ISA time to curb tax-free nest eggs?
With all the hoo-ha over the Royal Mail flotation- where shares are currently trading 40% up on subscription price- many of the private investors getting £750 shares may have decided to hold the shares within an ISA to protect the income and gains from tax. Indeed, many people prefer to invest in an ISA over a pension scheme as there are no restrictions on what you can do with the ISA gains as and when you want to spend them. Now, however, it seems the Treasury is considering implementing caps on how much can be invested in ISAs, and on how much can be withdrawn tax-free from personal pensions.
ISAs have been around since 1999 when they took over from the popular PEP scheme. ISAs can either be cash, or hold investments, and when they were first introduced, the contribution limits were £7,000 per annum for shares, or £3,000 for ‘mini’ cash-only ISAs. However, in 2009, the previous Government decided that contribution limits should be upped, and the limit currently stands at £11,520, with a maximum of half invested in cash ISA accounts.
But in a disturbing and likely to be highly unpopular move, the Sunday Telegraph has reported that Treasury officials are worried that ‘ISA millionaires’ are taking the mickey, and are discussing the possibility of introducing a £100,000 lifetime contribution cap.
Now. If you had contributed the maximum to an ISA every year since they appeared, the total possible contributions is around £130,000, and it would therefore take some investing genius to have turned that into a million in 14 years. However, if you bring in any previous PEP/TESSA savings from before 1999, it is possible that some people are sitting on a tax-free mountain. However, the Sunday Telegraph claims this is a tiny fraction of ISA holders.
But if the contribution limit were £100,000, far more people would be affected- an estimated 2% of current ISA investors and an unknown proportion of people who may have been hoping to build up that level of contribution over a lifetime, particularly when planning to use the ISA funds as retirement savings. According to reports, in 2012/13 an estimated 15 million ISA accounts were opened with an average £3,900 investment- this would mean the £100,000 limit would be met in a little over 25 years of average contribution.
But if the average contribution is, and has been, well below the maximum contribution limit, why was the limit increased at all? If it is only the wealthy that benefitted, it is now the not-so-wealthy who end up paying the price.
But Government fiddling with tax free vehicles is not new, and fiddling may be one of the reasons why ISAs are used as retirement savings. Before, money held in a pension plan could be drawn at 50, now the lower age limit is 55 and who’s to say the Government (whomever that may be at the time) won’t change it again, up to 60 or even 65 before you retire. This time, however, reports are not that the age will be adjusted, but the tax free percentage.
The current regime allows you to contribute into a scheme (subject to ever-tighter contribution limits) and receive tax relief at your marginal rate at the time. However, the price for this tax relief on the way in, is that the funds are restricted on the way out, in that, you have to buy an annuity or draw from the capital. When you die, if you’ve bought an annuity there’s nothing left; if you haven’t, you suffer a massive tax charge on any balance. Any pension paid is also taxable as income.
The one shining advantage in the pension structure is that you can withdraw up to 25% of the value of the pension fund out as cash, tax-free, and many people will use this to pay off any mortgage outstanding, so as to reduce living costs in retirement. Sunday Telegraph sources claim that it is this tax free cash under scrutiny, with rumours that the amount will be cut to 20%, or even capped- the Republic of Ireland has introduced a €200,000 cap and the Pensions Institute suggest a cap of just £36,000 would be appropriate.
Sounds like the Government might be scuppering its own plan to get more people to save more for their retirement. Either that, or this is all smoke and mirrors in advance of the Chancellor’s Winter Autumn Statement, so that when he announces that tax relief on pension contributions will be capped at basic rate, we all think it could be worse.
The Treasury deny a lump sum cap is being considered, but say they have been out ‘listening’ *hums twilight zone*.