New Pension And ISA Regime To Create Personal Tax Shelters


Baker Tilly, a leading national provider of accounting and business services, looks at whether recent government announcements will give everyone the opportunity to create their own mini tax havens.

Prior to George Osborne’s recent pension and ISA revolution, UK residents were able to build up tax free assets within their pension funds and by using their annual ISA allowance. The scale of the Chancellor’s latest reforms suggests that every Briton will now have the opportunity to go way beyond this towards a world wherein they have their own mini tax havens.

Leaving political idealogy aside, the logic behind this is presumably to replace the tax revenue lost with the higher taxes derived from accelerated flows of funds. Looking at the example of someone who previously planned to vest his pension at the age of 65, we can assume that he already had a portfolio of ISAs and planned to take his 25% tax-free lump sum from his pension fund.

This would, in turn, be re-invested over a period of time into further ISAs. Once this lump sum had been fully deployed into the tax free ISA environment, any future ISA subscriptions would depend on him having an investable surplus on his annual income drawdown. In any event, the maximum that could be invested in tax-free ISAs assuming our pensioner lived to 85 would be £ 230,400 (20 years @ £ 11,520 p.a.)

Contrast this with the situation pertaining when the new rules come fully into effect. The man in our example would still be able to take his 25% tax free lump sum and gradually redeploy it into ISAs but now the upper annual limit would be £15,000 p.a. so his lump sum would be invested in ISAs that much quicker.

Moreover, he will now also be able to withdraw 25% more each year from his pension fund in the form of income drawdown. This is because the maximum is being increased from 120% of the notional GAD annuity rate to 150%. This will make it easier for him to maintain his annual £15,000 ISA subscription.

The upshot is that his tax-free ISA portfolio would be worth £300,000 after 20 years, a full 30% more than under the old regime.

The real difference occurs where a pensioner needs to spend the whole of his annual income drawdown and has nothing left to take advantage of the annual £15,000 ISA allowance. Under the Chancellor’s new rules, the pensioner will be able to withdraw additional amounts from his pension fund over and above the 25% tax free lump sum and the annual income drawdowns provided he is prepared to pay Income Tax on it at his marginal rate.

If we assume that this is only 20%, then by taking a one off hit of this amount, he will be able to take up his full annual ISA allowance and ensure that he maximises his total tax-free umbrella. To the extent that this is invested in AIM shares, this will also provide an added bonus by being   exempt from Inheritance Tax.

To stay aware of the issues and concerns that matter to you surrounding pensions visit the Baker Tilly website: http://www.bakertilly.co.uk/sectors/pensions.aspx