mowatt financial Planning

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Mowatt Financial Planning: July 2010

Wednesday, 21 July 2010

The Budget and Financial Planning

It’s been a few weeks since we had the emergency budget. To an extent the dust has setlled so it's worth a look at how the Budget measures can affect financial planning.

Personal Allowances

The personal allowance will be increasing by £1,000 to £7,475 with effect from April 2011 for those under 65. This will not affect higher rate tax payers as the basic rate limit will reduce to compensate for this.

Financial planning tip:

The personal allowance means no tax is paid on the first £7,475 of income. Where a husband and wife have savings and one of the allowances is unused or not fully used, it is tax efficient to move the savings to the individual with an unused personal allowance.

Capital Gains tax

The rate of Capital Gains tax has increased from 18% to 28% for higher rate income tax payers from 22nd June 2010. Each individual has an annual Capital Gains Tax Allowance of £10,100. This means that the first £10,100 of gain is exempt from tax.

Financial planning tip:

Capital Gains should be reviewed on an annual basis to consider realising any gains below the annual exemption to avoid this tax. In addition, assets transferred between a husband and wife are not treated as a gain and so it is possible where one spouse has used the annual exemption to pass some of their gain to the other spouse to use the annual exemption of both.

Pension Tax Relief

The previous government had made some very complex changes to the tax relief of pension contributions. Although the 2010/11 measures remain in place, there is to be consultation on a simpler approach which is likely to include a lower annual allowance of between £30,000 and £45,000.

Financial Planning tip:

For those individuals earning less than £130,000 per annum there is an opportunity to make a significant contribution in the current tax year (up to the current annual allowance of £255,000). For those individuals earning more than £130,000 the options are more restricted but they should also consider making an additional pension contribution in the 2010/11 tax year as the scope for doing this in future years is likely to be reduced. This is a complex area where it is important to take professional advice.

Scrapping the age 75 rule

Before the 22nd of June it was compulsory to buy an annuity from age 75. This has been changed to 77 as an interim measure while there is consultation on the detailed changes.

Financial planning impact:

Although this affects a minority of individuals, those who are approaching age 75 now have more flexibility in how they take their retirement income.

State Pension Age

The government are looking to accelerate the increase in the state pension age to 66.

Financial Planning impact:

Those who decide to retire before the state pension age will need to bridge the gap between their chosen retirement age and state pension age for a longer time.

Basic State Pension

The Basic State Pension will increase in line with the higher of average earnings; Consumer Price Inflation or 2.5%.

Financial Planning Impact:

The basic state pension will increase at a higher rate than previously expected. This will in some part help pensioners who have been exposed to a higher rate of inflation than the population as a whole.

Final Salary Pension increases

In contrast to the Basic State Pension from April 2011, the statutory requirement to increase final salary pensions and the State Second Pension will change from the Retail Price Index (RPI) to the Consumer Prices Index (CPI). The impact is likely to reduce the strain on final salary pension schemes as the CPI has historically been lower than the RPI.

Financial Planning Impact:

At an individual level, the expected retirement benefits are likely to be lower once they are paid and will increase at a lower rate than had previously been expected. In actual terms, although it will result in lower pensions, the impact will depend on the extent to which the CPI increase matches the actual cost of living increases for pensioners.

ISA limits will increase in line with inflation

The ISA limit for future tax years will increase in line with reference to the Retail Price Index in September each year. The cash ISA limit will be half the value of the Stocks and Shares ISA limit.

Financial Planning Impact:

This is a useful measure which will maintain the ISA limit in real terms. This follows a significant increase in the overall limit from £7,200 to £10,200 introduced by the last government.

Clearly the overall impact of the Emergency Budget will mean that the bulk of people will be worse off in the short term. However, the opportunity to manage your finances and ensure that you are being tax efficient remains as important as ever.

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