What will Chan­cel­lor Ham­mond pull out of his red box on 29 Oc­to­ber?

We look at how savers and in­vestors could be af­fected by the forth­com­ing Bud­get

Shares - - CONTENTS - Tom Selby, se­nior an­a­lyst, AJ Bell

Em­bat­tled Chan­cel­lor Philip Ham­mond has al­ready dropped one sur­prise by an­nounc­ing an ear­lier-thanex­pected Bud­get on Mon­day 29 Oc­to­ber. In do­ing so he has bro­ken with the tra­di­tion of hold­ing the eco­nomic set-piece on a Wed­nes­day, im­me­di­ately af­ter Prime Min­is­ter’s ques­tions.

As al­ways the event will be a must-watch for savers and in­vestors. That is par­tic­u­larly the case af­ter Ham­mond ef­fec­tively scrapped the Spring State­ment, mak­ing Oc­to­ber’s event his only op­por­tu­nity in the fi­nan­cial year to an­nounce ma­jor tax and spend­ing changes.

The eco­nomic and po­lit­i­cal back­drop is chal­leng­ing. Un­cer­tainty over Brexit hangs over White­hall like a fore­bod­ing mist in a gothic Vic­to­rian hor­ror, while the Trea­sury must find some­where in the re­gion of £20bn to meet a fund­ing prom­ise for the NHS.

In the midst of all this noise, what ma­jor changes should you ex­pect when the Chan­cel­lor opens his fa­mous red brief­case in just un­der three weeks’ time?

PEN­SION TAX RELIEF

Rarely does a Bud­get go by with­out ru­mours that pen­sion tax relief for higher earn­ers could be set for the chop.

Un­der the cur­rent sys­tem tax relief is granted at your mar­ginal rate, mean­ing higher and ad­di­tional-rate tax­pay­ers get a big­ger up­front sav­ings bonus than ba­sic-rate tax­pay­ers.

Some cam­paign­ers want to see this sys­tem over­hauled, ei­ther through the in­tro­duc­tion of a flat rate of tax relief set at some­where near 30% or the abo­li­tion of higher-rate relief al­to­gether. Oth­ers have called for the tax-free lump sum – cur­rently 25% – to be capped.

Given pen­sion tax relief costs the Ex­che­quer around £25bn a year (when in­come tax re­ceived on pen­sion with­drawals is taken into ac­count), it would be naïve to think the Trea­sury isn’t con­sid­er­ing changes to raise short-term cash.

How­ever, a fun­da­men­tal over­haul seems un­likely in the cur­rent po­lit­i­cal cli­mate. Fur­ther­more, at­tack­ing the tax-free lump sum would be ex­tremely un­pop­u­lar among core Tory vot­ers.

In­stead, the Chan­cel­lor might look to raise funds by re­duc­ing the an­nual tax-free al­lowance – which cur­rently sits at £40,000 for any­one who hasn’t ac­cessed their pen­sion flex­i­bly – or low­er­ing the point at which the an­nual al­lowance ‘ta­per’ kicks in.

At the mo­ment those with

an ‘ad­justed in­come’ above £150,000 could see their an­nual al­lowance fall as low as £10,000.

Al­ter­na­tively, the Chan­cel­lor could re­strict ‘carry for­ward’ rules which cur­rently al­low savers to utilise up to three years of un­used an­nual al­lowances in the cur­rent tax year – po­ten­tially gen­er­at­ing an an­nual al­lowance of £160,000 if used to the max­i­mum.

In the mean­time, if you were plan­ning to top up your pen­sion this tax year any­way, it makes sense to do so be­fore the Bud­get to make sure you max­imise the in­cen­tives on of­fer.

DEATH BEN­E­FITS

It’s not just payments into your pen­sion that ben­e­fit from gen­er­ous tax treat­ment at the mo­ment. Any­one with a pen­sion who dies be­fore age 75 is able to pass on their en­tire un­used fund to loved ones with­out the re­cip­i­ent(s) pay­ing in­come tax – pro­vided the money is trans­ferred to their ben­e­fi­ciary (or ben­e­fi­cia­ries) within two years of them dy­ing.

If some­one dies af­ter their 75th birth­day, tax is charged at the ben­e­fi­ciary’s mar­ginal rate of in­come tax.

This regime was in­tro­duced along­side the pen­sion free­doms re­forms in April 2015, and re­placed pre­vi­ous rules which meant pen­sions could be hit with a 55% tax charge on death. Given the fis­cal pres­sures cur­rently fac­ing the Chan­cel­lor, it would not be sur­pris­ing to see this come un­der re­view.

TAK­ING YOUR TAX-FREE CASH

A po­ten­tial tech­ni­cal tweak at the Bud­get may in­volve the de­ci­sions you are re­quired to take when ac­cess­ing your 25% tax-free lump sum.

Un­der ex­ist­ing rules any­one who wants to take a lump sum from a de­fined con­tri­bu­tion pen­sion must first ‘des­ig­nate’ how they want to take an in­come from it. This could be through the pur­chase of an an­nu­ity pro­vid­ing a guar­an­teed in­come for life, or tak­ing a flex­i­ble in­come through draw­down.

A third op­tion, known in the jar­gon as UFPLS, al­lows you to take chunks of your money out and re­ceive 25% of each chunk tax-free.

The Fi­nan­cial Con­duct Author­ity (FCA), the City reg­u­la­tor, has rec­om­mended the Trea­sury re­view its rules and con­sider ‘de­cou­pling’ tax-free cash. If in­tro­duced, this would sim­ply mean you could take your tax-free cash from your scheme with­out mak­ing a de­ci­sion about how you want to take your in­come.

It is pos­si­ble that none of these things will hap­pen – or the Chan­cel­lor could pull an en­tirely dif­fer­ent rab­bit from his hat. What­ever hap­pens on 29 Oc­to­ber, we’ll en­sure you stay fully in­formed on how it will im­pact you both to­day and into the fu­ture.

Photo: Chris McAn­drew

Philip Ham­mond.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.