Budget 2014: Good news for savers and pensioners – if they're rich enough
The news that the amount you can put away in a tax-free individual savings account will rise to £15,000 from July is, perhaps, the most obvious point to take from George Osborne's self-termed "Budget for Savers". But the surprise announcement about pension liberation was the most dramatic change the Chancellor announced.
He plans to overhaul the pensions system: to put the right to decide what to do with a retirement nest-egg into the hands of individuals. Or, as he put it: "What I am proposing is the most far-reaching reform to the taxation of pensions since... 1921." It's all about handing over personal responsibility, so we will all eventually be forced to make our own decisions affecting our financial futures.
Mr Osborne's announcements are all aimed at those who save sensibly – and tax-effectively – whether it's in individual savings accounts or the retirement savings accounts known as pensions. Savers have a lot to thank the Chancellor for today – but insurers will be fuming.
It is the concept of pension liberation – the right for people not to have to buy an annuity with their retirement savings – that has hit insurance firms. Companies that make up the so-called "at-retirement" industry – which mainly make profits from flogging annuities – saw their share prices plummet after the surprise Budget announcement. Specialist firm Partnership fell by more than 50 per cent while Just Retirement slumped more than 40 per cent.
The top five UK pension giants – including names such as Aviva, Legal & General and Resolution – saw some £3bn wiped off their value, as investors reacted to the effective freeing up of the pensions market.
However, the news was good for financial advisers, as more people are likely to want professional help in deciding what to do with their pension pot, despite the Government promising that retirees will be given free face-to-face guidance. Finance firm Hargreaves Lansdown climbed 14 per cent on the news, for instance.
But the savings news should cheer everyone apart from insurance company shareholders, shouldn't it? The answer is no, because not everyone can afford to save. In fact, the average amount stashed in an Isa at the moment is only around £4,000, so an awful lot of savers already can't afford to make full use of the existing tax-free allowance.
That suggests the measure to increase the Isa limit to £15,000 from July – along with the increase in the amount you can put into Premium Bonds – is aimed squarely at the well-heeled, who currently find the £11,520 limit unsatisfactory.
The move comes after mounting calls for Isa rules to be relaxed, backed by Nationwide Building Society, which published research this week showing that one in eight (12 per cent) of people aged over 45 with a stocks and shares Isa have considered transferring these funds into a cash version, but could not do so.
Interestingly, recent analysis by the Institute for Fiscal Studies shows that young people save nothing because they're building up their income or paying off debt first. Those in their late thirties and forties save modestly, but people in their fifties and early sixties really get into the savings habit. In short, Mr Osborne's Budget for Savers is actually a Budget for well-off older folk.
The freeing up of the pensions market will give the 320,000 people who retire each year with defined contribution schemes the right to choose whether or not to buy an annuity. That, on the face of it, is good news – but in practice it's only good news for those who have saved up decent-sized pension pots. In other words: well-off older folk, again.
The new Pensioner Bonds, which will offer market-leading rates from next year at an estimated 2.8 per cent for a one-year bond and 4 per cent for three years, will also benefit older people who can afford to save.
It's probably just a coincidence that these are the people most likely to turn up at the poll booth come election time. And the pension rule change will come into effect in April 2015, just a month before the next general election. In short, it's a vote-winner aimed at those who are most likely to vote.
However, that doesn't mean it won't benefit others. Making pensions more flexible – by scrapping the need to buy an expensive and poor-paying annuity – will make pensions more attractive and may go some way towards reversing the trend among younger people not to bother with retirement saving at all.
Questions of cash: Make the most of the changes
How can I get the biggest benefit from these changes?
Save more. If you have savings then putting them into a tax-free wrapper is common sense. The Chancellor has simplified individual savings accounts (Isas) — renaming them New Isas — by increasing the annual limit to £15,000 from July and allowing holdings to be kept in cash, shares or funds, or any mixture of all, with transfers allowed from shares to cash as well as the other way around. This is a massive improvement and makes ISAs much more attractive.
So will I be better off putting £15,000 worth of my savings into one straight away?
Actually, in the short term, not that much. With savings rates currently so low, it's calculated that ploughing the larger allowance straight into an ISA will only yield an extra £30 worth of interest in a year. Of course, in the long-term the benefits of tax-free savings will mount up cumulatively and if you use your allowance in full each year, the difference could eventually be quite marked.
What about pension changes?
If you're retiring after April 2015 you suddenly have an extra lot of financial decisions to make. Before your retirement date you should find out about your options and what you should do to ensure you get the best outcome for yourself, whether that's stashing as much extra cash into your pension pot as you can now, or finding out the best ways to invest your cash when you get it.
Are the Pensioner Bonds worth a look?
The Chancellor promised they will offer market-leading rates when they are launched by National Savings & Investments next year. While the actual rate will depend on what happens to interest rates between then and now, he estimated that a one-year bond would pay 2.8 per cent while a three-year bond would pay 4 per cent.
Who wins and who loses?
When George Osborne suggested in his Budget speech that the economy was recovering faster than forecast, millions probably wondered when that recovery would trickle down to them.
"Support for savers is at the centre of this Budget," the Chancellor promised. He backed that up by increasing the amount you can stash in a tax-free Isa to £15,000 from July and scrapping the distinction between cash and equity Isas to allow people to shift money between the two.
He then announced widescale changes to pensions – which are, after all, just long-term savings schemes – to make them more flexible and stop people being forced to take out an expensive annuity with their pension pot.
All positive for those with more than £11,000 of savings or a decent sized pension pot.
But what about the millions of "hard-working people" – as Osborne's oft-repeated mantra has it – who have neither? Is there any good news in the Budget for them?
No. Not unless they're beer-drinking bingo-players in a two-parent family where both parents work.
If that's not you either, how will the changes announced in this year's Budget affect you? In fact, with savings rates at historic lows, even those who can afford to stash a few thousand in the new-look Isas won't be that better off in the short-term.
It is calculated that moving money from a standard deposit account into an easy access Isa up to the new limit will yield only an extra £30 worth of interest in a year.
Meanwhile, if you're a smoker, drinker or driver (hopefully not the last two together) your bills will rise. The personal finance website Money Dashboard has crunched some numbers for us to see how the changes will affect you.
In a nutshell, they reckon smokers will pay £69.06 more a year, drinkers will have to find an extra £19.76, while drivers will pay an additional £38.32 a year.
So who are the actual winners and losers after the 2014 Budget? Our analysis of the figures published on these pages, calculated by accountants Blick Rothenberg, reveals that, other than well-heeled savers who will benefit from the pension and Isa changes, there are two particular categories of people who will be better off than all others in the next tax year 2014-15, taking into account the latest changes to the tax regime.
The biggest winners will be married couples where both partners earn, who have two children, but who earn £30,000 a year gross between them. They will be a far-from-generous £33 better off.
Celebrating, if that's not too strong a word, that extra cash for the household budget next year, with the same £33 boost, will be pensioner couples born between 1938 and 1948 whose gross income is an already generous £150,000 or more.
However, the extra £2.75 a month is probably going to mean less to them than to the married couple with kids, even though the extra cash only just covers the cost of a comic once a month for their children.
Who will be worse off next year?
Most working people earning £125,000 a year or more will be hardest hit, facing a £4 deficit in their post-tax income in 2014-15.
That includes single people and married people with two kids where just one parent earns. Oddly enough, if both parents earn a total of £125,000 or more, their income is set for an annual boost of £28.
What about in the tax year 2015-16? A married couple who are both earners and have two children will be £40 better off if they earn £25,000. If they earn less, just £20,000, they can look forward to being £39 better off in 2015-16.
However, if a married couple with two children has just one partner earning, they will be £39 better off if they earn between £15,000 and £30,000.
The 2015-16 losers? It's those working people earning £125,000 a year who who will face a second year of being hardest hit. Single people and married people with two kids and one earner will see their incomes shrink by a further £3 in the tax year after next.
How will you do? Check your income against that closest to your own, according to which category you fall nearest to. The majority are a few quid better off, which is presumably largely down to the increase in the personal tax allowance to £10,500.