Would he introduce a "Pension ISA", or move to a flat rate of tax relief? Or would he surprise everyone and retain the status quo? Then, in the last few days before the Budget, there was an effective statement that the Budget would not contain any announcement on this.
However, we continue to believe that there will be a change, most likely in the 2016 Autumn Statement (and therefore post the EU referendum which is currently causing the government to postpone some of their more controversial proposals).
As a consequence, those currently making pension contributions and receiving 40% or 45% tax relief should still be of the mind-set that this generous relief is a finite resource and should be secured as much as possible while available, including the carry forward of any unused allowances from the last 3 years.
Whilst we still believe that a flat rate of tax relief is the most likely outcome of any change, the Budget did introduce the new "Lifetime ISA" which perhaps suggests the Chancellor has a preference for the Pension ISA. The Lifetime ISA (LISA) will be introduced from April 2017 and only available to those under 40. They will be able to save up to £4,000 per annum, with the government adding a 25% bonus (equivalent to 20% tax relief in pension terms). Holders will be able to remove their funds at any time, and withdrawals will be tax free. However, they will only be allowed to retain the bonus (and its related growth) if the withdrawal is to purchase a first home, or is made from age 60 onwards.
As a vehicle for retirement savings, the overall tax position of the LISA is generally more attractive than a pension, due to the tax free treatment of withdrawals. The one exception is for those who are receiving 40% or 45% on contributions, and expect to pay only basic rate (20%) income tax in retirement. However, the maths swings clearly from LISA towards pensions for everyone if there are employer pension contributions also available, particularly relevant for those who have joined their employer's pension as part of auto-enrolment.
There were a couple of other announcements in the Budget that are important from a financial planning perspective. The standard ISA allowance will remain at £15,240 in 2016/17, but from April 2017 it will increase substantially to £20,000. Recall that less than a decade ago this allowance was only £7,000. This level of annual allowance will allow substantial funds to be accumulated over a relatively short period of time within the tax favoured ISA wrapper.
The other announcement was the surprise reduction in the rate of Capital Gains Tax (CGT), down from 18% to 10% for basic rate taxpayers, and from 28% to 20% for higher and additional rate taxpayers (and Trusts). Whilst positive for those holding traditional investments, the Chancellor chose to further antagonise buy to let investors by expressly excluding residential property from these lower CGT rates.
The reduction in CGT on investments, in conjunction with the new £5,000 annual dividend allowance, makes holding investments directly (rather than through a wrapper such as an ISA, LISA or pension) relatively more attractive.
Having assets in the optimal combination of tax wrappers helps to minimise an investor's ongoing tax obligations whilst maintaining flexibility and accessibility. These changes, when considered in their entirety, will mean that many investors should be reviewing the allocation of their investments between direct holdings, ISAs, LISAs, pensions, and other wrappers such as onshore and offshore bonds.
Please get in touch if you feel that you would benefit from such a review.