Budget 2014 Implications
This was probably the most important Budget since 2011, which set in place the austerity strategy for this parliament. Its significance lies not so much in the economic or fiscal announcements but more in the area of personal financial planning, allowing investors aged over 55 full access to their Defined Contribution pension assets, and in simplifying and extending the ISA savings rules.
The Budget measures had minimal impact on the economic forecasts, the government’s fiscal policy for this parliament having been set soon after the last election. Longer term, the Budget plans envisage a continued steady squeeze on public spending through to 2018/19. In terms of total spending cuts in the current austerity programme, only about one-third have so far been delivered, and where those cuts will come from 2016 onwards have not yet been identified.
The Budget measures are being seen as bolstering Conservative support for the older half of the population, a demographic that was seen as vulnerable to voting for UKIP. The economic recovery that is now finally emerging will also tend to shore up support for the Conservatives and belief in their economic competence. The opinion polls since the Budget have shown a clear improvement in Conservative support, narrowing Labour’s lead. However, to gain a majority in 2015, given the current constituency boundaries, the Conservatives require a substantial lead over Labour.
The changes to pensions have led to falls in the share prices of those companies that provide annuities and gains for investment and wealth managers. Longer term, a decline in annuity demand may mean less demand for very long-dated government bonds and infrastructure assets, which are favoured investments of the annuity providers, and greater demand for income-producing funds from investment managers.
The implications for personal savings, and pensions in particular, are profound. Combining Cash and non-cash ISAs into one account with a higher overall cap on the contributions of £15,000 will mean that, for most households, there need be no tax on the returns from their savings. Assuming a 2% annual increase in the ISA contribution limit and a 7% annual return, after 25 years, over £1.2 million can be accumulated completely free of tax inside an ISA, under the new rules.
For pensions, from 6 April 2015, from the age of 55, the government is proposing that investors can have complete access to their Defined Contribution pension assets, with 25% (capped by any applicable lifetime allowance) able to be withdrawn tax-free, further withdrawals taxed at the individual’s marginal tax rate for that year, and no requirement to buy an annuity. The individual will thus have much greater control and scope for effective financial planning over their pension assets. There is to be a short period for technical consultation prior to the introduction of legislation to enact these changes.
In the meantime, from 27 March 2014, (i) the minimum secured pension income requirement to qualify for “flexible drawdown”, which already provides complete access to Defined Contribution pension assets, fell from £20,000 to £12,000 per annum, and (ii) the capped drawdown limit rose from 120% to 150% of the equivalent annuity rate, providing scope for increased withdrawals up to 5 April 2015.
For more in depth analysis of the 2014 Budget please follow the links below.