4 significant deadlines to keep an eye on in 2018
7 January 2018
What does 2018 have in store for savers? Tom Selby, senior analyst at AJ Bell, looks at four events that we should be set to deal with this year.
2017 felt like a year where the whole world teetered on the brink.
From the President of the United States threatening war via Twitter to cryptocurrencies potentially destabilising the natural order of central banks, finding a sense of what is ‘normal’ has become increasingly difficult.
In the UK, too, there was a pervading sense of challenge to the established way of doing things.
Political bickering over Brexit continues to dominate the Parliamentary agenda, while the Conservative Party’s wafer-thin majority following a botched general election campaign has also contributed to a sense of paralysis around the House of Commons.
Ironically this has created some long overdue stability around savings policy which advisers, paraplanners 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).
Given the set-piece was preceded by feverish speculation about potentially dramatic cuts to pension tax perks as part of an attempt at redressing the balance between older and younger voters, this came as welcome relief to savers (particularly higher and additional-rate taxpayers).
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.
It’s possible a Government with bigger fish to fry will once again leave pensions and savings alone in 2018 – and the decision to only have one major fiscal event a year (the Autumn Budget) should reduce the likelihood of tinkering.
However there are a number of significant deadlines to keep an eye out for as we move further into 2018.
1. Automatic enrolment contributions going up
This is a big one because 8.8 million people have been automatically enrolled into a workplace pension scheme since auto enrolment began, adding to the 10.4 million people who are already members of a qualifying pension scheme*.
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 as a policy. 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.
4. An increase in the Lifetime Allowance
This will be the first increase in the amount people can hold in pensions without a whopping tax charge since the Lifetime Allowance rose to £1.8 million in 2010. Since then it has been gradually salami sliced down to £1 million today.
While the increase in April 2018 will only be an inflation linked 3% rise to £1,030,000 it is worth being aware of. It means there is a bit more scope for anyone who is approaching the £1 million mark and an extra £7,500 of tax free cash for anyone who is lucky enough to have reached the allowance.
No doubt 2018 will have a few more surprises beyond these changes in store to keep paraplanners, advisers and media commentators on their toes.
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