New budget plans will have the biggest impact on defined contribution pension savers and that changes made to ISAs and Personal Saving Allowance should prompt a review of individual long-term saving plans predicts Mercer, a consulting organisation in talent, health, retirement and investments.
George Osborne, Chancellor of the Exchequer, announced the budget for 2015 ahead of the election on May 7th.
Osborne claims that they have come up with a ‘plan that is working’. He calls Britain the ‘comeback country’ and that the UK is experiencing a growing economy, a record number of jobs, rising living standards, a reduced deficit and a reduction in the national debt.
The new budget includes proposals to set up a new Help to Buy ISAs for first-time buyers and reducing the Lifetime Allowance to £1 million.
In reaction to the new budget plans, Kevin Davey, Principal at Mercer says:
“Reducing the Lifetime Allowance to £1 million is only expected to impact four percent of people reaching retirement in the near future but it will affect more and more people over time. This will force many individuals to review their overall long term savings plan, and the balance of how they save between cash, ISAs, and pensions to maximise their post-tax returns. The introduction of a new tax-free “Personal Savings Allowance“, and the new tax efficient “Help to Buy ISA” for first time buyers, are significant changes and should be considered carefully as part of their overall savings plan.”
Osborne is states that Britain should stick with their ‘long-term economic plan’. Along with tax allowance the plan he confirmed that anyone over 55 who had pension allowance would have the option to trade it in for cash.
According to Brian Henderson, Partner at Mercer:
“The reduction in the annual Lifetime Allowance (LTA) to £1 million will hit DC savers harder than DB members. Under current rules, a DB pension of £50,000 will be impacted by the penalty tax charge. In contrast, an equivalent DC saver will only be able to receive a much smaller annuity before they are affected by the penalty tax charge. We estimate that a DC member will typically be able to buy a pension of under £25,000 a year based on current annuity rates.
Henderson adds:
“On the face of it, £1 million is a huge amount of money and beyond the reach of many. However, the impact of this reduction on DC savers reminds us that they continue to be the poorer relation when it comes to pension provision. To an extent, some DC savers will therefore welcome the Chancellor’s announcement of tax free savings on personal savings accounts of up to £1,000 a year and the increased ISA allowances as an alternative to pension savings. There has recently been a call for an increase in the level of total contributions to a pension arrangement to 15% of salary. For a 25 year old saver currently on a £30,000 salary then, using standard illustrations this participant would accumulate pension savings of £1.1m over his working life, which is in excess of the LTA. This cannot be the Government’s objective.”
Amie Filcher is an editorial assistant at HRreview.