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December 5, 2012 2:26 pm
Experts react to the measures announced in the Autumn Statement
Patrick Stevens, tax partner at Ernst & Young, said: “The chancellor’s announcement on the restrictions on pension relief to £40,000 per annum, together with a reduction in the lifetime limit from £1.5m to £1.25m, is the second time we have seen a change in this Parliament. This will deter contributions above this annual amount and will particularly impact on some of those in defined benefits schemes, including many civil servants, teachers and nurses. Last year’s changes allow the resulting large tax charges to be offset from pension pots, avoiding an immediate cash charge.
Vince McLoughlin, partner at business and tax advisory firm, Russell New, said: “There was a time when investing in pensions to provide financial independence in retirement was seen as a good thing. Now we seem to be going to the other extreme and persecuting even middle-income earners. Does this now mean that we are encouraging or discouraging pension provision? I think most people could accept a drop in the annual allowance from £255,000 [the limit two years ago], but down to £40,000 could be a drop too far.
“The problem is that far from being an attack on the wealthy, as it is portrayed, the restriction to £40,000 starts to hit the middle-income earner and the heart of Tory support. It could be political suicide. Maybe a more acceptable solution would be to restrict relief to the basic rate – simple to operate and overtly equitable to all earners.”
Andrew Penman, head of London private clients at PKF, said: “If I put £100 into my pension today, what will I get out on retirement? That question is hard enough to answer anyway, without the Treasury moving the goalposts on a regular basis.”
Reaction on lifetime allowance cuts
Ian Malone, lawyer in the pensions team at Taylor Wessing, said: “Many will remember pre-Budget 2011 predictions that the annual allowance would be cut to as low as £30,000 from the then comparatively whopping £255,000 – only to see a marginally-less-savage reduction to £50,000. It seems the chancellor is catching up with the 2011 prediction, using the opportunity of the Autumn Statement to announce a further cut in the annual allowance from 2014 to £40,000. The chancellor also announced that the lifetime allowance will be reduced to £1.25m from in the same tax year.’
‘It is questionable whether reducing the tax efficiency of pension savings to pay for short-term priorities really fits the message that everyone should be planning for retirement. In a year which saw a television commercial for auto-enrolment featuring Theo Paphitis and Karren Brady bracketed by workers in high-vis jackets declaring ‘I’m in’, these changes might cause the average worker to wonder exactly what it is they are getting into.”
Raj Mody, head of pensions advisory at PwC, said: “The reductions in both the annual allowance and lifetime allowances completely undermine confidence and trust in pensions. This is a direct blow to the pensions savings culture and could put pressure on the few remaining private sector defined benefit (DB) schemes to close. Employers may also be inclined to lower their contributions to defined contribution (DC) schemes to avoid inadvertently breaching thresholds.
“The trouble with repeated reductions in the allowances is that everyone will suspect further erosion to the system any time the UK economy runs into difficulty and the government needs to raise more tax revenue. Constant changes to pensions mean employers and employees are much more likely now to throw in the towel and stick closer to the minimum savings required. Moreover, reducing the lifetime allowance again not only limits people’s tax-free cash at retirement but will add yet more complexity to the running of DB schemes as another form of protection is introduced.
“These changes will hit DC savers harder, which seems unfair. Someone saving the maximum of the £40,000 annual allowance into a DB scheme would receive a pension of £2,500 a year, but a DC saver investing the same amount, may only be able to secure a pension of about two-thirds of that amount, because of current annuity prices. The cut in annual allowance means savers in DC schemes, who want to contribute the maximum amount, could be losing out on £300 of pension payments a year. It is unhelpful to reduce the allowance thresholds just at the time when the government is trying to encourage people into DC pension schemes through auto-enrolment.
“The measure is aimed at targeting the wealthy, but could in fact hit middle-income workers or long-servers in final-salary schemes. People who deliberately plan to increase pension savings later in life, rather than save a little each year, will be unfairly penalised and restricted in their retirement planning.
Keith Evins, head of UK funds marketing at JPMorgan Asset Management, said: “Today’s announcement to increase Isa limits to £11,520 is good news for savers. Consumers are continuing to feel squeezed when it comes to their finances and making savings as tax efficient as possible should be a key priority for everyone. But it is not just the Isa limit in itself that is important; we as an industry need to spend more time and effort on transforming “consumers” into “savers” and encouraging more people to take out and contribute to savings accounts in general and tax efficient vehicles such as Isas in particular.
“An Isa is a simple way of kick starting a regular savings habit – by starting to save £50 per month for example, you could accumulate an Isa savings pot of over £4,000 in five years. With interest rates on cash savings at an all-time low, now is the time to consider whether an investment Isa is not a better solution for your hard-earned money!”
Catherine Penney, vice president at Barclays Stockbrokers, said: “Increasing equity ISA allowances from 6 April 2013 to £11,520 – from the current £11,280 – is a further step to encourage investors to save tax efficiently and should give them the ability to move even more of their investments into tax efficient vehicles. For those seeking income at a time of record low interest rates, corporate bonds have been a popular choice. 2012 has seen a consistent flow of retail bond issues which offer an interesting alternative for those seeking higher returns to preserve the value of their income stream. Holding these within an ISA means this income is tax free.”
Gavin Oldham, chief executive of The Share Centre, said: “Today’s announcement of a consultation reviewing access of AIM stocks through ISAs is very good news for UK individual investors, and something The Share Centre has been campaigning for for a long time.
“There is simply no logic in keeping AIM shares outside an ISA portfolio. Investors are already able to access the AIM market through a SIPP, and there are many AIM listed stocks that circumvent these restrictions through an international dual listing. Investors can currently invest their ISA allowance in small cap shares, often with the same risk profile and exhibiting the similar levels of volatility as AIM stocks.
“Personal investors are an important source of capital for UK businesses, and opening the AIM market to ordinary ISA investors could help raise much needed equity capital for the UK’s SMEs. The AIM market offers investments with some of the growth prospects available to UK investors, and giving investors access to the AIM market also allows important portfolio diversification. The Share Centre looks forward to being able to offer AIM shares within its Self Select ISAs and will take an active part in the consultation”.
Henk Van Hulle, head of savings at the Post Office, said: “Savers can let out a Christmas cheer - the Chancellor’s move to increase the overall ISA limit to £11,520 from April 2013, with up to half in a Cash ISA (£5,760), is good news for those looking for a tax-efficient haven for their savings. With family finances squeezed, it is important they receive as much support as possible to save. This increase to the ISA allowance will provide them with a much-needed opportunity to boost their tax-free savings.”
Patrick Stevens at Ernst & Young, said: “The personal allowance is going to go up from April 2013 to £9,440. We knew that it was going up to £9,205 but the chancellor has added a little bit more. It is taking him further towards his £10,000 threshold, which he will need to do next year before the election.
“He has also raised the other tax rates by 1 per cent. The amount that employees will need to earn before they are pulled into the higher-rate tax threshold is going up by 1 per cent. However, if you have a job at that level you are likely to get a 2 per cent or more annual increase in your salary, so it means that more people are still likely to go into the higher rate of tax because the threshold is only going up by 1 per cent.
“In terms of inheritance tax, the nil-rate band is being increased by 1 per cent to £329,000 in April 2015. Bearing in mind the £325,000 level has been with us for a few years, and will be with us until 2015, this means that the value of this relief is being eroded all the time with inflation. It also means more people are being dragged into the IHT net all the time.”
Richard Mannion, national tax director at Smith & Williamson, accountancy and investment management group, said: “Personal tax allowance to go up an extra £235 from April 2013 which is great news for those at the lower end of the market.
“The extra increase in personal allowance from next April takes us closer to the target of £10,000 more quickly than originally planned and it is obviously common-sense to take those on the lowest incomes out of income tax. This time higher rate taxpayers will get some of the benefit but at £47 for a full year, probably too small to notice!
“The increases to thresholds of 1 per cent will be less than inflation and therefore it is likely that many taxpayers will end up paying higher rate tax because of the impact of ‘fiscal drag’.”
Peter Goodman, Partner, Wilkins Kennedy said: “Raising the inheritance tax threshold is helpful, but it hasn’t been raised nearly far enough. Inflation has already significantly chipped away at the value of the threshold, so a rise of just one per cent after six years is disappointing.”
“Some might describe this as a stealth tax. £329,000 is still well below where the threshold would be if it had been tied to inflation since 2009. By not raising the threshold further, the government has dragged more and more families, many on ordinary incomes, into the inheritance tax net.”
“This is particularly true in the South-East, where high property prices mean average income families can end up being burdened with inheritance tax bills on relatively modest estates. A fairer way to adjust the inheritance tax threshold would be to peg it to the Retail Price Index or Consumer Price Index. This would ensure that families on ordinary incomes are not hit disproportionately hard by a tax that was not originally intended to affect them.”
Simon Leney, partner at law firm Cripps Harries Hall, said: “‘The planned increase in the IHT threshold by £4,000 is welcome news; it will have the effect of reducing IHT in respect of deaths after 5 April 2013 by £1600. The threshold has been unchanged since 2009. Until then the threshold had been index linked for some years, but that was abolished by Alistair Darling’s budget, so the change in threshold also re-establishes the principle that it should be adjusted to reflect capital values eroded by inflation. However the amount of the increase means that the relative value of the threshold still remains lower, after adjusting for inflation, than it was in 2009.”
Dominic O’Connell, executive director and head of tax trust & estate planning at Coutts said: “The debate over whether a ‘mansion tax’ should be charged on high value residential properties is an extremely contentious and emotive issue both in and outside of the Government. Property owners and buyers have only just been hit by an increase in SDLT for properties valued over £2m and so the introduction of an annual ‘mansion tax’ could have proved hard to bear.
“Not only would this measure have been extremely unpopular with many high net worth individuals, it could also have been considered unfair for the typically more elderly population living in certain property ‘hot spots’, who may have benefitted ‘on paper’ from the rise in house prices while they themselves are very income-poor.”
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