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For those who love a good thriller or conspiracy film, the latest fiscal sustainability analytical paper from the Office for Budget Responsibility* suggests that government activity and policy measures alter the public’s behaviour and choices. This isn’t some sort of subtle brain washing of course, but it is physiological and demonstrates how the human brain is hard wired - our genes are programmed to follow the crowd.
This is highlighted in the report, as the significant changes introduced to the tax treatment of pensions and savings has generally resulted in a shift. For example, higher earners often feel that pensions are now less attractive than they perhaps were just a few years ago, given the restrictions imposed earlier this year.
The annual allowance (the limit setting how much an individual can contribute each year and receive tax relief) was substantially higher in previous years than it is today. At its peak in the 2010/11 tax year the limit was £255,000, compared to just £40,000 today, and even less for higher earners. This only limits the tax relief though and those with sufficient earnings could contribute more, but it still demonstrates the influence the measure has had, as individuals rarely contribute in excess of the limits set.
The behaviour of higher earners has been influenced by government decisions on pensions this tax year, with the introduction of a contributions taper for those earning in excess of £150,000. The taper reduces the annual allowance from the £40,000 limit to just £10,000 for those with earnings of £210,000 or more.
Introduction of pension freedoms in 2015 resulted in a high initial take up of people flexibly accessing their pension and was reflected by a sharp increase in tax receipts by HMRC. Another case where government policy has shaped the decisions made by individuals.
Government policy may well influence decisions, but it often takes time to fully play out and doesn’t always work as originally planned. It’s worth remembering that the government needs to balance the books, so most policy measures have an underlying revenue attached to them. The report states that the pension freedoms were estimated to raise £3.1 billion over a 4 year period, whereas the new savings allowance introduced in April this year, was estimated to cost £3 billion over a 5 year period, but if a by-product of the Brexit vote is an increase in interest rates, the cost to the government could increase still further.
Under another new initiative to be introduced by the government in April next year - the Lifetime ISA (LISA) - payments made into a LISA will attract a 25% bonus from the government. Assuming it is used for retirement post-age 60, a previously higher rate tax payer reverting to the basic rate in retirement would find the return to be less advantageous than saving via a pension. On the other hand, for a basic rate tax payer who remains a basic rate tax payer during retirement, this bonus is worth more in the pocket than a pension, as it is paid free of income tax. However, given the maximum saving limit is just £4,000 per annum, it is substantially lower than those allowable via a pension and it cannot accept employer payments.
ISAs are a good example of positive impact and influence, according to the data recorded in the report. The amount that can be saved into an ISA has risen over the last few years and is set to rise again, to £20,000 from April next year. Data shows that the amount being invested into ISAs has consistently gone up when ISA subscription levels also went up. £79 billion was invested in total in the 2014/15 tax year compared to £57 billion in the previous tax year.
So what’s the conclusion? Keeping up with changing legislation and trying to beat the system can be challenging and will require time and effort, but there are legitimate ways of using the available exemptions and allowances to maximum effect. Nothing stands still, government policies will continue to change and their impacts could be beneficial or detrimental, especially over the long term.
Change is a virtual certainty, so to help you plan around the changes our independent financial advisers can help you focus on what’s important to you and make the most of your finances. Contact any of our advisers at any of our office locations on 0808 144 5575 or email: firstname.lastname@example.org.
* The report is available here: http://budgetresponsibility.org.uk/docs/dlm_uploads/FSAP-pensions-and-savings-1.pdf
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