Personal finance 2020: The big changes savers and investors should look out for next year

The start of a new year is a popular time for people to review their finances and plan for the year ahead. So what does 2020 have in store?

AJ Bell analysts Tom Selby and Laura Suter consider the changes that – for better or worse – will affect the personal finance landscape in the New Year.

Inheritance tax breaks get more generous

From April everyone will be able to leave more money as part of their estate before they have to pay inheritance tax. From April 2017 anyone with residential property were given an extra inheritance-tax-free allowance, which has gradually been increasing each year and will go up one final time in April 2020 to £175,000.

This means that including the standard nil rate band, a couple can leave a property worth £1m entirely inheritance tax free. There are some tricky rules you have to stick to, so the property must be left to a child, grandchild, or step versions. Those with very large estates won’t get the full amount, as anyone with an estate valued at more than £2m will lose the allowance by £1 for every £2 they are over this limit.

Landlord tax breaks finally axed…

Landlords will see another hike in taxes from April next year, as the tax breaks they previously had are ratcheted down again. The Government has gradually been reducing the amount of mortgage interest landlords can use to offset against their income over a four-year period, and this year is the final year.

It was cut this year so that only 25% of their mortgage costs could be set again profits, but that falls again in April next year so that none of the costs can be offset. Instead buy-to-let investors will get a basic rate tax relief reduction, at 20%.

The move only affects higher or additional-rate taxpayers, although the move itself will push some landlords from the basic-rate tax bracket into the higher-rate bracket. As an example, a higher-rate taxpayer landlord who gets £1,000 a month in rent and has mortgage costs of £600 a month would have paid £1,920 in tax pre-2017, but will now pay £3,360 in tax from April.

…while second homeowners face higher taxes too

Anyone who has rented out their home after moving out, rather than selling it immediately, will face a higher tax hit next year. The Government has made three big changes to how the tax works when you come to sell this property.

Firstly, many sellers will lose the ‘lettings relief’ tax break, affecting how much capital gains tax you pay when you sell the property. Currently you get capital gains tax relief up to £40,000 per person (so £80,000 per couple) if you let out a property that was your home, but from next year this relief will only apply to landlords who are actually living in the property with their tenants.

The next big change is to private residence relief, which currently means that any increase in the property’s value during the final 18 months that you own a property is not counted for capital gains tax purposes. However, from April next year that will be limited to nine months.

The third change is that you will have to pay up for any capital gains tax you owe much more rapidly. Currently you just have to pay this bill by the end of the January in the following tax year, but from April you have just 30 days to pay the tax due on any gains from the sale of UK residential property.

There’s little landlords can do about these changes, other than be aware of them. The changes apply to sales after April 2020, so if you’re currently selling your property or planning to early next year, you might want to think about completing before the deadline.

Rail fares increase by 2.7% in January…

Commuters will see another hike in their train costs next year, as rail fares go up by 2.7% from January. The increase is far ahead of the current CPI measure of inflation, which was only 1.5% last month. Someone commuting from Tunbridge Wells to London, with tube travel, will now pay £5,664 while a season ticket from St Albans to London, with a travelcard, will rise to £4,664.

To beat the hikes you can buy your season ticket in 2019 and pay this year’s prices, but that’s not an option if you’ve still got time left on your current ticket. You could also make use of your employer’s season ticket loan scheme, to cut the cost, or put the season ticket on a 0% interest credit card to spread the cost across 12 months, meaning you don’t have to start the new year by forking out thousands of pounds in one go.

Broadband prices get cheaper

Anyone of the 8.8 million people with broadband who are out of contract could see their bills cut next year. Ofcom has intervened to get those who don’t shop around a better deal, with providers pledging to cap rates for those out of contract and stop preferential rates being offered just to new customers.

What you’ll be offered depends on your provider, but will all be in place by March 2020. After February next year, providers will also have to warn customers if they are out of contract.

While these changes will save you money, you’ll still save more by switching to a better deal once your contract ends. Or if that’s too much hassle then call your current provider and haggle over the cost.

Student loan repayments fall

Graduates will get a small boost from April, as the amount you can earn before starting to repay your student loan will increase from £25,725 to £26,575, a rise of 3.3%. It means if you earn less than £26,575 you won’t pay anything back.

For those over this limit, you repay your loan at a rate of 9% above this figure, so the hike will mean graduates get an extra £76.50 in their back pocket. Meanwhile those on a Plan 1 loan – so those who went to university between 1998 and 2011 - will see their threshold rise from £18,935 a year to £19,390.

Overdraft fees will be easier to understand, and maybe cut

From April next year banks won’t be able to charge more for unauthorised overdrafts than for arranged ones, which is good news for anyone who accidentally slips into the red. The regulator has brought in the changes, after discovering that in some cases overdraft fees can be 10 times higher than payday loans.

Banks will have to make their fees clearer, putting them in one annual interest rate, and won’t be able to charge fixed fees, per day or month, for going into your overdraft. The Financial Conduct Authority thinks the move will mean that someone with £100 in an unarranged overdraft will go from paying £5 a day to just 20p a day.

If you are in your overdraft you should check how much you’re being charged and see if there is cheaper credit available, so you can move it to that while you pay it off.

Mini-bond advertising banned

This ISA season we won’t all see the same wall-to-wall advertising from mini bond companies that we saw in 2019, as from 1st January 2020 the regulator will ban advertising of these products to the mass public. Many of these providers offered interest rates of 8% or more and likened their returns to cash, meaning that people who have grown weary of their cash savings earning next to nothing were lured into investing in the hope of getting a return on their money.

The ban on marketing is initially for a year, but it’s likely the regulator will extend it after that. However, investors will therefore still need to be on their guard as the regulator has warned that there are a growing number of promotions that are scams – which the marketing ban will not prevent.

New tax rules roll out to private companies

These controversial tax rules come into force for private companies next year, having already been rolled out to the public sector. It means that from April 2020 companies will have to determine whether any contractors working for them through a personal service company should be classed as an employee for tax purposes.

However, the introduction of the new rules is a political hot-potato and the Conservatives have already said they will look to review the rollout if they remain in power. But seeing as the new rules come in on April 6th this would need to be a speedy review.

State pension age rising to age 66

State pensions have been at the heart of the general election campaign, with parties of all colours bidding for older people’s votes in different ways.

However, even the most radical and expensive plans do not propose to reverse the increase in the state pension age to 66. The rise started incrementally in 2018 and is scheduled to complete by October 2020. That means anyone born after 5th October 1954 will have a state pension age of at least 66.

From that point onwards the future of the state pension is less certain. While the Conservatives have set out plans to increase the state pension age again to 67 by 2028 and 68 by 2039, Labour has promised to halt planned rises beyond 66, a pledge which could cost £24 billion a year by the 2050s.

Investment pathways

Almost five years after the pension freedoms reforms were introduced in the UK, the FCA is making a significant intervention aimed at protecting people who enter drawdown without taking advice.

DIY investors entering drawdown from August next year will be offered off-the-peg ‘investment pathways’ solutions designed to broadly meet their retirement objectives.

Savers who invest 50% or more of their pension fund in cash will also be required to make an active decision to do so. The purpose of these changes, brought about as part of the regulator’s Retirement Outcomes Review, is to reduce the risk of retirement investors sticking in cash over the long-term and seeing the value of their pensions eaten away by inflation.

This regulation, while well-intended, runs the risk of nudging people into drawdown investments which are relatively broad in scope and thus won’t match their changing needs.

Investors who opt for drawdown need to engage and review their retirement income strategy regularly to ensure withdrawals are sustainable and investments remain appropriate. This fundamental point will not change as a result of the introduction of investment pathways.

The Pension Schemes Bill – DB reform, scams clampdown, dashboards and Collective DC

DB reform

Reforms which garner cross-party political support aren’t exactly ten-a-penny at the moment, but the DWP managed to find four when it published its Pension Schemes Bill last month.

The Bill ultimately didn’t make it into legislation as the Queen’s Speech was dropped and a general election called. However, given the level of consensus on the items contained within it, it is likely the key measures will be back on the agenda in 2020.

That could mean new legislation creating severe punishments for company directors who neglect defined benefit schemes. This is a direct response to a series of high profile corporate failures – most notably BHS and Carillion - which have resulted in members being hit with cuts to their pensions.

The new deterrents are likely to include a criminal offence for bosses who demonstrate ‘wilful or grossly reckless behaviour’ in relation to defined benefit schemes.

Scams clampdown

The fight to protect savers from pension scams continues and the Pension Schemes Bill proposed a welcome strengthening of the power of schemes to reject transfers to potentially dodgy vehicles.

Previously there has been a real tension between the right of savers to move their money to a different scheme, which is clearly very important, and the responsibilities on providers in blocking transfers to suspect schemes.

Addressing this tension will help ensure fewer people fall victim to pensions fraud.

Pensions Dashboards

Whatever the outcome of the election, pensions dashboards are coming to the UK. If introduced properly, this initiative – which should eventually allow people to see all their pensions in one place, online – could act as a catalyst for a genuine revolution in retirement engagement.

Key questions remain around the timing of the launch, how information will be presented and the extent to which private sector providers will be able to participate in the market.

The answers to these question are intrinsically linked to the outcome of the December 12 vote, with Labour wanting a single dashboard and the Conservatives preferring a market-led approach to complement a central offering from the Money and Pensions Service.

While Dashboards should be a good thing for savers, we need to recognise the first versions will be extremely limited. Schemes won’t be forced to provide data in the initial phase and total compulsion is expected to take years, meaning people will only see partial information.

Ensuring the limitations of early Dashboards are made crystal clear to users will be vital in establishing and maintaining trust.

Protecting member’s data to prevent scammers from infiltrating the system is of paramount importance and there should be no attempt to launch until security can be guaranteed. There are also significant questions around data standards, regulation and the presentation of information which will need to be addressed in 2020.

Introducing Collective Defined Contribution schemes

Finally, expect legislation allowing new ‘Collective Defined Contribution’ (CDC) schemes to be introduced in the UK back on the agenda in 2020.

Versions of these schemes, which sit somewhere between old-style defined benefit arrangements and more modern DC plans, have been introduced in other countries, to varying degrees of success.

Royal Mail has pledged to shift its members to a CDC scheme once the rules are in place, although there has been little sign of significant demand from other employers.

These articles are for information purposes only and are not a personal recommendation or advice.