Spending review & autumn statement 2015 – commentary.

25th November 2015

The Chancellor has today delivered the Spending Review & Autumn Statement 2015. Whilst the speech set out his spending plans over the next 5 years, there were other announcements made including those relating to pensions and taxation;

State pension

The Chancellor confirmed they will maintain the triple-lock (the higher of price inflation, earnings growth or 2.5%) and that the basic state pension will rise by £3.35, bringing it to £119.30 per week. However, for those retiring on or after the 6th April 2016, the new single tier state pension will be no less than £155.65 and will depend on having 35 qualifying years of National Insurance contribution. There will be a deduction for those who were contracted out of the Additional State Pension.

Jonathan Watts-Lay, Director, WEALTH at work, leading providers of financial education, guidance and advice in the workplace comments, “In reality, not everyone will be eligible for the maximum amount of the new state pension. Therefore, it is important that employees check their State Pension record and National Insurance contribution history early; if they have any gaps they may still be able to make up the difference. We urge everyone approaching retirement to make an enquiry to find out what they are going to receive. They can request their State Pension statement using a form called a BR19, which is available online or by calling the government helpline on 0345 3000 168.”

Buy-to-let

Some people plan to use buy-to-let properties to fund their retirement as an alternative to saving towards a traditional pension pot. However the Chancellor has continued the theme, set in the summer Budget, of making such investments less attractive from a tax perspective.

In the summer the removal of the wear and tear allowance was announced. Previously, landlords of furnished properties could claim 10% of their rent as tax relief for wear and tear, but this is no longer the case. Instead, the allowance is being replaced by a system that only allows landlords to deduct costs they actually incur. Also, the tax relief landlords receive on their mortgage interest payments was to be cut from 40% or 45% to 20%. Today it has been announced that the purchase of additional residential properties, such as buy-to-lets, will be subject to higher stamp duty, 3% above the current rates. Additionally and under consultation, capital gains tax on the disposal of a second property will be required to be made within 30 days of the completion of the disposal as from April 2019.

Watts-Lay comments, “It is clear the Chancellor has targeted the buy-to-let market and is reducing the previous tax breaks. These changes may put off new entrants to the market who were relying on the tax breaks to make the investment viable.

He continues, “Although there are other considerations to take into account, I believe there are other more tax efficient and flexible methods of saving for retirement. Make sure that if you are still working you have maximised your pension savings on which valuable tax reliefs are available, depending on individual circumstances. Making use of generous ISA allowances also tend to feature high on most agendas and both spouses should utilise the annual tax free limits.”

Auto-enrolment

The government will delay the next two scheduled increases of the minimum contribution rate by 6 months each, to align these changes with the start of the tax year. Instead of increases taking place in October, they will now occur in April of the following year.

Watts-Lay comments, “I fully support measures to simplify the administration of automatic enrolment bringing it in-line with the changes made to pension input periods in the summer.”

Secondary annuities

The government will remove the barriers to creating a secondary market for annuities, allowing individuals to sell their annuity income stream. Further details on this measure will be set out, including the framework for the consumer protection package, in its consultation response this December.

Watts-Lay comments, “Once introduced, it could be good news – allowing individuals to sell the income they receive for a cash lump sum. However, the ‘sting in the tail’ is what value they are likely to be able to get, and in reality this may not be good. In addition, caution is required because once the money has gone, it’s gone.”

Watts-Lay concludes, “It looks like the Government is waiting to respond to the pension tax relief consultation in the next Budget. High earners might want to consider making the most of the next few months in case higher rate tax relief is removed.”

Further coverage can be found in FTAdviser and Pensions Insight.

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