Tax breaks under threat?

The Chancellor is due to make his Autumn Statement on 4 December, and it is being suggested that some of the tax advantages of ISAs and pension schemes could be under review.

When ISAs were launched in 1999, the maximum investment limit was £7,000, of which £3,000 could be contributed to a cash ISA. The limit has since risen to its present figure of £11,520, of which half can be invested in cash ISAs.

ISAs replaced PEPs (Personal Equity Plans), and the total amount which could have been invested in PEPs and ISAs is £218,000. However, with the benefit of shrewd investment decisions and the reinvestment of income, a few people have amassed PEP and ISA savings which now exceed £1 million in value.

This has prompted suggestions that the well-off are being unduly favoured and that a cap should be placed on the total value of accounts. However, any such cap would be very difficult to administer in practice and Treasury officials have emphasised that at present they are only fact-finding.

Successive governments have of course gone much further then fact-finding when it comes to pensions. The tax advantages of pension savings have been progressively curtailed, and with effect from April 2014 both the maximum permitted annual contribution and the maximum total lifetime value eligible for favoured tax treatment are to be further reduced – to £40,000 p.a. and £1.25 million respectively.

The particular pension benefit which it has been suggested might now be under review is the amount which can be withdrawn in the form of tax-free cash – in the case of personal pensions, 25% of the total.

Tax-free cash can be drawn at any time after age 55 while leaving the rest of the pension pot in place, and some alarmist commentators have suggested that this right should be exercised at the earliest possible time in case it is withdrawn.

The concern here may have arisen from proposals in the Pensions Policy Institute’s July report on pension tax incentives, which made a few radical proposals, including reducing the tax-free cash allowance to 20% and/ or capping it at £36,000.

However, it seems unlikely that either possibility will be pursued. Too many people have built the expectation of pension tax-free cash into their financial plans.

Even if the proposals were pursued, the established practice is to provide guarantees that those with existing entitlements would be no worse off. Nevertheless, it continues to make sense to take advantage of current ISA and pension allowances while they are available.

Duncan R Glassey
Senior Partner – Wealthflow LLP

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