The Chancellor, George Osborne, has announced the Budget for 2014/15. Amongst other measures, the Government has announced major pension reforms.
We’ve picked out the measures, alongside the changes announced in the autumn, which are most likely to affect people over pension age now and in the near future.
State Pensions and benefits - new rates from April 2014
As previously announced, the basic State Pension will go up by £2.95 to £113.10 per week. At the same time, the standard rate of Pension Credit, which gives pensioners a guaranteed minimum income level, will increase to £148.35 a week for single people and £226.50 for couples.
This increase is partly being paid for by a reduction in Savings Credit (extra money if you’ve got some savings or your income is higher than the Basic State Pension). From April 2014 this will be a maximum of £16.80 a week extra if you’re single and up to £20.70 if you’re a couple.
Personal pension reforms
The Chancellor announced a number of major pension reforms to defined contribution pensions. These are intended to allow people to access their pensions more flexibly by lifting tax restrictions. Previously, if you took out over a certain amount from your pension you had to pay 55% tax on it. This has been abolished. However, you still have to pay normal rates of tax so you should check this before taking any money out.
For example, from 27 March 2014, if you’re aged over 60 and:
- you have total pension savings of up to £30,000, you’ll be able to take all of it as a lump sum (previously it was £18,000)
- you have individual pension pots of up to £10,000 you can cash these in as a lump sum (previously it was £2,000). If they are from personal pension pots, the lifetime limit has been raised from two to three.
From April 2015 you’ll no longer have to buy an annuity with your pension savings (an annuity pays you a fixed income for the rest of your life). Instead, after the age of 55, you’ll be able to cash in however much you want of your pension savings and decide what you want to do with it yourself. You’ll be entitled to free independent advice on your options.
Remember, you will have to pay income tax on any money you take out. You also need to check whether any state benefits you get will be affected.
New State Pension voluntary contributions
A new scheme starting in October 2015 will allow current pensioners and people reaching State Pension age before 6 April 2016 to pay a new class of voluntary National Insurance (NI) contributions. This is intended to help people to top up the amount of additional State Pension they receive by a maximum of £25 per week. It will be open for a period of 18 months from October 2015. Before taking this up you should consider carefully the cost and benefits.
The current State Pension age for men is 65. For women it is gradually increasing from 60 to 65. The Government has announced that the State Pension age will increase from 66 to 67 between 2026 and 2028. Five-yearly reviews will be introduced to look at further rises. State Pension age is then expected to reach 68 in the mid 2030s and 69 by the mid 2040s. Use Gov.UK's State Pension calculator to find out your State Pension Age.
If you have some savings, from July 2014 you can put up to £15,000 a year in cash or stocks and shares, tax free in a NISA (New Individual Savings Account), an increase from £11,520. You will also be able to switch freely between cash and equities within that ISA.
From January 2015, if you’re over 65 you’ll be able to put your money into a new Pensioner Bond savings scheme. This new bond is intended to help older people who have seen the value of their savings drop because of low interest rates. You’ll be able to save up to £10,000 in each bond and the rates are likely to be around 2.8% for a one-year bond and 4% for a four-year bond.
Personal allowance is the amount of income you can receive before you pay tax. For people born after 5 April 1948 this allowance will go up to £10,000 from April 2014 and rise to £10,500 in April 2015. Allowances for people born before 6 April 1948 stay frozen this year at £10,500 for people aged up to 74 and £10,660 for people aged 75 and over.
As previously announced, from April 2015 a person of any age whose income is too low to use all their personal allowance can transfer part of their unused allowance to their spouse or civil partner, as long as they’re not a higher or additional rate taxpayer or receiving the Married Couple’s Allowance. This means that you could make savings if one of you is not a taxpayer, and the other pays basic-rate tax. This change will only benefit married couples and registered civil partners.
10p tax rate abolished for low-income savers
The 10p tax rate on savings for people on low incomes will be abolished from April 2015. This means that if you have a total income of less than £15,500 per year, you will not have to pay any tax on your savings income. (The amount of £15,500 is based on the £10,500 personal allowance plus an additional £5,000 of savings interest.) You will be able to sign form R85 certifying that you are entitled to receive the interest without tax deducted.
George Osborne announced a spending cap of £119.5 billion on state benefits that will come into effect in 2015. The cap will not include State Pensions or Jobseeker’s Allowance but will cover other social security benefits including Pension Credit, Attendance Allowance and Winter Fuel Payments.
As previously announced, a new national 50% Council Tax discount will be introduced from April 2014 for an annexe where family members live. This scheme is intended to support extended families living together.
George Osborne previously announced that the Government will reduce energy bills by £50 per household. This will be done by changing the way the Warm Homes Discount is paid for, slowing down the Energy Companies Obligation (ECO) scheme and reducing charges made for the pipes and wires that bring you your energy. In his Budget speech he also announced a freeze in carbon taxes. This is likely to save households up to £15 a year on energy bills.
If you drive, you’ll be happy that the Government has again delayed a planned increase in fuel duty. The planned September 2014 increase of 2 pence a litre will not take place.