The new pension freedoms planned for April will provide unprecedented…
Firstly, thanks to those eagle-eyed readers who have pointed out that the deposit limit for banks and building societies has recently changed (again!). Unfortunately, this happened between writing the last financial article, the checking procedure and going to print. So I can confirm that from the 30th January 2017, the new deposit limit is £85,000 – apparently the new limit will protect about 98% of the UK public so people have reassurance about their money in banks, building societies and credit unions.
For those who are interested, you can research the compensation limits for a range of products, including investments, insurance, mortgages and general insurance on the Financial Services Compensation Scheme website (www.fscs.org.uk).
The most pertinent news over the last few weeks has, of course, to do with the Budget and of most interest was probably the fiasco on class 4 National Insurance Contributions for the self-employed on which the Chancellor has suffered rather an embarrassing reversal (for now anyway) and also the reduction of the tax-free dividend allowance from £5,000 to £2,000 with effect from the 2018-19 tax year. Unfortunately, the new allowance looks as though it may impact on some retired individuals who may rely heavily on dividend income as an integral part of their retirement income. The Chancellor was, I believe, probably targeting small business owners who have been taking “salary” in the form of dividends and thus avoiding some National Insurance Contributions and some tax. The answer, of course, for the retired investor is to make sure that you use your annual ISA allowance. For some years, it was widely mooted that, for a basic rate taxpayer, ISAs might not have been cost effective, however, with these tax rule changes on the horizon, the use of your annual ISA allowance looks more important than ever. You do need to take care when moving capital from investment funds (OEICs and unit trust) that you don’t rack-up a Capital Gains Tax (CGT) bill in the process – at the moment your CGT allowance (for 2016-17) for gains is only £11,100 (this hasn’t moved up very much over the years) whilst your new ISA allowance from next year will be £20,000. ISA holdings are tax-efficient in a number of ways but not being subject to CGT means that you have more flexibility in your investment strategy and therefore making changes to your ISA holdings (especially on a platform) might not have costs or tax implications for you. Most importantly, I often find that many investors completely forget that income from ISAs is not reportable for tax purposes and therefore ISAs are highly efficient as income-producing investments. With flexible income now available from pensions, it is important to consider the various tax advantages of different tax wrappers and how you could arrange for them to interact to provide the most tax effective income outcome in retirement.
Also don’t forget from the new tax year (2017-18), the new Residence Nil Rate Band will come into force which will mean an additional £100,000 for individuals who are leaving their family home directly to children or grandchildren. This is a welcome development for those faced with IHT and can be used along with a number of other planning opportunities. The amount of tax taken by the Capital Taxes Office in relation to Inheritance Tax has climbed steadily over past years with receipts in the 2015/16 tax year rising to £4.6 billion from the 40,000 estates that have been affected*. IHT, often known as the voluntary tax, can be successfully mitigated by careful tax planning.
* Statistics from HMRC receipts data.
The article is for information only, it is recommended that you seek independent advice before taking any action. Please note that levels of tax are subject to change.