Business

Autumn Statement 2014: What you need to know

Man on stage Image copyright Thinkstock
Image caption The financial world is put under the spotlight on Autumn Statement day

The announcements made in the Autumn Statement affect the finances of millions of people but, on the day, it is pure political theatre.

Consider it the first Act of a pre-election play in which the main characters try to give a dominant performance before an audience of the electorate.

Act Two will be the Budget in the spring as the final lines about our finances are delivered before we head to the polling booths.

Centre stage will be Chancellor George Osborne. Expect to hear some of the script that he has delivered on other occasions.

It is often the case during an Autumn Statement that chancellors repeat some of the policies and information we have heard before.

Yet, there will also be plenty of new detail for the audience to consider.

Pensions overhaul

In the March Budget, Mr Osborne's standout announcement was a plan to make it easier for people to dip into their pension pots when they want, ending the requirement to buy an annuity.

The overhaul begins in April 2015, but in recent weeks there have been questions asked about the rules governing this new policy and the guidance available to those approaching retirement.

The National Association of Pension Funds recently raised 101 "questions and uncertainties" about the changes with the government.

Alan Higham, retirement director at the investment company Fidelity, says he expects to hear more information in the Autumn Statement about the regulations surrounding the pension reforms.

Tom McPhail, head of pensions research at Hargreaves Lansdown, predicts that an assessment of the impact of the new policy will be published at the same time.

Other significant changes for pensions, that we already know about, include the end of a 55% tax charge on inherited pensions.

From April, any money left in the pension pot of someone who dies before the age of 75 can be inherited tax-free.

If somebody dies at the age of 75 and over, the funds can remain in a pension with no tax to pay, or be withdrawn by the beneficiary subject to his or her normal rate of income tax.

Further twists?

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Image caption Big changes are being made that will affect most people's finances in later life

Despite lots of change in the world of pensions, there is widespread speculation of more announcements on the subject in the Autumn Statement.

One area that could be affected is pension tax relief, a system first introduced in the UK in 1921.

At present, part of the system means UK taxpayers see £1 knocked off their taxable income for every £1 that they contribute to a pension.

There are some limits to this. For example, individuals do not get tax relief on contributions greater than the equivalent of their annual earnings.

And individuals usually pay tax on any private pension savings above the annual contribution allowance, which is currently £40,000 a year.

For example, somebody earns £60,000 and wants to put that into their pension scheme in a single year. They are likely to pay income tax on contributions over the allowance of £40,000.

However, the annual allowance can be topped up with any allowance that was not used during the previous three tax years, and other factors can also affect it. There is also a lifetime allowance, at present, of £1.25m.

"The abolition of higher rate tax relief of pension contributions could be one easy way to pay for tax breaks elsewhere," says Lucy Brennan, partner in the private wealth group at Saffery Champness.

"The lifetime allowance has been reduced steadily, and this chancellor has proven he has no reservations when it comes to tinkering with pensions."

At the other end of the life cycle, the coalition government has already announced plans for a tax-free childcare scheme, set to begin in the autumn of 2015.

Nest eggs

Savers have been left struggling with the Bank rate at a record low of 0.5% for more than five years.

In the Budget earlier this year, the chancellor announced a new Pensioner Bond, for older people who save but who receive little return from their savings.

The new bond will be available from January to over-65s, with possible rates of 2.8% for a one-year bond and 4% for a three-year bond. Up to £10,000 can be saved in each bond.

Since then, it has been announced that the interest will not be paid monthly. There is also speculation that pent-up demand might mean they could sell out quickly.

The annual tax-free savings limit in cash and shares individual savings accounts (Isas) was increased to £15,000 in July.

Meanwhile, the cap on Premium Bonds was lifted from £30,000 to £40,000 in June and will rise further to £50,000 next year.

The savings rate of tax, which has previously stood at 10% for income of up to £2,880 will be cut to a 0% rate for savings up to £5,000 from April.

Only those whose non-savings income is less than £15,500 in 2015-16 will benefit from this change. The main group likely to benefit are pensioners.

Given that the Bank of England and others have suggested that interest rates are likely to stay low for some months, the chancellor will be under some pressure to do more for savers in the Autumn Statement.

'Stop tinkering'

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Image caption Many have argued that the UK's tax system is too complicated

A further extension of the personal allowance was another major announcement made in the Budget. The point at which people start paying income tax will be raised from £10,000 to £10,500 from April 2015.

The threshold at which taxpayers start to pay the 40% higher rate will increase by 1% from £41,865 to £42,285 at the same time.

The overall effect of these changes will give basic rate taxpayers a saving of £100 in 2015-16 and higher rate taxpayers a saving of £184, says Patricia Mock, tax director at accountancy firm Deloitte.

The future level of the personal tax allowance is likely to feature prominently in parties' election manifestos, along with other pledges on tax.

But the ACCA accountancy body wants politicians to stop tinkering with the tax system.

"We should ensure we do not get tax shocks, but that changes are thought through and properly exposed," says the ACCA's Chas Roy-Chowdhury.

"We have an extremely complicated tax system and further tinkering to aid one industry or another will just add to this further."

He said that a period of stability with tax would be good for businesses and allow tax authorities time to make the tax system simpler.

"Without certainty, neither governments nor taxpayers can effectively budget or plan for their future actions," he said.

This is a coalition government's Autumn Statement. With the main players leaving the stage to write their manifesto scripts for the approaching election, it may well be the case that little of major significance is agreed between the Conservatives and Liberal Democrats.

If that proves to be true, then we might have to wait until next year for the true drama.

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