3 client deadlines in H1 2018
Tom Selby, senior analyst at AJ Bell, looks at three main events for clients in the next few months
Whether it’s Donald Trump’s latest tweet or the rapid rise of cryptocurrencies, 2017 has felt like a year when the ground shifted in ways few of us can truly comprehend.
Here in the UK a combination of Brexit and a hung Parliament contributed to a sense of paralysis around the House of Commons.
Ironically this has created some long overdue stability around savings policy which advisers and savers will undoubtedly have welcomed after years of constant tinkering.
Indeed, the November Budget was one of the quietest in memory for pensions, with the Chancellor confirming a rise in the lifetime allowance by £30,000 to £1,030,000 (in line with Consumer Price Index, or CPI, inflation) and the uprating of the state pension by 3% (again simply protecting the payment from inflation).
That said there was one particularly nasty change – namely the cut in the Money Purchase Annual Allowance from £10,000 to £4,000. There was some faint hope that the general election would perhaps prompt a rethink of this wrong-headed policy, but ultimately the Treasury pressed ahead.
And as we move into 2018 there are a number of significant deadlines to keep an eye out for:
1. Automatic enrolment contributions going up
People who are currently paying the minimum contribution of 0.8% of their salary need to prepare for their contributions to rise significantly. From 6 April 2018 that level will increase three fold to 2.4%.
For someone on an average salary of £27,000 this will mean the amount they are putting into their pension each year jumps from £169 to £507.
This ramping up of contributions is arguably happening at just the wrong time for auto-enrolment. The latest Office for National Statistics figures show average UK wage growth is trundling along at 2.5% (including bonuses) while Consumer Price Index inflation crept up to 3.1% in November – its highest level since March 2012.
With the price of goods in the shops now running significantly higher than the salaries people are receiving, consumers will inevitably feel the pinch and cut back spending where possible. Given most people agree the total auto-enrolment minimum contribution rate – due to be introduced from April 2019 – needs to rise from 8%, any spike in opt-outs at this early stage would be a serious cause for concern.
2. Help to Buy / LISA transfer deadline – £2,100 of free cash up for grabs
There is an important deadline approaching for any clients who have built up funds in a Help to Buy ISA and want to transfer the money to a Lifetime ISA (LISA).
Until 6 April 2018 savers can transfer funds invested in their Help to Buy ISA before April 2017 (when the LISA launched) into a LISA without using up their £4,000 LISA allowance.
Someone who had contributed the maximum to a Help to Buy ISA between December 2015 and April 2017 – £1,200 in the first month and £200 a month thereafter – would have £4,400 saved.
If that individual transferred the £4,400 into a LISA and also contributed the £4,000 LISA limit they would receive a 25% bonus on the entire amount – or £2,100 – meaning their total pot would be worth £10,500.
3. The dividend allowance going down
A cut in the amount of dividend income people can receive tax-free from £5,000 to £2,000 will come into force from April 2018.
Any dividend income received above this amount will be taxed at 7.5% (basic-rate taxpayer), 32.5% (higher-rate taxpayer) or 38.1% (additional-rate taxpayer).
In pounds and pence, someone who receives £5,000 in dividends would previously have paid no tax but next year will be hit with a tax bill of £225 if they are a basic-rate taxpayer, £975 for a higher-rate taxpayer and a whopping £1,143 for an additional-rate taxpayer.
This change will make it even more important for people to ensure their dividend paying investments are held with tax wrappers like an ISA or a SIPP, where they can continue to enjoy tax-free dividend income.
This is, of course, just the stuff that we know about and various initiatives – not least the FCA’s Retirement Outcomes Review and the ongoing focus on defined benefit transfers – could bring about more radical change.
So while tax policy may stand still for a little while, the pension sands will inevitably shift over the next 12 months and beyond.