tv/session53

Everything you need to KNOW

So, let's deal with everything you need to know in three parts, first, we’ll look at some miscellaneous stuff:

1 – Miscellaneous

Getting the least interesting stuff out of the way first, the Chancellor made these announcements:

The personal allowance will rise to £10,500 from April 2015. We already knew that it will rise to £10,000 this April and this nice round number has been a headline policy of the LibDems for ever. But we didn’t really expect it to rise further. Remember, the personal allowance is the amount that you can earn without paying any income tax at all.

The higher rate tax band is also to rise to £41,865 this April and £42,285 next April.

All Long Haul flights will be at the lower rate of Air Duty, the same as is applied to flights to the US. Beer duty is down a penny and bingo duty is halved from 20% to 10%. The proposed rise in fuel duty has been scrapped.

From next September working parents with income up to £150,000 will be able to claim 20% of registered childcare costs up to £2,000 per child per year.

Help to Buy for new build property is being extended until 2020.

Emergency workers who die in the line of duty will be exempt from Inheritance Tax.

Oh and there’s going to be a new, 12-sided £1 coin from 2017.

Now let’s get to the juicy stuff…

2 – Savings & Investments

The headline here was the merging of the Cash and Stocks & Shares ISAs into one New ISA, or NISA. You just know that no-one is going to call it that.

This will happen from 1^st July and the combined limit will now be £15,000. This can be split any which way between cash and stocks and shares elements, which is useful extra flexibility. You can still only subscribe to one cash and one stocks and shares provider each tax year though.

You will be able to transfer from Cash to Stocks and Shares (just like you can now) but also back in the other direction. At the same time, the annual limit for Junior ISAs and Child Trust Funds will rise to £4,000.

The starting rate of income tax on savings is being abolished, and if you have no other income, the first £5,000 per year of savings income will be tax free.

National Savings and Investments will launch a new pensioner’s bond, exclusively available to those aged over 65 and with an investment limit of £10,000 per bond. They will come in one and three year varieties and the interest rates are expect to be markets leading, at 2.8% for the one year bond, and 4% for the three year bond.

Finally, premium bonds will have their limits raised from the current £30,000 per person to £40,000 this June and then to £50,000 next year. The number of £1 million prizes each month will increase to two from July.

3 – Pensions

This really was the bombshell of the budget.

From 6^th April 2015, anyone will be able to take their entire pension fund in cash. The first 25% will be tax free, as is the case right now, and the rest taxable as income in year it is taken, and taxed at whatever the marginal rate of income tax will be. Let me explain that term – marginal rate.

Income tax is applied in bands, as I’ve explained before – listen to Session 19 for more detail. So the first part of your income falls within your Personal Allowance and is tax-free. Then you have the basic rate at 20%. Over a certain figure (the amount doesn’t matter right now) the rate of tax is 40% and then over £150,000 the rate is 45%. Your Income is stacked agains these bands and the relevant rate is applied.

So if you have a pension fund of, say £200,000, you will be able to take £50,000 tax free, and the rest will be taxed, some at 20%, some at 40% and maybe even some at 45% if you have other income besides. These are your marginal rates. Put simply, the pension funds will be added to your other income in that tax year and taxed accordingly.

There are some interim measures put in place. Right now you can take as much as you wish form your pension as long as you have other secured income from state pensions, company pensions and annuities of £20,000 per year. This is called the Minimum Income Requirement. This is being reduced to £12,000 from 27^th March (this Thursday).

Also, the income limit you can take from a pension is being increased from March 27^th from 120% to 150% of the government’s GAD limit. All limitations will then be removed from April 2015.

The last change in the pensions rules applies to small pension funds. Currently if your total pension provision is less than £18,000 you can commute the whole fund into a lump sum from age 60. Part will be tax free, part taxable. This will rise this month to £30,000.

Summarise KNOW

Let’s be quite clear here. The changes to the pensions rules are the most sweeping since the pensions regime was dreamt up in the first place. Back in 2006 the then government passed a set of rules laughably called Pensions Simplification – they did nothing of the sort. These new rules really do blow things wide apart for those looking to make the most of their pension funds.

So that’s quite a lot of quick-fire information there, but I imagine that if you’re interested enough in personal finance to listen to this podcast, you’ve probably digested this stuff already.

But what you really want to know is what difference all this makes. What do you have to DO?

Everything you need to DO 

1 – Seek advice

Is that a collective groan I hear? Yes I know I would say this, but retirement already has a myriad options attached to it and the chancellor just offered us a whole lot more. So now, more than ever, if you are approaching retirement, you should seek advice from someone not interested in product sales but in financial planning. I say it most weeks but use a Certified Financial Planner or CFP professional.

2 – If you’re buying an annuity, take stock

In light of the changes announced last week, many annuity providers are extending the length of time they give to new annuity holders to change their mind – the so-called cooling off period.

If you have just taken out an annuity or are in the process of applying for one, you might want to take a step back and decide if this is indeed the right thing for you to do. Remember that in buying an annuity you are handing over your amassed pension fund forever, in return for a guaranteed income for life. It’s a one-off, irreversible transaction, so make sure it is still the right thing for you in light of these changes.

Chances are it will be. Annuities are not bad things; they are very good products indeed in the right circumstances. Time was they were the only choice, but over the last 30 years the market has created new options and now the legislation is in place to allow full flexibility as to how you take benefits from the pension fund you have built up.

3 – Remember that property is not the be-all and end-all

One scenario being played out in many media outlets right now is the possibility of drawing out one’s entire pension fund, paying let’s face it, a shedload of tax on it and then buying a property to rent out. On the face of it, this sounds like a reasonable idea, but there are issues.

Apparently, the average yield on a rental property is currently 5.8%, but this reduces to 4.1% after you take into account costs and void periods where you have no tenant. And these figures are gross, and so are subject to income tax.

Plus being a landlord is not for the fainthearted. Yes, you have a bricks-and-mortar asset, but as we’ve discussed before, property can be illiquid, difficult to sell, so you may not be able to get your hands on that money should you need it quickly. Also, tenants can be a royal pain in the backside and there are onerous legal responsibilities on landlords too.

Pension funds are a very benign environment as far as tax is concerned, but rental properties are not, so it wouldn’t seem to make sense to move money out of pensions into property.

Yet you just know that estate agents and dodgy property investment salesmen are going to be harping on about the changes to the pension rules being a great opportunity to get into property investing. Property is an excellent asset class, but it is one of many and it is not the panacea many hold it out to be. So try not to be suckered by the inevitable column inches these ideas will be given.

I think that’s all the obvious immediate actions steps for now. The implications of the Chancellor’s announcements are still to be worked out in real life situations, and many of the true freedoms don’t come in for a year yet anyway, So lets avoid knee-jerk reactions for now, take a deep breath and let things settle.

Listener questions

Late last week I sent out an email to those subscribed asking whether the budget had raised any questions. I had a few in, but no-one wanted to leave a voicemail – you’re all too shy! So I’m afraid you don’t get to listen to anyone else’s dulcet tones, I’ll just read out the email questions for you.

Maxine asks:

I was wondering though what other alternatives are available for investing one's pension pot, besides an annuity or purchasing a ‘buy to let' property. Do you think new financial products will be devised for those people who are disinclined to blow the money on a Lamborghini?  

Maxine also asked for clarity as to what ‘marginal rate of tax’ meant, so I hope I answered that one earlier.

I don’t know that new products will come along to serve those who are wanting to take out their pension. I suspect that the best products for someone looking to invest all exist already. Once the money is outside a pension plan, it’s just ordinary money with no tax advantages or anything really. So you should just spend it on a Lamborghini, or invest it as you would any other sum of money you come into.

Again, a pension fund is about as tax-efficient as investments get, so I don’t know why anyone would take money out of there just because they can, and then invest it in a different kind of wrapper. Once the money is out of your pension pot, any available investment becomes available, such as Premium Bonds, the new Pensioner Bonds if you’re over age 65, ISAs and even the more esoteric stuff like EISs and VCTs. The worry is that people with pension funds will be actively marketed to, to encourage them to pull their money out into too-good-to-be-true schemes.

Next, Ruth asks:

Do the government hope I will spend all my pension quickly so giving them more tax?

This is an astute question. There are certainly tax benefits in all this for the Government. Someone with a fund which might pay them an income of, say, £5,000 is only ever going to pay basic rate income tax, and maybe not even that, depending on whether or not they have other sources of income. Whereas under the new rules, they could take out their pension fund of, say £85,000 in one go and pay up to 40% tax on a chunk of it. It’s a one-hit tax whammy, but it’ll come in the short term, when the government needs it. Of course, then the money is in a taxable environment, so there may more tax to pay in future on it.

Richard asks:

I guess it’s a case of what is the detail – so for example can people merely take their pension in full, pay their tax and blow it all at the bookies? Or using the change more positively, could someone effectively transfer the fund into an alternative income producing wrapper / asset, such as ISA, property or whatever? Further, given that tax will be paid on the proceeds, will tax be paid again on subsequent income derived from investing it – the answer presumably has to be yes but doesn’t that make the decision more marginal as effectively it is a double-dip tax to compare against even a poor annuity return rate?

Hi Richard, yes, there will certainly be tax to pay on the income, and yes, it is really a double dip tax. The Revenue will get tax when the pension fund is withdrawn and then tax on whatever income or gains that money subsequently produces. The usual tax havens will be available of course, so people intent on pulling out their pension funds should definitely consider ISAs.

You ask if this makes the decision more marginal. I would say absolutely, yes. All the headlines have been about people being able to pull out their money entirely, but remember that a pension is extremely tax-efficient, and now more flexible than ever, so it would seem to me to be as good a place as any to keep the money, knowing that it is accessible should it be needed in future.

Richard asks again:

One other point that has me a bit confused is the Lifetime allowance of £1.25m from April – is that £1.25m in contributions or in investment fund value at retirement? I guess that also reminded me to ask about the annual contribution limit of £40k again from April – I assume that means total contributions i.e. including mine, a company contribution and any tax credit into the scheme does it?

The Lifetime Allowance is a total fund value allowed across all pensions from all providers. This can be reached more easily than you think, particularly if you have final salary schemes. These don’t have a fund value as such, so the benefits are multiplied to achieve a notional fund value for lifetime allowance purposes. Usually that figure is 20 times. So if you have a final salary pension which is going to pay you £50k per year, multiply that by 20 and you’ve got a cool million. More people hit that lifetime allowance than you’d think.

The annual allowance is a contribution limit, from all sources, including the tax relief. It is a gross contribution limit.

Alan asks:

Currently, a drawdown fund is passed on in inheritance, less 55% tax. Have you found out the new rules as result of the latest budget speech?

This is the biggest grey area in the budget regarding the pensions changes. As far as I have seen so far, both looking at the original budget documents form the Treasury and all the commentary afterwards, nothing has changed. That means that in Drawdown, you will suffer a 55% tax charge on death, as you would now. Given the new rules it would make sense, assuming you knew you were going to die, to pull all the money out in the last year. Worst case, you’ll pay 45% tax on some of the fund which is better than 55%. This would put the money into your estate though, so you could end up paying another 40% inheritance tax on it!

There definitely needs to be clarification here.

Finally, Manncubdad asks:

Does the increased 15k limit change anything?

Why would I go down the ISA route at the moment, when there are current accounts paying more?

Surely I'm better going with the current accounts, but being prepared to empty them and dump the money into an ISA, when its advantageous to do so.

This is largely a mathematical decision. Of course, Manncubdad is talking about cash ISAs, which are just tax free bank accounts, rather than Stocks & Shares ISAs. Rates are poor, and so if you can get more after tax on on of these accounts like the Santander 123 arrangement, than you can gross in an ISA, why wouldn’t you do that? Go where the money is!

Regular listeners know that I believe that cash held in bank accounts is not an investment, but just a short term place to hold money you might need in the near future. But you might as well get the best rate you can on your cash.

I don’t think the increased rate changes anything, but it is good news nonetheless. Being able to put £15,000 per year away in a tax-efficient environment is quite a benefit and should be taken advantage of if possible.

I wonder if you have any more questions about the budget, or about anything else we’ve talked about today? If so, then do leave me a voicemail at meaningfulmoney.tv/feedback. Thanks to those who responded with questions this week

This week’s reviews

[This is where I read the reviews]

If you like what you hear on this podcast, please leave a rating or review on iTunes by hitting the big red button below just like Carzo the newbie this last week. This helps others to hear about the show and to subscribe, because it keeps me near the top of the rankings.

News

Forgot to weigh this week, sorry

Nothing else earth-shattering to report int he world of personal finance – the budget kind of hogged the limelight!

Next Session Announcement

Next time we'll be talking about what I originally promised you this week, a dive into the world of share ownership and dealing. If you have a question on this subject, or any other financial query that you want answering here on the show, then the best way to do that is to leave me a voicemail at meaningfulmoney.tv/feedback

Outro

That's it for this session of the MM podcast, I hope it was helpful. Did I miss anything? Do you have any questions? If so, please leave them in the comments section below

I hope you enjoyed this session. Thanks for listening – I'll talk to you next time.