November UK Budget
It is quite hard to do a review of the Budget and its impact on financial planning when there was nothing much in the speech. After so many changes to pension legislation in previous budgets, it was good that this topic was left alone with nothing very significant of note. Hopefully this is a sign of things to come and will help to increase understanding of, and confidence in, pension planning.
Life Time Allowance
The only area of note on pensions was regarding those that have not yet taken their pension benefits and the Life Time Allowance (LTA). It was confirmed that the LTA for pensions savings will rise in line with the Consumer Price Index (CPI) as at the preceding September. This means that the LTA for 2018/19 will be £1,030,000. In his Budget of March 2015 the then Chancellor George Osborne announced a reduction in the LTA to £1m. He also declared that from 2018 the LTA would be index-linked to the CPI so should increase gradually over time. The 2017 Autumn Budget confirmed this.
For retirees who are over or near to the LTA, when they crystallise will be important. I have explained this with the following case study.
John has a pension fund of £1.3 million and decides to crystallise £1 million. Currently the LTA is £1 million. John decides to take tax-free cash of £250,000 (25% of £1 million). The remaining £750,000 is designated for income drawdown. There is therefore no LTA excess at this point in time. However, 100% of the current LTA has been used.
John will not benefit from any future increases in the standard LTA. However, if he waits until after the 6 April 2018 to crystallise £1 million then instead of using 100% of the LTA, he will have used 97.1% of the LTA. There will still be a lifetime allowance tax charge at the next benefit crystallisation event if he uses over his remaining 2.9% of the LTA, but less tax will be payable overall. The increase in the LTA means that if the LTA excess is taken as a lump sum, there will be a saving in tax of £16,500, and if the excess is taken as income, there is a saving in tax of £7,500.
State Pension Increases
In the last ever Autumn Statement in 2016 the Government confirmed that they will maintain the "Triple" Lock on State Pensions until 2020. This increases the state pension each April by the higher of:
- growth in average earnings
- the Consumer Price Index
This means that for those that are under the "old" or "new" state pension rules they will see an increase of 3% on their state pension income. This will include the additional state pension for those under the "old" state pension rules and the protected payment for the new state pension members, as both of these are linked to CPI (and not the triple lock).
Income Tax Bands
There was little change on these with the personal allowance increasing from £11,500 to £11,850. The basic rate of tax remains at 20% until income reaches £34,500 (previously £33,500).
All in all it was a very peaceful budget. The changes to the LTA, however, are important for those with a certain size of pension pot that are looking to take benefits. There could be advantages of delaying this until the next UK tax year starting 6th April. That is not to say that you should delay such planning. Anyone nearing their retirement should plan many months before they intend to take their benefits. My experience is that pension trustees can take weeks and in some cases months to transfer benefits which will have a knock-on effect if you are then planning to draw your benefits.