Blurred Lines: Pensions V New ISA

Blurred Lines  Pensions V New ISAOnce the entire UK pension scheme is overhauled next year, the way in which savings are accumulated to enable comfortable retirement will be unrecognisable compared to what we see today.

The Budget 2014 introduced some huge amendments to pension rules which – after consultation of course- will kick in once we reach April 2015. The effects of these changes are very likely to blow the entire industry wide open, with new streamlined products, incentives, and ISA’s being developed by providers as we sleep.

Because of the unbridled access savers will get to their entire pension pot at 55, the need to by an annuity will for most, be negated. As a result, products will be developed to coerce the retiree into taking something slightly different, also, and perhaps most importantly, there is a very real chance that despite the savings apparently being made readily available, a percentage (yet to be decided) will be held back in order to pay for any health requirements.

New Tax, New ISA

Currently the tax regime for ISA’s is completely different to that of pensions, whereas a pension gets taxed as income when withdrawn (aside from the initial 25%), ISA’s are taxed before the money reaches the fund, but are free of tax upon withdrawal.

The proposed new type of ISA, Nisa as it has imaginatively been titled, is set to be introduced in July. This new ISA gives each individual the option to invest up to £15,000 a year in cash accounts or stocks and shares, or a combination of all. And this will be completely free of tax. This will be of particular appeal to couples who will effectively be able to put £30,000 into savings tax-free, meaning that despite the new pension ideas, the Nisa provides a new, and potentially better way of saving for retirement.

Inevitably, this new scheme has created much in the way of debate surrounding a potential one-tax-for-all. A single tax regime is seen as being the optimum way to move forward by the Treasury Select Committee (TSC), with the potential for flexibility to a point, but with the abolishment of the 25% lump sum tax-free option.

There are two ways to look at the relaxation of tax rules on savings and pensions: Either it will encourage people to save more, or it will encourage people to spend more as they know they aren’t going to lose as much in taxation.

While nobody can deny that a clearer and consistent tax regime would be ultimately beneficial to the saver and the government, there are some alternative viewpoints from government officials, relating to the idea that perhaps people can’t be trusted with the large sums of money they will undoubtedly draw-down because of the tax breaks afforded.

While this may seem slightly patronising to the ‘Great British public’, there is actually an extremely valid point hidden in there. With a health service already stretched beyond breaking point, the pension reforms could well mean that some will completely exhaust their funds to ensure they don’t have to pay for health care going forward. You see, currently anybody with assets below a pre-determined threshold are not liable for their own medical expenses. We all know that there are some who enjoy exploiting the system. And this is certainly an issue that has been raised.

One proposal currently being discussed, is the potential for some kind of sanctions being imposed on individuals electing to blow their entire pension, and subsequently having to fall back on the state to pay for their care.

This is still in discussion, but a new type of healthcare pension is more likely to be the way forward, essentially ring-fencing a proportion of the pension in order to pay for health, and then being free of inheritance tax if un-used.

The End for Annuities?

The Budget certainly had insurers scratching their heads, the future of annuities has been thrown into doubt, but after a few months of brainstorming, new products are beginning to take shape. The general consensus is that there will be products which provide a kind of happy-medium between the full draw-down of a pension, and the guaranteed income of an annuity. The plans are getting there, but the pension reforms are certainly having an impact which is being felt across various sectors, all of whom have their biggest brains locked in a room, and on the case…..

About John Cassidy

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