Reflections on the Budget – The hysteria about pensioners blowing their retirement fund on a Ferrari by taking their entire pension fund in cash rather than as an annuity seems to have abated.
Car dealers and travel agents selling luxury holidays may be disappointed but the vast majority of the population are careful about their money. The main concern for most of our clients is not what colour Ferrari they should buy, but whether they will have enough money to “see them out”.
In this respect, the Budget seems to send conflicting signals when read together with previous policy announcements.
On one hand, the government has been discouraging savers by capping pension funds and making a 20% reduction in the amount that can be put into a pension fund each year.
On the positive side, the increase in the ISA allowance to £15,000 and the abolition of some of the previous restrictions means that the reduction in the ability to save for your pension has been compensated in part by the ability to grow a tax free fund in your own name.
What does it all mean?
The ability to do what you like with your pension fund can be seen as a libertarian measure designed to put people in control of their financial situation. The fact of the matter is that the obligation to buy an annuity was being pushed back, but the latest measures significantly advance something that many commentators had regarded as inevitable.
It has been said that this is one of the most political Budgets in modern times and that may be the case. From a practical point of view the main point to appreciate is that many clients will now want to have two separate funds – a pension fund and an ISA fund. Both have considerable tax free advantages but it seems to us that there may well be a case for combining the two funds. This might make a lot of sense from an investment point of view as well as reducing charges on the funds.
The other aspect to consider is what impact these changes will have on inheritance tax.
A recent study by the Institute for Fiscal Studies has calculated that the amount of inheritance tax that will be payable by estates in the next few years will be at a very high level, comparable with the high tax era of 40 years ago. For example, four years ago only 2.6% of those dying paid inheritance tax whereas in three years time it is predicted the number will triple to 10%. Rising house prices account for much of this.
However, the ability to free up money that would previously have been locked up in a pension fund may make it possible for clients to pass on funds to their children under the seven year rule and so diminish the amount of inheritance tax payable on death.
The tax planning opportunities made available as a result of the Budget should now be taken into account in every inheritance tax review.
If you would like any further information on this years budget, estate planning or tax issues please contact one of the Edwin Coe Private Client team.
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