I’m shocked to be saying it – but this was a great Budget for investors

The Budget is great for investors

I hate to say it, but I’m impressed.

The Budget is the most tedious event on the economic calendar. It’s leaked to within an inch of its life. It’s a prolonged party political broadcast.

And certainly since the dawn of the Gordon Brown era, if not before, it’s been all about making life more complicated in a fiddly, underhand fashion.

But yesterday marked a genuine departure.

Sure, the public finances are still completely up the creek with nary a paddle in sight.

But if you’re a saver or an investor, then believe it or not, this was a great Budget…

Isas have been supercharged

Let’s deal with the simple stuff first. The Individual Savings Account (Isa) allowance is going up to £15,000 a year. You’ll be able to fill that as you wish – stick the lot in cash (rather than half, as is the current rule) – or invest it all.

The range of investments is being widened too. Isas are hardly restrictive as it is. But the government is looking at how to allow peer-to-peer lending in Isas (so loans via Zopa and the like). That’ll make P2P far more attractive than it currently is.

There were also tweaks to rules on bonds – you’ll be able to hold bonds with a maturity of less than five years. It’s not a big shift, but it might be handy for some people – such as anyone who wants to build a bond ladder for example. (If you’re wondering what that is, my colleague Phil Oakley discusses it in this week’s issue of MoneyWeek magazine, out tomorrow – get your first three issues free here.)

This is great. We like Isas. They are more flexible than pensions, and a lot more transparent. People find pensions confusing, which means they’re the first port of call for any government looking to raise large amounts of cash on the sly (Gordon Brown’s dividend raid being the classic example).

But people ‘get’ Isas. They put money in. They take money out. It doesn’t get taxed (much). That makes them a trickier target for future governments, because it’s extremely obvious if you make a detrimental change to them.

Now that a couple can stick £30,000 a year between them in Isas (or at least, they’ll be able to very soon), they are a very feasible alternative to pensions for the vast majority of people.


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Pensions are a better deal too

But it’s not just Isas. The chancellor made pensions more attractive too.

Some of the stuff about annuities has been overhyped a little. Annuities have not been compulsory since 2011.

However, as the FT points out, “more than 90% of the 400,000 or so savers who retire each year still buy one.”

That’s partly because the alternatives are poorly explained by the financial industry. And it’s partly because the alternatives have not been especially attractive.

But that’s changing. At 55, you’ll still be able to take the 25% lump sum tax free. But if you want to, you’ll then be able to take the rest too, or a bit of the rest, at your marginal tax rate, rather than the 55% rate.

These changes are being put in place from April 2015. But if you’ve got a small total pension pot – £30,000 or less – and you’re at least 60 years old, then by the end of next week, you’ll be able to take the lot out (prior to the Budget, it was £18,000): as commenters have flagged up below, you can take the 25% lump sum free of tax, and the rest is subject to income tax. It’ll also be easier for more people to opt for drawdown – where you keep your pot invested, but take an income from it.

My colleague Ed Bowsher wrote more on the details here. But what it boils down to is that people with pension pots will have a lot more options when they retire. You’ll no longer effectively be forced to buy a rubbishy annuity due to a lack of feasible alternatives.

Good news for savers and investors

Clearly these changes are not going to create a massive retirement pot for you if you don’t already have one. Nothing can do that.

But if you are trying to save hard for your future, then these changes give you a lot more freedom as to how you go about it. That means taking more responsibility too. But that’s got to be a good thing, given how badly the financial industry has collectively managed our money.

Yes, there’s the risk that some people will blow through their pension pots more rapidly than they would have (though given current annuity rates, it may not make a lot of difference to their standard of living anyway).

And there’s the risk that the more rapacious end of our financial industry will already be trying to figure out how to create a structured product that has a nice shiny name, but still funnels half of your pension pot to them.

But at the same time, by stripping annuity providers of their near-captive market, they’re going to be forced to work harder for our money. And that should mean lower fees and better rates.

The Retail Distribution Review has already demonstrated the benefits of introducing tougher competition, more transparency and better investor education to the funds and advice business. This could do the same for annuities.

What’s the catch?

The big question of course is – what’s in this for George Osborne? It does appeal to traditional Tory voters who are being wooed by Ukip, or even those thinking of jumping the fence to Labour.

Tossing a bone to savers and pensioners who feel they’ve had a raw deal from the Bank of England is a shrewd move. Particularly as the Bank’s mission will be to keep rates as low as possible as long as possible.

There’s also the risk that this is softening us up for a gradual pensions / Isas merger. The more appealing Isas become, the easier it’ll get for the government to ditch costly tax reliefs on pensions.

And it’s worth noting that the government expects to raise money from this move. If lots of people take their pension pots as a lump sum, they’ll be paying more tax. So rather than annuity providers creaming off a chunk of your pension pot, the government will be getting it in tax.

But at least you’ve got the choice. And for anyone who wants to take and keep control of their own finances, that’s a good thing. We’ll be looking in more detail at pensions in next Friday’s issue of MoneyWeek – I’d look out for it, particularly if you already have a significant pot built up. If you’re not a subscriber, get your first three issues free here.

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  • MRSC

    “And if you’ve got a small total pension pot – £30,000 or less – you’ll be able to take the lot out, tax-free (prior to the Budget, it was £18,000).”
    It’s the Trivial Computation limit that has been raised to £30,000.
    From Moneyfacts: When you take (or trivially commute!) your pension pot the first 25% will be tax-free; however, you will have to pay income tax on the remaining 75%.
    Correct me if I am wrong.
    And be careful. HMRC tend to code these trivial payments on a Wk1Mth1 basis so that you might pay 40% on this 75% even if you are on low income. They should eventually reconcile their records but that could take years. You might be dead first. Best to do a self assessment return.

    • Moderator

      Thanks MRSC, you are right. We’ve amended the article.

  • Phil S

    What can I do if I’m already in drawdown; could I take the fund out of the control of the pension administrator, pay the tax, administer the remainder myself and save the charges of the pension administrator? Or is my only other option to convert to an annuity, which I don’t want to do?
    Regards

  • Pl0ns

    Dear John S.,

    I’m not sure who do you represent when writing this article. As I’m sure you are more aware of the difference between nominal and real interest rates then aware reader, your credibility as MoneyWeek journalist is put in danger…
    As CPI ( inflation ) index is manipulated and we are at negative interest rates for years now – ALL our savings left at bank or any financial institution LOSE value. If government decides to increase the ISA ( NISA ) limits then it allows to rip as even more… What a point of keeping life savings at bank account for 1 or 2% ( if lucky ) if inflation is much higher ? – considering the risk of the bank default.

    There are much better ways of storing the wale in risky environment as we are far from recovery.

    The issue is however you are trying to “shock” advert wrong ideas, you defend financial and government institutions witch does not correspond with MoneyWeek savers profit or even value preservation.

    There are mistakes and misleading arguments with your article witch contradicts financial economy basics.

  • sodit

    “it’s been all about making life more complicated in a fiddly, underhand fashion”…

    … you mean ‘making life more difficult, because, according to Labour, life isn’t already difficult enough’.

  • dlp6666

    To quote from this FT blog – ‘goodbye annuities, hello social care accounts':

    http://blogs.ft.com/off-message/2014/03/19/how-social-care-explains-the-budgets-pension-changes/

  • Paul Claireaux

    Interesting article John but, as MRSC notes above, you do need to watch your tax facts.

    My alternative (less glowing) assessment of the pension changes can be found here.

    http://wp.me/p45vXF-bF

  • Pinkers Post

    A great budget and not just for investors: Radical, beautifully balanced, and, for once, making a real difference. This chancellor has got it sussed. Poor Ed.

  • Angela

    I calculate that, if one is in drawdown and has a taxable income below the level at which tax comes in at 40%, the best policy would be to to calculate how much of the pension capital one could extract each year whilst staying within the 20% tax band and use that money to feed an ISA. Which is of course untaxed and, wonderful boon, unnecessary to declare. Also, so far, not accessible to the Treasury.
    On the other hand you could just leave it where it is and take it all out when you are 75, pay the 40% tax, and reinvest for whatever remains of your life. Which will probably still pay you more than an annuity.

  • Paul Claireaux

    To Angela

    There’s quite a lot more to these pension conundrums than meets the eye.

    One decision is whether you really need to Crystalise your pension at all – and you can find more on that issue here. http://wp.me/p45vXF-bF

    In a nutshell – if IHT is likely to be an issue then the answer might be no.

    Of course, you may have already crystalised your pension (perhaps to realise the tax free cash) so another question (if you’re already in DrawDown (DD) and don’t need all the income) is whether to switch if off or whether to take it at an optimal rate.

    Drawing out the income may then make sense – but just parking it into an ISA (whilst okay to build an accessible fund) may make less sense longer term.

    It might be far more tax efficient to use the income to boost some new pension contributions. I assume you’re still working.

    You’d enjoy tax relief on the payments in (as normal) and build a new pension fund which is both outside the tax net on death – and offers a slice of tax free cash when you come to crystallise it.

    Neat?

    I would thoroughly recommend that you speak to a good pensions adviser.

  • Paul Claireaux

    Whilst on the subject of death taxes – it’s worth reminding ourselves just how tax INEFFICIENT the ISA can be too.

    This is a key reason why George Osborne is so keen to raise the limit.

    It’s really not all about being kind to us – he has a keen eye on tax revenues.

    See here http://wp.me/p45vXF-bR

  • Changing Man

    John, I believe you are still misreporting the change for trivial pension commutation. From gov.uk “We’re increasing the size of a small pension pot that you can take as a lump sum, regardless of your total pension wealth, from £2k to £10k. We’re also increasing the number of personal pots you can take as a lump sum under the small pot rules from two to three”
    So if you have 3 pension funds of say £9k each you can take them all as a lump sum, but if you have one fund of £27k you can’t!
    Can anyone explain the logic behind that rule?

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