Five changes savers need to be aware of in 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 £517.

“While some might be tempted to opt-out due to the extra hit on their disposable income, doing this would mean missing out on the bonus of employer and Government contributions, the latter in the form of tax relief.  The increase coming in in April will take the total contribution up to 5% once the employer contribution of 2% and tax relief of 0.6% have been added.  Those numbers will increase again in April 2019.

“Over the next 40 years, someone contributing even the minimum amount each year could build a pension fund of £219,000.” (See table 1 below for all calculations)

*Source - http://www.thepensionsregulator.gov.uk/docs/automatic-enrolment-declaration-of-compliance-monthly-report.pdf

2.     Help to Buy / LISA transfer deadline - £2,100 of free cash up for grabs

“There is an important deadline approaching for anyone who has built up funds in a Help to Buy ISA and wants 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.  (See table 2 below for further examples)

“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.“

5.     An increase in the state pension by 3%

“This may only be a modest rise in line with inflation but it shows the value of the triple lock for pensioners, which increases the state pension each year by the highest of earnings, inflation or 2.5%.

“The April boost will be welcomed by pensioners already in receipt of the state pension as they face higher costs of living due to the weak pound following the Brexit vote.  However, people approaching retirement age can also check how much state pension they will receive and when so they can factor this into their retirement planning - https://www.gov.uk/personal-tax-account.”   

And keep an eye on annuity rates…

“Interest rates were increased for the first time in a decade last month from 0.25% to 0.5%.  If this trend continues during 2018 it could improve long term gilt yields which in turn could translate into higher annuity rates.

“This will be important for anyone planning their retirement.  Sales of annuities fell off a cliff following the introduction of pension freedoms with many people seeing them as poor value.  If interest rates do increase and push up the guaranteed income people can get from annuities, more people may choose to use them for at least part of their retirement income.”

Table 1: Increases to auto-enrolment contributions

Table 1 assumptions: 4% annual post-charges growth.  Starting salary of £27,000, increasing by 2% per annum, therefore relevant earnings for auto-enrolment start at £21,124

Table 2: Impact of the cut to the Dividend Tax Allowance