Scottish Widows Budget Commentary
This Budget commentary has been prepared by the Scottish Widows Techtalk team – Anne Young, Ian Naismith, Paul Thompson and Ian Allan – along with Nick Kirwan and Richard Dingwall-Smith from SWIP, who provided the economic commentary.
SAVINGS, PENSIONS AND PROTECTION
ISAs
The Chancellor confirmed that the limits would remain the same for 2007/08 as in 2006/07 but would increase in 2008/09. The current (2006/07), 2007/08 and future proposed positions are summarised below: Mini ISA Limits Cash Mini ISA Stocks and Shares Mini ISA 2006/07 £3,000 £4,000 2007/08 £3,000 £4,000 Maxi ISA Limits Cash Component Stocks and Shares Component 2006/07 £3,000 Balance up to £7,000 2007/08 £3,000 Balance up to £7,000 Overall Limit Cash Component Overall Limit 2008/09 - £3,600 £7,200 Other changes that are proposed from 6 April 2008 are A removal of the distinction between mini and maxi ISAs The facility to transfer previous years cash ISAs to a stocks and shares ISA PEPs will be brought within the ISA wrapper The Child Trust Fund (CTF) can be rolled over into an ISA when the child reaches 18. While the perceived tax benefits of ISAs might be more than the actual benefits in practice for many people, everyone can make use of the fact that no records need be kept and no return need be made of income and capital gains arising within ISA holdings. The stabilisation and simplification of ISAs is therefore to be very welcomed as it can only encourage people to save for their futures.
Anne Young ’ s view:
"The increase in the overall ISA annual contribution limit to £7200 from 6 April 2008 is of course welcomed – although a bigger increase would have been better – perhaps in line with the 20% increase in the cash limit. Equities have traditionally delivered higher returns than cash and the Government should continue to encourage stocks and shares investment for the long term. “
The fact that ISAs have a long term future is to be welcomed as are the proposals to simplify the rules. The changes to the ISA rules will not come in until 6 April 2008 which should give consumers and the industry time to adapt to the new rules. In particular the removal of the mini/maxi distinction should help members of the public better understand the ISA rules and the facility to allow transfers from cash to stocks and shares should encourage long term investment which is really to everyone's benefit. ”
State Pension
The Basic State Pensions for 2006/07 and 2007/08 are summarised below:
2006/07 2007/08 Single Person £84.25 pw/ £4,381.00 pa £87.30 pw/ £4,539.60 pa Dependent ’ s addition £50.50 pw/£2,626.00 pa £52.30 pw/£2,719.60 pa Total married pension £134.75 pw / £7,007.00 pa £139.60 pw / £7,259.20 pa 2.3 Financial Assistance Scheme The Financial Assistance Scheme (FAS) was set up to help members of pension schemes that were unable to meet their commitments when the employer became insolvent. The Pension Protection Fund, which is funded by a levy on occupational schemes, was set up in April 2006 to provide compensation but is not retrospective. The Government has received a lot of criticism because members of some pension schemes that failed earlier were set to receive little or no compensation through FAS. The budget for FAS is now to be increased from £2 billion to £8 billion, meaning that it should now make payments to all the estimated 125,000 scheme members who lost out.
Pensions Term Assurance
Pensions Term Assurance (PTA) will be killed off, as proposed in last December ’ s Pre- Budget Report. Although the change will not affect relief available for contributions paid by employers, it will have an impact on any pensions contributions paid by individuals that are used to fund PTA policies.
Tax relief will no longer be available for all contributions made on or after 1 August 2007 under occupational pension schemes in respect of PTA policies, unless the insurer received the policy application before 29 March 2007 and the policy was taken out before 1 August 2007. As far as any other pension scheme is concerned, tax relief will no longer be available for contributions made on or after 6 April 2007 in respect of PTA policies, unless the insurer received the policy application before 14 December 2006 and the policy was taken out before 6 April 2007.
Tax relief on premiums for policies that continue to qualify will be stopped if the policy is varied to increase the sum assured or extend the term, unless the variation is as a result of the exercise of an option within the policy.
Nick Kirwan ’ s view:
“ U-turns like this send out completely the wrong message to consumers about the need for protection. We worked hard with the Treasury to get to an acceptable middle ground position and were confident that we had reached a workable solution to link PTA to a pension. So this is a severe blow for consumers who will no longer have any tax incentive to protect their families. “ It's also a severe blow to the industry which has collectively invested and lost around £35 million in developing products and systems. And as the Government only introduced PTA less than a year ago, this u-turn has left the industry with sub-scale portfolios to administer for the next 25 years or more. What we need now is a clear strategy from the Government on how the State, the industry and employers can work together to address the protection gap. If we'd had a cohesive strategy before A Day last year we wouldn't have been in this position, so let's now work together to ensure we don't get here again."
ASP and other pensions changes
The pre-budget announcement on the changes to Alternatively Secured Pensions (ASP) will be included in the finance Bill 2007 with some minor changes: The minimum income that will have to be taken, this will now be 55% of the annual amount of an annuity for a 75 year old. The inheritance tax rules are being amended slightly where the fund is passed to another member of the scheme following the member's death. The effect of the change is to ensure that total tax charges are the same whether the inheritance tax is deducted before or after the unauthorised payment charge payable by the scheme. Where a scheme administrator cannot trace a member at age 75 HMRC had originally suggested that the member would be deemed to be in ASP. It is now proposed that the unclaimed funds should be held separately. If the member is traced he or she will have six months to choose either an annuity or ASP. Member who do not make a choice will be deemed to be in ASP and minimum income will be paid A consultation paper has also been issued on the details of how the Government can prevent inheritance of pensions through ASP. The intention of the ASP changes is to make it an unattractive option except for those with religious objections to annuities. It is likely to be successful in that, although some people may still choose the option despite the penal tax charges.
The technical changes, which were mentioned in the pre-budget report are also going ahead. These include a relaxation of the transfer rules where an individual has an enhanced lifetime allowance, and an increase to the period in which a tax-free cash can be paid to the member from the current three months to 12 months. This 12 month period could go beyond the individual ’ s 75th birthday.
Ian Naismith ’ s view:
"The move to kill off ASP removes an option that was attractive to consumers and carried no discernable loss of taxation income for the Government. This is one area where there is no consensus among the political parties, and further changes are likely should the governing party change in the next few years. Consumers continue to face uncertainty about how they will receive their pensions, which does not encourage saving for retirement."
Life insurance policies and commission
Rebated commission will now have an impact on the amount of any subsequent chargeable gains, but it will not be necessary for product providers to calculate the effect of any such rebate when producing chargeable event certificates. In calculating the chargeable gain on surrender, maturity or assignment for money or money ’ s worth of certain contracts (e.g. investment bonds), the current legislation allows “ premiums paid ” to be deducted. The meaning of “ premium ” is not defined in the legislation. For contracts made or enhanced on or after 21 March 2007, the amount of the premium used in the chargeable gain calculation will be reduced by the amount of any commission passed on to the policyholder or connected person by an intermediary and will not include any commission waived by an intermediary that is reinvested into the contract, for example by enhancement of units. The new rules will only apply where the premiums paid in a tax year exceed £100,000 and where the contract is surrendered, matures or is assigned before the end of the third tax year after the premium threshold is crossed. The existing reporting requirements imposed on product providers will continue to apply, even if the new rules are relevant. In other words, providers will not be expected to make enquiries to ascertain whether or not commission has been rebated when reporting on chargeable gains. The person liable to pay tax on the gain will have to add the amount of any rebated commission to any gain reported on the chargeable event certificate to arrive at the amount to include in their self-assessment return.
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