After the pensions bombshell dropped in last year’s Budget there’s a sense that anything could happen in when George Osborne delivers the 2015 statement next Wednesday.
The chancellor used the 2014 Budget to unveil the so-called pension “freedoms”, rocking the industry to its core and taking even the City regulator by surprise.
The chances of a similarly seismic announcement this Wednesday would appear to be slim, not least because the Chancellor’s options are limited, but with an election just around the corner there may well be a few surprises in store.
Here are some pointers as to what might emerge from the 2015 Budget.
The proximity of the election means Osborne will be very tempted to increase the inheritance tax (IHT) threshold. The “nil rate band” has been frozen since 2009 at £325,000 (£650,000 for couples), but with rising asset prices dragging more people into the IHT net the pressure has grown on the government to raise the point at which the 40 per cent charge kicks in.
The Chancellor could increase the threshold to £1 million, matching the 2010 Tory election pledge.
Angela McMahon, private wealth manager at Anderson Strathern Asset Management, said: “The increase in the threshold would certainly ease the IHT dilemma faced by many families and allow the Chancellor to fulfil his promise to increase the level of the IHT threshold in 2015-16.”
Probability: Better than average.
The popularity of these products, launched in January and offering above-market rates of interest to savers aged 65 or over, will be seen as presenting another easy win for the Tories in their pursuit of silver votes. One option is to change interest payments from annual to monthly and so meet strong pensioner demand for a regular income.
John Mortimer, director at Shepherd and Wedderburn Financial, said: “I think he will launch another tranche, with a lower rate of interest but still in excess of the best bank or building society rates, and the new launch will offer the option to take the interest each month.”
Probability: Low on the list, but it’s certainly there.
The point at which 40 per cent income tax kicks in has fallen in real terms under the coalition, although it will rise from £41,865 to £42,385 next month.
The “fiscal drag” created by the frozen threshold has swollen the number of 40 per cent rate taxpayers by more than a million since 2010, with implications for payments including child benefits. However, the Chancellor may “re-announce” a further increase in the threshold this week, perhaps to £50,000. “I suspect we will hear a reiteration of the Chancellor’s plans to increase the higher tax rate threshold to £50,000 by end of the next Parliament if the Conservatives are still in government,” said Peter Young, personal tax partner at Johnston Carmichael.
More likely is another rise in the personal allowance (the amount you can earn before paying income tax). It’s already going up by £600 to £10,600 next month and Osborne may well nudge it up to £10,800. But with any giveaway there is usually a payback, warned Mortimer.
“I see National Insurance rates rising as the pay back and an increase in both employee and employer rates could very well happen.”
Proposals first aired last Autumn and set out again in January by pensions minister Steve Webb would allow existing annuity holders (who are therefore unable to take advantage of the new pension freedoms) to sell their annuity in exchange for a lump sum.
It was discussed by ministers yesterday and while the industry response has been decidedly cautious, it’s likely to appear either in Osborne’s speech or in the Budget papers.
“This measure would undoubtedly be popular with those who feel that purchasing an annuity offered poor value for money particularly those with small annuities,” according to McMahon.
But Mortimer said: “My concern with this is the amount that would be offered and the fees associated with such a transaction.”
Probability: Almost certain
Pensions tax relief
Rumours abound of a cut to higher rate tax relief, but with the pensions industry scrambling to be ready for next month’s big shakeup the chancellor is likely to leave pensions tax well alone.
If there is a change it would likely be the introduction of a new tax relief rate of 30 per cent, replacing the 40 and 45 per cent rates. But with Labour having already proposed reducing pensions tax relief for top rate taxpayers to 20 per cent Osborne will probably steer clear. “I cannot see him restricting the tax relief on contributions just before an election, but I do think this is a target in the future,” said Mortimer.
The lifetime allowance (LTA) - the maximum that can be saved tax-free into a pension – was reduced from £1.5 million to £1.25m in April and the annual allowance is currently £40,000.
Both of these could be further reduced, said Young. “The Chancellor may also consider reducing the three year carry forward period for unused annual pension allowances and a cut in the tax-free lump sum.”
Mortimer agreed: “You can go back and ‘mop up’ the previous three years of allowances if you have not used them and I do see this as a target. Whether he limits the timeframe rather than scrapping it is debatable but I can see him mulling this one over.
Probability: Can’t be ruled out.