Autumn Statement 2015 – 9 points to note

On 25 November 2015, the Chancellor of the Exchequer delivered his Autumn Statement and spending review. This event allows the government to outline its taxation and spending plans, based on economic projections through to the tax year 2020/21.

The Chancellor covered a wide range of issues. Below we provide comment on news relevant to savers and those in retirement.

1.       Basic state pension updating

2.       New single state pension amount announced

3.       Personal Allowance and Basic Rate Tax bands increased

4.       ISA subscription limits frozen

5.       Buy-to-let and second home stamp duty land tax

6.       Automatic enrolment timeline changes

7.       Pension tax relief – no changes, yet

8.       Pensions annual allowance changes

9.       Pensions lifetime allowance reduced to £1m

1.      Basic state pension updating 

The basic state pension is only payable to people who reach State Pension Age on or before  5 April 2016. For more information about the basic state pension, see our November newsletter.

The basic state pension increases each year in line with the ‘triple lock’. The triple lock guarantees an increase each year by the higher of the rate of price inflation, the rate of wages growth, or 2.5%. The triple lock is likely to stay in place until the end of this parliament in 2020.

From April 2016, the basic state pension will rise to £119.30 a week from its current level of £115.95 a week. This represents a rise of 2.9% in line with wage inflation, this being the highest of the three triple lock measures.

From 6 April 2016, a new  state pension will be introduced. This will combine the basic state pension and additional or state second pension (formerly the state earnings related pension scheme) into one payment. Our November newsletter shows how the new state pension will work.

Aviva comment

This is good news for pensioners. The rate of price inflation is close to zero, so an increase in the basic state pension should make pensioners a bit better off – but only by £3.35 a week! Pensioners will experience different personal rates of price inflation depending upon how they spend their money. Those spending more on transport, food and non-alcoholic beverages have fared best over the last year as prices for these areas of spending have come down. Those spending more on clothing/footwear and eating out in restaurants will probably have seen their expenditure increase the most.

2.    New single state pension amount announced

The amount of the new state pension will be £155.65 a week.

From April 2016, the basic state pension and the additional pension, which is also known as the state second pension or SERPS (state earnings related pension scheme), will be combined into one single payment.

Anyone who reaches state pension age after 6 April 2016 – that is, men reaching age 65 and women reaching age 63 on or after that date – will receive the new state pension.

Everyone qualifying for the new state pension will receive a ‘starting amount’, which may be more or less than the amount of the new state pension.

People whose starting amount is greater than the new state pension will see their pension increase each year in line with inflation, but won’t be able to build up any new entitlement.

People whose starting amount is less than the new state pension will be able to build up further entitlement by earning additional National Insurance credits.

For more information, read our November newsletter.

Aviva comment 

The new state pension will help simplify the existing state pension system, particularly the additional pension, which is virtually impossible to calculate.

However, those hoping for a big hike in the amount they receive will be disappointed. Most people (80%) will receive the same amount as they would have got under the current system.

The main winners from the change will be women who have already worked 35 years but who have not built up much in additional pension, or have been ‘contracted out’ via a personal pension or employer’s pension scheme. The other main beneficiaries will be those who have been self-employed over most of their working life.

State pension statements issued by the Department for Work and Pensions over the last year indicate that a third (33%) of women will be better off, whilst only 9% of men will do better out of the new system.

However, whether you are better off or not, the government has indicated that no one will get less  under the new system than under the old. And everyone will now have a clear idea of how much they will get when they reach state pension age.     

 

3.    Personal allowance and basic rate tax bands increased

From 6 April 2016, the personal allowance – the first part of your taxable income on which you pay no tax – will increase from £10,600 to £11,000.

The band of taxable income on which basic rate tax is paid will increase from £31,785 to £32,000 on 6 April 2016.

This means that someone will have to have taxable income of £43,000 in the next tax year (2016/17) before they start paying higher rate tax.

Aviva comment

The increase in the personal allowance is higher than either the rate of price or wage inflation. This should make lower earners feel a tiny bit better off, increasing the take-home pay of basic rate taxpayers by £1.54 a week.

4.    ISA subscription limits frozen

ISA limits usually increase each year in line with the consumer price inflation (CPI) figure for September. The government can of course override these normal increases as they did in July 2014 when raising the limit by £3,480 from £11,520 to £15,000.

However, in this Autumn Statement, the government has decided to freeze the ISA allowance at £15,240 and Junior ISA allowance at £4,080 for 2016/17.

Aviva comment

Given that inflation is hovering around zero, no increase in ISA allowances was expected. The level of the ISA allowance allows the vast majority of savers to shelter most, if not all, their non-pension savings in a tax-free environment.

5.    Buy-to-let and second home Stamp Duty Land Tax (England, Wales and Northern Ireland only)

The government plans to increase the rate of Stamp Duty Land Tax (SDLT) payable on purchases of buy-to-lets and second homes in England and Wales. This will take effect from 1 April 2016 and be charged on any properties purchased for £40,000 and above.

The new rates of stamp duty will not apply to the purchase of caravans, mobile homes or houseboats.

The rates will be as follows:

Property purchase price

Rate of Stamp Duty Land Tax

Up to £40,000

Nil

Next £85,000 (the portion from £40,000 to £125,000)

3%

Next £125,000 (the portion from £125,001 to £250,000)

5%

Next £675,000 (the portion from £250,001 to £925,000)

8%

Next £575,000 (the portion from £925,001 to £1.5m)

13%

Excess over £1.5m

15%

Scotland has its own Land and Buildings Transaction Tax.

Aviva comment

Many people are relying on buy-to-lets as a source of income, particularly in retirement.

This increase in SDLT is in addition to the changes already announced which will limit tax relief on buy-to-let mortgage interest to 20%.

Taken together, these tax changes make buy-to-lets less attractive as an investment.

6.    Automatic enrolment timeline changes

Everyone who is employed and eligible will be automatically enrolled into a pension by 2018, with current minimum contributions set at 1% from the employer and 1% from the employee (before tax relief).

These rates were due to rise to 2% from the employer and 3% from the employee in October 2017 and again to 3% from the employer and 5% from the employee in October 2018.

These two increases will now be put back to 6 April 2018 and 6 April 2019 respectively.

Aviva comment

Automatic enrolment has been a big success so far with around 90% of people enrolled staying in and making pension contributions, many for the first time.

The current total contribution of 2% in addition to the new single state pension is still nowhere near enough to fund a comfortable retirement for the vast majority of people.

However, the delay in the increase is only six months and, many employees and employers are already contributing more than the 2019 minimum limits of 5% (employee) and 3% (employer).

There is nothing to stop employers and employees increasing their contributions earlier than required.

7.    Pension tax relief – no changes, yet

As expected, there was no announcement on pension tax relief, but the Autumn Statement document confirms that an announcement will be made at the March 2016 Budget.

Aviva comment

At this stage, no one knows what the new rules might be or whether the status quo will prevail.

Those people considering making contributions before the March Budget may benefit if they feel that the change in rules will prove to be a disadvantage to them. If in doubt, consult a qualified and regulated financial adviser.

 

And a couple of timely reminders from the Summer 2015 Budget…

 

8.    Pensions annual allowance changes

Although this measure was first announced in the 2015 Summer Budget on 8 July, it’s worth a reminder that these new rules take effect on 6 April 2016. They only affect people with both income of £150,000 or more including  total (employee plus employer) pension contribution, and income of £110,000 or more, net of total pension contributions.

Those who think they might be affected can read more in our Summer Budget briefing note.  

Aviva comment

This change was announced in the Conservative Party manifesto ahead of this year’s General Election, so doesn’t come as a complete surprise. However, the calculations are complex and difficult because total income is not known until the tax-year end, by which time pension contributions for that tax year will have been paid. People who earn more than £110,000, and pay pension contributions, should consider speaking to a financial adviser.

9.    Pensions lifetime allowance reduced to £1m

The government announced this change in the March 2015 Budget, but it is worth considering whether you might be affected. This affects the maximum amount that people can withdraw from their pension tax efficiently. The current cap of £1.25m will reduce to £1m from April 2016.

You can read more about this change in our Summer Budget 2015 briefing note

Aviva comment

£1m might sound like a lot of money but it would only buy a guaranteed index-linked lifetime income of about £30,000 for a 65-year-old, assuming the pension was paid at half that level to their spouse on death. 

Savers who are uncertain whether they should pay more money into their pension, and/or opt for one of the lifetime allowance protections  should consult a financial adviser.

 

AR01572  11/2015

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