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At last, some good news for the good guys: Budget 2014

There was a lot in the budget box this year worth opening it for.

I started Monevator seven years ago, writing about the rewards that would shower upon the righteous who followed the virtuous path of spending less than they earned, saving the difference, and aiming for financial freedom.

As for taking the opposite path – that of a feckless borrower, say, or a risk-taking punter – then woe be upon you.

What lousy timing I had!

Within 12 months the financial crisis struck. The world was turned upside down, and so were the basic principles of personal finance.

Far from coming a-cropper, borrowers with vast mortgages acquired at the top of a housing bubble were bailed out by the lowest interest rates for 300 years.

Far from being rewarded for saving, interest rates on cash deposits plunged below inflation, again favouring borrowers over savers.

The stock market pretty much halved from peak to trough, shares in blue chip banks were decimated, hitherto safe-looking stuff like PIBS went loco, and crazy-eyed gold bugs made out like bandits.

Forget prudence. The luckiest person to be was someone who’d over-borrowed in the bubble years to buy the biggest house they could – perhaps using an inflated self-cert loan, preferably signing up for PPI in the process – who didn’t bother with savings or pensions or any of that old rubbish.

Mortgage rates slashed, seven years of inflation, and a bit of PPI compensation to boot. Result!

So much for personal finance 101.

How savers were screwed

Many people have suffered in the downturn. They’ve seen their real incomes curbed, their benefits cut, their bedrooms declared surplus to their requirements.

Some of this was warranted. Some not.

But there’s no disputing that the most ironic misery was that inflicted on savers who’d done the right thing during the borrowing binge that led up to the crash.

Their poster child – or perhaps pop-up OAP – was someone who retired during the turmoil, was forced to buy a rubbish annuity touting a woeful income using their depleted pension funds, and saw any other spare cash languish at pitiful rates of interest.

This person won’t get the natural sympathy we have for say the young and unemployed, or the genuine victims of welfare restraint.

The relatively flush private pensioner still gets a pension. They are not on the streets.

True, but there is a bigger picture here.

When someone comes to draw their pension, they’re drawing down on consumption they personally postponed for many decades. A whole lot of foregone pleasure when they could have lived for the day – only to be hit by a dodgy decade at the end.

What kind of society do we want to live in? One where making some sacrifices so you can comfortably take care of yourself in the future is encouraged and rewarded, or a bailout compensation culture where you borrow to the hilt and blame someone else if it all goes wrong, and then fall on the State at the end?

Most people inhabit shady streets of grey, of course, not Benefit Street, Reckless Row, or Horrid Banker Heights for that matter.

But I think it’s inarguable that when it comes to the middle classes, recent years punished the prudent and patted the clueless on the back.

And that’s a terrible lesson that turns moral hazard into a personal finance nightmare.

A nicer ISA

Hence why the 2014 Budget was so encouraging.

Out of the blue we finally got a Budget that encourages and rewards our efforts at saving and investing.

Nobody expected the annual ISA allowance – currently £11,520 – to be raised to £15,000 a year from 1 July 2014.

In fact, the usual suspects in financial services were warning ISAs could be cut down in size – no doubt to try to get more last minute ISA money through their doors from the jaded public.

Junior ISA annual limits rose too, to £4,000. Together, these higher allowances mean a nuclear family of two adults and two kids can shelter £38,000 a year of their savings free from tax.

Another excellent development – cash and stocks and shares ISA allowances are being merged into one New ISA (or NISA) that you can split between cash and shares as you see fit. In fact you’ll be able to swap from cash to shares and vice versa.

This move treats investors as grown-ups, and at the same time it gets rid of a pointless split that has confused and turned off so many over the years.

Some will now churn their asset allocation like a hedge fund manager on commission, but that’s a choice they take. It can only be good news for the rest of us that we’ll now have the flexibility to turn some of our equities to cash if we want to – and also for some of that cash to find its way back into the stock market at opportune times.

Given today’s low yields on bonds, even ardent passive investors could benefit from moving some of their fixed income allocation into tax-protected cash, too.

And being allowed to buy short-term bonds in ISAs will also be useful one day, even if today’s micro-light yields make it seem pretty irrelevant currently.

The bottom line on these ISA changes is most people will be able to shield the vast bulk of their savings from tax if they start young enough, and with less of the restrictions that they faced before.

Meanwhile those of us who have substantial investments outside of ISAs (perhaps because we were slow learners!) can now look forward to getting more of our money sheltered than we thought possible.

Pensions fit for purpose

In any normal year the powering-up of ISAs would be the big news, as well as another nail in the coffin of pensions – a coffin that already looks more like a porcupine.

But in a pinch-me-I’m-dreaming moment, Chancellor George Osborne then went on to do a Gok Wan job on pensions, too.

Instead of the usual silly fiddling, these look like sensible yet radical changes that Actually Make Pensions More Attractive. (Gasp!)

The biggest change is still to be fully confirmed – that you will be allowed to take your entire pension pot as a lump sum in your mid-fifties. The first 25% lump sum would still be tax-free, but the rest would only be taxed at your marginal rate, instead of at today’s punitive 55% rate.

If that gets through consultation, it’s a game changer.

No more being forced to buy a crappy annuity. Infinitely more flexibility about how you use your money.

No more having to convince a 25-year old that she should save for her retirement in 40 or 50 years time. Instead, there’s an escape clause at 551, at which point she could spend all the money she’s saved on a mini super yacht if she wants to.

Of course she won’t actually want to blow her whole retirement pot when she gets there – not usually.

But she might want to downsize and move to Spain, or invest some of her money in her son’s business, or use a sensible portion to take the trip of a lifetime before her lifetime is over.

Given such freedom, pensions can better stand toe-to-toe with buy-to-lets in the flexibility stakes, as well as two holidays a year in the Y.O.L.O. department.

And that’s important if pensions are to be made attractive to everyone.

More modest treats from Budget 2014

Osborne had more tricks up his sleeve, including:

  • Higher drawdown limits for those already taking an income from their pension, starting 27 March.
  • A lower qualification limit that will allow more people to take flexible drawdown.
  • New “pensioner bonds” from National Savings & Investments that should deliver markedly higher interest on savings for those over 65 than they can get today in the market.
  • Premium bond limits rising from £30,000 to £40,000 and then to £50,000 over the next two years.
  • The personal allowance for income tax rising from £10,000 to £10,500 in 2015/2016, and the higher rate threshold finally going up, from £41,865 next year to £42, 285 in 15/16. (These had already been announced).

Not all of this is earth shattering, admittedly.

Scrapping the 10% is a welcome simplification, but it won’t add up to much given current interest rates. Premium bonds are poor investments right now. As for the higher rate tax threshold, it should be rising further, faster, after its freezing has dragged millions more into the higher-rate tax band in recent years.

But it seems churlish to complain.

Savers can’t be trusted?

Some people will say that higher ISA limits are only good for the wealthy, and that ultra-flexible pensions can’t be trusted on the British public.

But that’s to misunderstand the mindset of those who save and invest.

It’s not only high earners who will enjoy the higher ISA limits. They will help all kinds of people get their finances into a more tax-efficient place, from those who were tardy about getting started with ISAs to those who receive lump sums, and also normal middle-class earners who want to retire early by saving far more than ordinary mortals.

As for pensions, few people save and invest for 30 years then blow it all in a moment of madness.

We who do save and invest know that doing so changes how you think about money. The very act of getting more people on-board with that mindset could reduce the financial self-immolation going off every day across the country.

Besides, if this is a giveaway then at least it’s one where the recipient has to give something up today to get something better tomorrow, as opposed to spending it all today and then whining about not having enough to get by when tomorrow inevitably comes.

Encouraging more people to save more into more flexible schemes doesn’t solve all the problems of everyone, especially those poorer workers who may have the motivation but don’t have much cash to spare.2

But the Budget is clearly a big step towards rewarding aspiration and self-reliance for many of us. And I’m all for that.

Making something out of nothing

Of course the cynic in me whispers the government is doing all this because it has to. That this is the carrot, and the stick of a steadily diminishing State pension is to come. That the territory is being prepared in advance.

And perhaps it is – though it must be said State pensioners have been virtually a protected species under this government.

But let’s worry about that another day.

The good news is we have a Budget for once that lives up to its name. It will help those with the means and desire to take greater control over their finances to help themselves, from their first pay slip to the grave.

You say this is just a Budget to win votes?

Fine. It gets mine.

Note: At GOV.UK you can download and read all the Budget 2014 documents.

  1. Potentially this will be 57 by 2028. []
  2. To help them I think the State should match contributions for the first £500 a year into a NEST pension, say. []
{ 52 comments… add one }
  • 1 underscored March 20, 2014, 8:43 am

    I asked around family members with significant pension pots to find out what they will do with the money.

    BTL – safe as houses. More bank bail outs, but this time from pension pots.

    Quite clever really.

  • 2 underscored March 20, 2014, 8:52 am

    You guys should also check out the BOEs own explanation of QE in this paper here http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf (full series and video here http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx).

    They explain that they are buying bonds to force down yields and drive investors into other riskier asset purchases somehow stimulating the economy. So no asset class price reflects the true risk of owning it.

    I am sorry but with such massive and wholesale government manipulation of the market I have lost my faith and withdrawn from the market.

  • 3 Neverland March 20, 2014, 9:38 am

    There is always a sting in the tail

    Buried in the small print of the Treasury pension document accompanying the Budget is a forthcoming consoltation on:

    – changing the age a private pension can be taken from 55 to 57 from 2028
    – automatically link it to ten years below the automatically rising state pension age thereafter (I wish I could underline the automatically bits)

    So the age you can actually access your private pension will probably go to 60 for some one in their early 30s today

  • 4 bob March 20, 2014, 10:16 am

    Any thoughts on how the new allowance on isas will work?

    I usually put the full allowance in on April 6th. If you do this, can you wait and make up the difference to 15k in July?

  • 5 PC March 20, 2014, 10:33 am

    Well said!

    The idea that people who have the self-discipline to save for years will suddenly blow it all is very improbable.

    The agonised media handwringing is misplaced and would be better directed at encouraging more people to plan for the future.

  • 6 ermine March 20, 2014, 10:34 am

    we’ll now have the flexibility to turn some of our equities to cash if we want to – and also for some of that cash to find its way back into the stock market at opportune times.

    this is great news, and losing that artificial ISA asset class split is great news.

    Shame that in your previous nominee account article you remind us just how precarious the security of cash is in nominee accounts, which an ISA has to be by definition 😉

  • 7 JAL March 20, 2014, 10:46 am

    I was wondering the same thing, Bob. It seems ISAs will just automatically become NISAs on 1st July. So yes, you’ll be able to put your £11,880 in on 6th April and then whack in another £3,120 on 1st July if that’s what you want to do.

    Quote from:
    http://www.moneysavingexpert.com/news/banking/2014/03/isa-allowance-to-rise-to-15000

    “Any Isas opened between 6 April and 30 June will automatically become a NISA, with a higher limit. From 1 July, you’ll be able to add further money up to the new £15,000 limit.”

  • 8 IverPotter March 20, 2014, 11:08 am

    @ Neverland – ouch.

    I will only be 53 and a half in April 2028 – so that’s at least a 2 year delay to my escape plan then.

  • 9 SemiPassive March 20, 2014, 11:16 am

    Neverland beat me to it, any move upwards from 55 was always a red line for me – the moment I cancel any personal pension contributions.
    But for now I’m still ok, as is anyone presently over 41 years of age. So, as a 40% taxpayer this has made a SIPP even more appealing.
    I feel the biggest threat will be a Labour/LibDem coalition reducing tax relief for “fairness”, another red line that would cause me to cease SIPP contributions in favour of ISAs and BTL.
    But for now, its all good. And will make it easier to shift money taken out of SIPP into ISAs to minimise income tax.

  • 10 bob March 20, 2014, 11:18 am

    Thanks JAL. Now just to decide where to put it.

  • 11 Luke March 20, 2014, 11:24 am

    I’m with SemiPassive,

    A change to the age at which I’ll be able to take my pension means that I will not be paying any more into it at any point unless I am receiving an employer match.

    I will be commenting on the consultation, as the suggested automatic future increases seem to be contrary to the spirit of the sweeping changes offered yesterday.

    The changes to ISAs and pensions allow responsible savers and investors a wonderful opportunity to plan for a smooth transition between their working life and accumulation phase and the period in their life when they begin to rely on their stash.

  • 12 Neverland March 20, 2014, 12:09 pm

    @Semi

    For me the liberalisation of the pension regime is, as Frosty the Tiger would have put it, GRRRREAATTT!!!!!

    However I do wonder how this is going to pan out down the road

    The conservative party (to their credit and in line with their underlying beliefs) are treating tax payers like adults in the use of the pension funds they have built up

    However are most people (who have been nudged quite heavily to save into pension schemes by government legislation) ready to act like adults in using and investng their funds?

    I worry that the future will bring a lot more “how we lost our retirement savings” and mis-selling scandals in the Daily Wail

    What I can definately see in the near future is a lot of funds being taken out ASAP and pushed into Buy-to-Let….

  • 13 BeatTheSeasons March 20, 2014, 1:36 pm

    I wonder if Hargreaves Lansdown will still be charging £25 to transfer out cash for those who decide to sell their bonds and move their money to the highest paying cash (N)ISA.

  • 14 Grumpy Old Paul March 20, 2014, 1:36 pm

    @Neverland,
    … and then wailing when the rental market becomes oversupplied, they have too many voids and property prices fall!

    Ultimately, the state (which means tax payers) will pick up the tab if people mishandle their pension pots since once they exhaust their capital they will become eligible for whatever the Universal Credit and its successors provide to supplement the State Pension for those with little or no capital or other income.

    There is also huge scope for squirrelling away pension pots abroad and then claiming benefits. Or am I missing something?

  • 15 Neverland March 20, 2014, 2:20 pm

    @GOP

    Isn’t that why we have had compulsory annuitisation for 60 odd years?

    Ironically the new welfare cap (if it continues for several terms) means there will be no money for substantially greater numbers of people to claim Universal Credit or its successors

    I think this is a policy which will have an impact which is only really felt a decade or two down the line

  • 16 Steve March 20, 2014, 2:25 pm

    The one niggling doubt in my mind relates to long term care costs. Its not something I’ve really looked into, but I’d guess that someone with an annuity no longer has assets that could be used for care costs. I’m not sure about the status of existing drawdown SIPPs, but the proposed changes would leave retirees with a simple pool of cash that the government may find easier to make claims on.

    Maybe I’m just assuming politicians do nothing except kick me in the nuts, and if yesterday’s budget didn’t hurt then I just haven’t seen where the blow is coming from.

  • 17 Luke March 20, 2014, 2:28 pm

    @Neverland

    Completely agree with BTL, was having the same conversation last night.

    People are ‘forced’ to buy equities through their work pension schemes in most cases, I bet they revert to something familiar as soon as they can get their mitts on the cash 😉

  • 18 Neverland March 20, 2014, 2:40 pm

    @Steve

    I suspect you are right. Once pension fund = cash, then pension fund will count when assessing if you have access to benefits

    I don’t personally view that as unfair though

    The kick(s) in the nuts are:
    – rasing the age a pension can be taken to 57 after 2028 (for consultation)
    – linking it to state pension age – 10 years automatically (for consultation)
    – all the 40/45% income tax the government will get from people accelerating the withdrawel of their pension funds (treasury predicts raking in £1bn a year on this by 2018)

    Not clear what happens when you spend all your cash before you die, however, I think the welfare cap is meant to sort out that option as only the state pension (and JSA) is outside it

  • 19 Steve March 20, 2014, 2:53 pm

    @Neverland

    I agree. Counting a cash fund as assets doesn’t seem unreasonable, although I then wonder about how my wife would feel if my (ie our) fund was used in this way.

    As for the kicks … I’ll hopefully be missing them all due to age & not having sufficient funds to take out that amount in a single year.

  • 20 gmuk March 20, 2014, 2:59 pm

    I agree with it being a good budget in that it rewards savers and people who want to take investing into their own hands with their pensions.

    But I am dismayed that the help To Buy scheme, which is helping inflate South East house prices, has been extended to the year 2020. The government seem dead set on fanning the flames of house price inflation. If pensioners decide to invest in BTL en masse, they will only exacerbate this problem.

  • 21 Jim Lad March 20, 2014, 3:22 pm

    I welcome any policy that encourages responsible retirement saving and promotes pensions. We have suffered bleak times for pensions through detrimental tinkering and stealth undermines of personal pensions since 1997 coupled with the weakening of annuities, so yesterday will hopefully prove to be a positive watershed. The Government should always formulate pensions policy on the assumption that the vast majority of savers are responsible people and to encourage widespread pension saving. This may well provide the flexibility of approach in retirement that rewards diligent saving throughout a working life.

  • 22 Jon March 20, 2014, 6:19 pm

    Can someone clarify, if I have a large fund for eg £100K in a stocks & shares ISA, could I convert all of that to cash and remain inside the tax wrapper and vice versa ?

  • 23 DianaW March 20, 2014, 8:54 pm

    Nice to have been so spectacularly proved right to resist the shoddy wiles of rotten annuity rates until annuities themselves finally became non-mandatory.
    And, after having for years been assumed to be able to live on the savings made when the job-market was kind, after having fallen victim to its vagaries, it’s good to see someone rewarding prudence for a change. Not that that makes (or could ever make) me an Osborne fan but even the Tories might get some things right occasionally!

  • 24 underscored March 20, 2014, 9:17 pm

    I am worried that the pension changes are not really targeted at non-profligate savers. There has been much discussion of what a stimulus PPI has been the economy and how that pot of money is running out. Likewise there are a tsunami of IO mortgages running out of time within the next five years. http://www.theguardian.com/money/2014/mar/20/pensions-interest-only-mortages

    The cynic in me does not think that in aggregate the pension changes are healthy.

  • 25 JAL March 20, 2014, 9:32 pm

    @Jon, yep, sounds like it… So says The Telegraph:

    “Currently, you can move money from a cash Isa to the stocks and shares version but not vice versa; this rule will be abolished and savers will be able to transfer previous years’ funds from stocks and shares Isas into cash Isas for the first time.”

    http://www.telegraph.co.uk/finance/personalfinance/investing/isas/10708770/Budget-2014-welcome-to-the-15000-cash-Isa.html

  • 26 dearieme March 20, 2014, 11:56 pm

    I wouldn’t be too worried about the age for crystallising pensions increasing. I rather expect to see life expectancies dropping quite soon. The gain from the cessation of smoking has already been cashed in, as has the gain from the collapse of rates of heart attacks. The rise of antibiotic-resistant bacteria seems likely to continue. There might even be a lethal viral pandemic – the Spanish flu is far behind us now, are we due another nasty one?

    Question: does anyone know whether the algorithm for increasing the pension age includes a ratchet, or can pension age in principle decrease if life expectancy does?

  • 27 bob March 21, 2014, 7:06 am

    Dearime,

    You must be a hoot at a party 🙂

  • 28 The Rhino March 21, 2014, 2:57 pm

    looks like p2p lending can be wrapped up within an ISA as well – i think that is a bit of a game changer..

    https://www.zopa.com/blog/2014/03/19/peer-to-peer-secures-isa-status/

  • 29 JAL March 21, 2014, 3:45 pm

    @ The Rhino
    I’m interested to hear more about this too, but from what I’ve seen so far, it could be a while before it happens. I think I read somewhere that it might not be until 2017?! Also worth remembering that the Financial Services Compensation Scheme currently doesn’t protect p2p lending.
    Maybe they’ll wait and try to get p2p covered before including it as an option for our ISAs..
    Anybody know more?

  • 30 Willem de Leeuw March 22, 2014, 2:11 pm

    Thank you for a sensible article on this. I’m exasperated by the ‘it’s only beneficial to the evil fat cats’ take from other outlets, including the FT in one of its comment pieces.

  • 31 gadgetmind March 22, 2014, 2:37 pm

    These changes really perk up my retirement spreadsheets. At last we can draw down heavily on our pensions from age 55 to make best use of personal allowances and 20% bands before state pension kicks in.

    After that, we back off on the pensions, get something back from the state for once (though I’ll still be paying about the same in tax as I get in SP!) and top everything up from our (N)ISAs that soaked up the extra drawn down from the pensions.

    The strong suggestions that PCLS and annual/lifetime allowances won’t be messed around with again too soon was also very welcome.

    I recommend that everyone reads the 54 page consultation document and responds where appropriate.

  • 32 The Accumulator March 22, 2014, 4:14 pm

    The age a private pension can be taken hasn’t changed. It’s going into consultation.
    If the age does go up it will be worth considering then whether you’re on course to retire by age 55 anyway or whether 57 is more likely.
    There’s also no need for retirement to be an all or nothing decision. It may well be a good idea to transition from full-time employment to retirement via part-time work. I could work 2 or 3 days a week if I wasn’t saving for retirement. 2 years of that may well be bearable and actually make your retirement more secure as you’re not tapping into funds too early.
    Bear in mind that the 4% rule (which is pretty much in tatters now anyway) only ever applied to 30 year retirements. Longer retirements require more assets / lower spending.
    If Labour get in and carry out the pledge to abolish 40% tax, the SIPP is still going to be superior to the ISA for pension saving for many, even those paying 40% tax:
    1. Once you draw down on your pension savings you don’t pay tax on the first £10K per person per year i.e. your personal allowance. So you get tax relief on the way into your pension and tax exemption on the way out. ISAs don’t offer that.
    2. No tax on your 25% lump sum from your pension. ISAs don’t offer that either.
    3. When you die, the tax protection for your ISA instantly vaporises. It becomes part of your estate and liable for inheritance tax. Interest and capital gains would also be liable for tax at standard rates.
    If you’re really livid at the thought of maybe having to wait another couple of years for your private pension, consider using ISAs as a bridge. Providing you with enough money to live in the intervening years before you can claim your pension.

  • 33 Jonny March 22, 2014, 7:27 pm

    @all

    Wow, some interesting comments. Consider me subscribed for updates!!!

  • 34 David March 22, 2014, 11:11 pm

    @The Accumulator – I agree the shift to 57 is a consultation, just like everything else including the option to take the cash. They are consulting on moving the age up to five years below state pension age too – although I couldn’t see what the proposal was in terms of phasing that in.

    In the version I read just after the budget announcement the change to 57 was proposed for 2018 – gave me a shock!

    David

  • 35 Vanguardfan March 23, 2014, 9:48 am

    I personally think that the changes will be altered to a degree by the consultation, with some nods to the worries about people depleting their pension pots. I feel that the age at which the money can be accessed may well be one area for change, to pin it to the state retirement age/life expectancy. Balanced against that is the fact that many people are forced into early retirement in their 50s, by ill health or by redundancy, and not allowing access then could mean they fall back onto working age benefits. We’ll see. Personally I think the greatest need is for much more education of working age people about pensions, as the level of ignorance is staggering. I’ve seen no commentary for example about levels of withdrawal that might be sustainable over a thirty year retirement- which are probably not much (any?) higher than the current capped drawdown rates. There needs to be much more commentary about the methods of creating an income stream from a pot of capital, instead of all the ways that a savings pot can be blown.

  • 36 gadgetmind March 23, 2014, 10:03 am

    > I personally think that the changes will be altered to a degree by the consultation, with some nods to the worries about people depleting their pension pots.

    That isn’t one of the areas where HMG have flagged that they want feedback. That we’re going to get flexibility seems to be a given.

    > I feel that the age at which the money can be accessed may well be one area for change, to pin it to the state retirement age/life expectancy.

    That is part of the consultation, with a proposed change to age 57 in either 2028 or 2018 depending on which section you read.

    > I’ve seen no commentary for example about levels of withdrawal that might be sustainable over a thirty year retirement- which are probably not much (any?) higher than the current capped drawdown rates.

    True, but 1) those retiring early may wish to draw down harder before state pension and then ease off, 2) just because more money is taken from the pension than is sustainable (perhaps to make use of tax bands?) doesn’t have to be spent and can be saved into (N)ISAs, 3) people may be happier depleting pensions hardware during the first couple of decades and then easing off and/or downsizing.

    I could come up with another half dozen scenarios quite easily that rely on this new flexibility to improve people’s retirement. We’ve been desperate for something like this for many a decade so let’s not use “here might be dragons” as a reason to shy away from it.

  • 37 Vanguardfan March 23, 2014, 10:57 am

    @gadgetmind – don’t get me wrong, I can see that the flexibility will have a lot of advantages to many people, including myself. But I also think that most people are woefully under informed about the true cost of providing secure income in retirement, and the media messages are contributing to that. And I am also sure that the government is going to want to look carefully at plugging gaps that could lead to greater demands on benefits/welfare. Pinning the age at which funds can be accessed to the state retirement age, as in the consultation, is one way of doing that whilst still retaining the commitment to flexibility -which I agree is not going to be withdrawn. It will be interesting to see if there are any changes to contribution limits (particularly for those without earnings), LTA and arrangements for inheriting pension pots- if not now, then maybe after the election…

  • 38 David March 23, 2014, 11:19 am

    > I can see that the flexibility will have a lot of advantages to many people, including myself. But I also think that most people are woefully under informed about the true cost of providing secure income in retirement, and the media messages are contributing to that.

    I agree, most people are under informed and the question is whether this will continue or be changed by the changes. Unfortunately I expect it will be the former, apart from a group of people who are interested in the topic.

    The media doesn’t help, with its focus on “poor value” annuities – it gives the impression that retirement is actually cheap and annuities are the problem rather than a part of a solution.

    > I feel that the age at which the money can be accessed may well be one area for change, to pin it to the state retirement age/life expectancy.

    I can see this is the way it is going, however it is rather contradictory. It is rather odd that a 57 year old would be deemed responsible enough to have full freedom over their retirement pot, while a 55 year old would not. Those young and feckless 55 year olds, they couldn’t possibly cope with the complexity, they need a couple of extra years on the clock!

    Also once they start to move these dates it does two things – firstly it makes it all the more likely to change in future (politicians just can’t help themselves) and secondly it damages the “plan with confidence” message that you need to get across to encourage pension savings.

  • 39 BeatTheSeasons March 23, 2014, 11:25 am

    As a hard-working 30-something trying to raise a family while also saving for our financial future, I don’t consider myself one of the ‘bad guys’ but I also don’t see how this budget helps people like me.

    If you pay any earnings above £42,500(ish) into your SIPP then you’re left with about £32,000 after tax. The Accumulator reckons you can live on £20,000 a year. Add rent or mortgage on a family house and the other £12,000 will be gone as well.

    So savings will be down to the second earner’s salary and how much higher it is than childcare costs. It’s likely to be part-time unless you want to leave your children to be raised completely by someone else.

    We already struggle to fill £20k of ISAs annually. Anyone who can find £30k of spare money every year is surely not getting it from basic rate earned income. Something like an inheritance would help.

    How on earth is it fair that the tax rate on earned income above £10,000 should be 32% (plus tax on transport costs) while the 0% band on unearned income from ISAs is being increased?

    (This is one reason I keep banging on about buying property. The capital gain on my BTL investment is more than my salary this year and will never be taxed until I die, as long as I never sell the house).

    It seems to be that this budget is another chapter of the old versus young story. As there are more old people and they are more likely to vote, it’s not a surprise.

    People like my parents have had cheap houses, free university education, final salary pensions, unrestricted child benefit and no higher rate tax to pay. They now get free dentists, opticians & bus travel, cheap train tickets and their winter fuel allowance.

    Are these really the ‘good guys’ so deserving of even more tax subsidies in the budget? Or is there an element of lucky generation too?

    Sorry about the rant. I’m still going to take responsibility for my own future, not blame the government. But I can’t sit here and read such a glowing budget review without commenting from my own perspective, which may be different from the majority of Monevator readers.

  • 40 Learner March 23, 2014, 11:54 am

    I’d be curious to know the number of eligible people who actually contribute to an ISA each year, and the number who use the full allocation.

  • 41 Learner March 23, 2014, 12:13 pm

    24m / 5m apparently.

  • 42 gadgetmind March 23, 2014, 12:29 pm

    We’ve always tended to use our full S&S ISA allowances. We fund these partly from SAYE maturity, partly from capital gains on unwrapped holdings, partly from dividends, and partly from “surplus” income.

    This year was already looking like a struggle for various reasons and now we really ought to find some extra. Still, it’s a “high grade” problem!

    We intend to keep on adding to them for a few decades yet as they will the “last port of call” as it makes more sense to spend unwrapped holdings (including PCLS) before ISAs.

  • 43 The Accumulator March 23, 2014, 12:51 pm

    The 2018 date for private pension age increase was a typo. They meant to say 2028:

    Correction made to page 26, paragraph 3.33
    Change:
    “Under the new system, people will be able to access their defined contribution savings from age 55 in all circumstances, rising to 57 in 2018”
    To:
    “Under the new system, people will be able to access their defined contribution savings from age 55 in all circumstances, rising to 57 in 2028”
    This aligns the text with the correct references in the paragraphs in the rest of the document (paragraphs 1.12 and 3.30).

    If you want to respond to the consultation then email: Pensions.Consultation2014@hmtreasury.gsi.gov.uk

    Questions are in appendix A:
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/294795/freedom_and_choice_in_pensions_web_210314.pdf

  • 44 GORDON March 23, 2014, 5:36 pm

    T he Sunday Times today implies that after April 2015 there will be NO LIMIT on secured income to prevent anyone with a sipp moving into flexible pension – is this correct – if so why have they reduced current limit down to £12k from £20k?????? seems odd to me.
    Also canm we trust govt not to further meddle with income drawdown limits – since coming to power they reduced from 120% to 100% saying risk of run out of funds before death – following year increased to 120% and now up to 150% .Although I will personally benefit from this am concerned that at this 150 level funds will quickly disappear.

  • 45 The Accumulator March 23, 2014, 8:40 pm

    That’s right, after April 2015 you can drawdown the lot as fast as you like. The 20K – 12K is an interim solution. Crazy but true. It’s personal responsibility time. I like.

  • 46 gadgetmind March 24, 2014, 8:54 am

    Yes, a few quick changes to numbers used in current legislation.

    GAD boost to 150%, triviality from £18k to £30k, stranded pots from 2 @ £2k to 3 @ £10k, and flexible drawdown MIG from £20k down to £12k.

    They couldn’t really do much more in a hurry as there are a *lot* of details still to settle. The interesting one is the “no more into a UK pension, ever!” when entering flexible drawdown – how will this work in the new age of everyone being flexible?

  • 47 vanguardfan March 24, 2014, 11:18 am

    @gadgetmind, presumably if you could draw down and then resume contributing, wouldn’t you essentially be recycling and getting tax relief on tax relief?
    Its tricky though, as you can certainly foresee some 50 and 60 somethings with intermittent employment needing occasional drawdown. And how does auto-enrolment work for someone who has already ‘retired’ or is using a pension to top up part time earnings?

    @Beattheseasons – I’m with you on much of what you say. Raising the ISA limit from £11k to £15k is only going to benefit the very small minority who can already find £11k of surplus income (or have a windfall lump sum to sock away). Finding surplus income is a hell of a lot easier on a salary of £60k compared with £30k; or if that £60k only has to support one person. I save because it is really quite easy for me to do so, the spending I am foregoing is not by any stretch of the imagination necessary! I don’t think that particularly makes me a ‘good guy’. And of course there is that paradox that the whole economy, including our investments, depends on spending – so maybe the spendthrifts are the good guys and the hoarders are part of the problem 😉

  • 48 gadgetmind March 24, 2014, 12:50 pm

    The recycling rules for those using capped drawdown or annuities are complex. Those for flexible drawdown are simple – you can’t recycle as you can’t contribute anything new to a pension, ever.

    I have no idea for what HMG will do next year and doubt they do either. I suspect there may have to be a notional cap that will trigger the block on future contributions if ever exceeded, but let’s wait and see.

  • 49 ermine March 24, 2014, 4:26 pm

    @BTS I feel your pain, and while I’m not quite as old as your parents I saw some of their world, so I’d like to point out it wasn’t quite as rosy as you say –

    People like my parents have had cheap houses, free university education, final salary pensions, unrestricted child benefit and no higher rate tax to pay.

    They did have cheap houses relative to earnings, though note that they generally had only one adult working – the SAHM was the norm in the 1970s ISTR. A lot of the house price inflation has been the addition of a second wage meant households could bid up prices more. And Thatcher has much to answer for in the hurt that is UK rental housing today. That at least is an ill wind that may blow you some good with BTL 😉

    Tax rates were much higher in their day. When I started work in 1982 I was paying BR tax at 30% and NI at 9%; almost as much as a HRTpayer now, in addition the tax threshold was very low. It was worse for your parents. Before that I worked in the holidays as a kitchen porter, I earned less than the current NMW in real terms and I had to pay NI on it!

    They did have free university education, because people had the courage to discriminate by academic ability. When I went to university only 11% of school-leavers went to university, the exams were norm-referenced (compared ot the cohort). It wasn’t a pedagogic crime to say you failed at this or you are no good.

    It wasn’t possible for the taxpayer to support a 50% of school leavers going to university from a lower tax base. The 1982 higher rate tax threshold looks very low to me now, I’m surprise that I was closer to it that the BRT threshold in an entry-level job. You don’t have to take my word for it, these historical rates are to be had fromthe IFS. People forget just how high general taxation was in those days. The cost of heating and electricity was high compared with even now, and things like telecommunications costs were off the scale.

    > plus tax on transport costs

    They paid a lot of money for their cars – if they could afford them that is, and the reliability was awful, men were always fiddling with them. It absolutely gobsmacks me still when I pass a local used car lot that I could buy a really decent used car for about £6k. That’s very much less in real terms than my first car and a modern used car would be so much more reliable, better and more fuel efficient.

  • 50 Mark Meldon March 24, 2014, 5:39 pm

    In brief, ISA’s can be exempt from IHT! As long as you hold assets that qualify for Business Property Relief in them. That’s AIM stocks to you and me. Just dealing with client with massive IHT “problem” (its a long story of procrastination making things worse). We have agreed to transfer bundle of stocks and shares ISAs (none of which I arranged) into AIM portfolio (via a discretionary management facility – not cheap but reasonable value). As long as he lives 2+ years, ISA portfolio no longer part of estate!

    As an IFA, the pensions stuff is only slightly thrilling, and I’m waiting for all of the technical bods to come up with the usual wheezes to exploit the unforeseen consequences like why would a company director ever have a salary going forward – pension route potentially far more attractive!

    Hey, ho!

  • 51 gadgetmind March 24, 2014, 6:39 pm

    The pension route has always been pretty attractive for directors as it helps greatly with corporation tax,

    Of course, there was always the option to “Do a Blair” by moving into a SSAS, giving up your rights to a pension from it, moving the surplus to an offshore trust, and the trustees then finding a lucky recipient for the money.

  • 52 The Investor March 26, 2014, 10:09 am

    Great discussion, thanks everyone (and for keeping it civil and not political!)

    I’d just add a couple of things.

    First I’ll reiterate my point in the article that I don’t believe people who save for multiple decades suddenly go mental at 55. The very act of saving I believe teaches you how to be a saver!

    While people have historically been very keen to cash out to get the lump sum, that’s hardly surprising given it was the first and only chance to get a big chunk of cash out at once. That incentive is gone with these changes. The 25% was/is also tax free. Under the new system, there’ll be a decent incentive to draw out the remaining 75% slowly over time for tax reasons.

    As for NISAs, I absolutely assure the doubters that they can be helpful to people who are not on mega-incomes. I have a decent sized six-figure portfolio *outside* of tax shelters, much of which has roots way back when I was earning a basic rate salary (albeit when you could earn relatively more at a basic rate salary without being considered a fat cat deserving of 40% tax).

    I’ve been shuffling money across to ISAs for years, but it grows faster than I can shuffle it.

    I don’t say this to brag. For a start, I should have been using ISAs before the early noughties! I was an idiot. Also, I’ve not had holidays or bought cars that others have enjoyed, and have invested instead. I’ve also not bought a house yet, so there’s capital outside of that tax-free shelter that I’ve had to compound unprotected.

    You can save harder and end up with more, if you fore go some things. “Fair” does not mean everyone gets to use every available shelter to its fullest extent. To me it means the playing field is made more even for anyone to pursue whatever strategies they deem appropriate. (E.g. Piling all their money into a capital gains tax-free primary place of residence versus investing it in businesses).

    I think I’ve had a perfectly fine life regardless of my love affair with saving. If you want to know how it’s possible, just read Monevator — or better yet on the lifestyle aspects the Mr Money Mustache blog. (Although he’d blast me for living in London! 🙂 )

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