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Autumn Statement 2016 - Financial Planning round-up

Several key changes will be introduced to the savings products available to individuals. I have outlined below the details of these updates and their impact.

Individual Savings Accounts (ISAs)

Every UK resident has an annual Individual Savings Account (ISA) subscription limit including children who can invest through Junior ISAs (JISAs) and Child Trust Funds (CTFs).  ISAs are long-term, tax-free savings accounts for individuals that can invest in either cash or stocks and shares. They are able to grow free of Capital Gains Tax and income tax, although they do fall within an individual's estate for Inheritance Tax purposes.

From April 2017 the JISA and CTF annual subscription limit will rise in line with the Consumer Price Index to £4,128 in April 2017. This increase will coincide with the increase in the ISA subscription limit from £15,240 to £20,000, as previously announced. The table below summarises the current and future position of the ISA, JISA and CTF allowances.

  2016/17 2017/18
ISA 15,240 20,000
JISA 4,080 4,128
CTF 4,080 4,127

Any child under the age of 18 and living in the UK is eligible to open a JISA. As regards the CTF scheme, this has now closed, but those who already have a CTF can either retain it or transfer it into a JISA. Parents, or guardians with parental responsibilities, can open a JISA in their child’s name and manage the account, but the money belongs to the child. The parent will retain investment control until the child reaches age 16 although the funds are not accessible by the child until age 18. Once the JISA is set-up, there is the ability for grandparents to make contributions on their behalf.

Example

Whilst the annual limit for JISA may not seem a large sum, in total over 18 years this can provide a good lump sum for help towards the purchase of .say, a home. Without any income or capital growth, the total over 18 years based on 2016/17 figures total over £70,000 per child.

New NS&I Investment Bond

From Spring 2017, NS&I will offer a new three-year savings bond, which will be available for 12 months. Interest will be paid gross at an indicative rate of 2.2%, although this may be adjusted to reflect market conditions when the product is launched. The bond will be open to those aged 16 and over, subject to a minimum investment limit of £100 and a maximum investment limit of £3,000.

Money Purchase Annual Allowance (MPAA)

The value of pension contributions that are eligible for tax relief is limited to an Annual Allowance (AA) of £40,000 (tapered to £10,000 based on earnings) with contributions in excess of this being subject to an AA charge.

Following the introduction of widespread pension flexibility in April 2015, we have had to become familiar with a new limit known as the Money Purchase Annual Allowance (MPAA). The MPAA applies to individuals who have already accessed their pensions under the new flexible rules.  In those circumstances, the maximum limit for further contributions was fixed at £10,000 per annum. Accessing a pension flexibly means taking benefits from a money purchase (cash balance or Defined Contribution) pension scheme through:

  • a flexi-access drawdown fund (whether or not having also taken a tax-free lump sum), which can be either:
    • income withdrawal, as and when required; or
    • a short-term annuity.
  • a lifetime annuity that allows actual or possible decreases in the annuity payable; and
  • a one off payment, known as an “uncrystallised funds pension lump sum” is paid for the first time – one quarter of which is tax free.

From April 2017, the MPAA will decrease from £10,000 to £4,000. This forms part of the government’s measures to restrict earners aged 55 and from potentially enjoying double pension tax relief. This is known as recycling i.e. an individual accesses a pension fund (on which they have had tax relief), takes money out and then puts it back in again (with tax relief).

Unlike the AA, it is not possible to carry forward any unused allowance once you are subject to an MPAA, and any contributions following the trigger event will be measured against that year’s allowance.

There is plenty to think about, please contact Michael Lapham or your usual Mercer & Hole contact if there is anything you would like to discuss.

 

 

Date: 25th November, 2016
Author: Michael Lapham

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