Chancellor George Osborne said he expects this measure to bolster Britain’s coffers by contributing an extra £600m in tax each year, despite the fact that only 4% of UK pension-holders approaching retirement will be affected by the cut.
From 2018, Osborne said the lifetime allowance will be indexed to protect pension pots from inflation, which therefore means the allowance will begin to rise again.
But he ruled out a proposal to reduce tuition fees by restricting the annual allowance for pension savings. This means the annual allowance will stay at £40,000 a year.
“That proposal involves penalising moderately-paid, long-serving public servants, including police officers, teachers and nurses, and instead rewarding higher paid graduates,” he said.
“Build the economy on savings”
Also announced in today’s Budget was a tax-free allowance for savers, which – according to Osborne – will help “build the economy on savings not on debt”.
The personal savings allowance will be introduced in April next year, and means a saver earning less than £42,700 a year will not have to pay tax on the interest on the first £1,000 of their savings.
Higher rate taxpayers earning between £42,701 and £150,000 will only be eligible for a £500 tax-free savings allowance.
The Chancellor also announced the introduction of two new ISAs: the “Fully Flexible ISA” and the “Help to Buy ISA”.
In a Help to Buy ISA, the government will contribute a 25% bonus for each monthly deposit a person saves towards their first home, meaning a person who has saved £12,000 in total will be given a bonus of £3,000.
“Without losing”
Meanwhile, a flexible ISA will give people greater freedom to access their cash ISA savings. “People will be able to take their money out, and put it back in later within the same financial year, without losing any of their tax-free entitlement,” said Osborne.
“People have already paid tax once on their money when they earn it. They shouldn’t have to pay tax a second time when they save it.”
Both ISAs will come into effect from this autumn.
“Fair and stable”
Responding to today’s Budget, Daniel Godfrey, chief executive at the Investment Association, said: “Increasing the attractiveness of ISAs should foster a stronger savings culture in the UK, supporting the broader ISA brand.
“We also believe that long-term savings through pensions needs a fair and stable regime. While growing fiscal pressures on levels of tax relief – as well as wider concerns about its distribution – mean that reform is needed, the continuing erosion of tax relief undermines the pensions environment.
“A new and lasting settlement is needed to encourage consumer confidence in pensions as a long-term savings vehicle, based on effective use of tax incentives at a level that is affordable for the Exchequer.”
“Shrinking”
Fund manager at wealth planning and advisory group Sanlam, Rick Eling, said: “Pension freedoms are growing, but the opportunity to benefit from pension tax reliefs is shrinking.
“A lifetime allowance of £1m in reality isn’t very high and could be reached by a person investing quite modest regular sums from age 25 to age 65, with a fair wind from the markets.
“A £1m pension pot offers a ‘best buy’ annuity income at today’s prices of about £55k a year.”
