Baggette & Company Wealth Management have outlined the aspects which we must consider when advising our clients with their financial planning; the salient points being as follows:
Dividend Allowance will fall
The tax-free dividend allowance will fall from £5,000 to £2,000 a year from April 2018. Mr. Hammond argued that the greatest beneficiaries of the perk are either director-shareholders or wealthy savers with substantial share portfolios and this action will “address the unfairness” of the current tax system. This move is expected to raise about £1 billion for the Treasury by 2020.
With the current Baggette & Company Wealth Management Balanced portfolio generating a dividend yield of circa 1.30%, we estimate you would need an Investment Account outside of Pensions or Individual Savings Accounts (ISAs) of at least £150,000 to be negatively affected by this change.
The reduction, however, does once again amplify the importance of using your ISA and Pension allowances to protect as much of your wealth as possible. The good news for investors is that the ISA allowance will increase next tax year (2017/2018) to £20,000; mostly offsetting the dividend tax reduction.
Income Tax Allowance trends higher
From 6th April 2017 the Personal Allowance, (currently £11,000), will rise to £11,500. Mr Hammond confirmed this will take hundreds of thousands of people, including many pensioners, outside income tax altogether.
Higher-rate tax is currently due on earnings of more than £43,000. Again, this threshold will rise to £45,000 from the next tax year (2017/2018).
Pension Planning gets a little more complicated
The government is pressing ahead with its planned reduction to the Money Purchase Annual Allowance, from £10,000 to £4,000 from April 2017, ignoring industry calls ahead of the Budget to revoke this change.
This restriction will hit investors who have used the new pension freedoms to dip into their retirement savings after the age of 55, by reducing their scope to make subsequent pension savings.
Our view is that this policy flies in the face of the Department of Work & Pensions’ (DWP) Pension Freedom Act, which offered retirees more flexibility with their pension savings from age 55. Anyone approaching retirement will now have to plan with more detail how and when they will access their pension savings, so as not to get caught up in these somewhat mutually contradictory policy goals.
Overseas Pension Schemes Tax Loop Hole Closed
In Mr Hammond’s speech he confirmed the additional restrictions that will apply to overseas pensions, with effect from 9th March 2017. Qualifying Recognised Overseas Pension Schemes (QROPS) transfers for individuals not in the European Economic Area (EAA) will now be hit with a 25% tax charge on transfer, limiting the effectiveness of this tax planning for some expats.
The charge will not apply if the individual and scheme are within the EEA or if the overseas scheme is provided by the individual’s employer. Only a “minority” of transfers will be affected, the Government said.
Baggette & Company Wealth Management believe this adjustment to the Pension system should not impede anyone with genuine retirement planning aspirations, as those retiring abroad still have the potential to transfer to an appropriate scheme.