DIY Investor Magazine
/
2015 Issue
18
PROBLEMS AHEAD?
George Osborne’s 2015 budget included the reduction
in lifetime allowance from April 2016 from £1.25 m to £1
m which continues the downward trend from the 2006
level of £2.5 m. However, achieving even the reduced
figure requires considerable application – assuming a
5% annual investment growth a 30 year old saver would
have to put away over £1,000 per month and starting
ten years later would require a contribution of around
£2,000 per month.
Those waiting to celebrate their semi centennial before
knuckling down would struggle to accumulate a seven
figure pot because of the £40,000 annual contribution
limit. If a 65 year old were to purchase an annuity with
£1m at today’s rates and wanted to secure a lifetime
income for a spouse they would achieve an annual
income of just less than £27,000 – approximately the
UK average wage.
The lifetime allowance will increase each year in line
with inflation from 2018 but the recent announcement
of 0% inflation for the first time since the CPI measure
was adopted in 1988 could result in those achieving
strong growth from their portfolio facing a punitive 55%
tax charge. The state pension increases in line with the
highest of CPI, earnings or 2.5% and it seems likely that
those making significant contributions and achieving
a good investment return could fall foul, particularly if
inflation remains low.
Of course index linking is only a comfort if the
allowance itself remains at current levels, whereas
recent cuts suggest that may not be taken as a given;
there are those that argue that the concept of an
annual allowance has been rendered redundant by
virtue of the reductions that have been made to annual
contributions.
Mr Osborne also announced that with effect from April
2016 the five million pensioners that currently receive
a guaranteed annual income will be able to sell their
annuity, paying tax only at their personal rate.
Those choosing to sell their annuity will be able to
either take a lump sum or draw an income although in a
Treasury document the Government said that it believes
that for most people, keeping their annuity income will
be the right decision.
Just as with Y2K, 6th April 2015 is being viewed in
some circles with some trepidation and some may
well take the opportunity to make some injudicious
purchases; DIY Investor Magazine will be treating the
day as the beginning of a whole new era rather than a
deadline and is looking forward to the ongoing debate
as the real effect of such new-found freedoms become
evident.
