How will the 2014 Budget affect our parents?
While many of us try to follow the goings-on of government to little or no avail now may be a good time to take note of the budget changes announced by George Osborne this week.
The implications for our ageing parents approaching retirement or perhaps just beyond this stage are quite significant and could mean they’ll have increased access to the funds they need in later life.
As with any budget changes there are positives and negatives to weigh for our parents. If your parents haven't tied up all their money in an annuity already, this is a very interesting, positive budget for them but for those of us with parents who struggle with financial intricacies this could mean a fair few hours scrutinizing T&Cs when it comes to investment options.
We've pulled out a few key things that could impact your parent’s financial future the most:
1) A new Pensioner bond
It’s been a tough time to be a saver over the last few years with such a low interest environment. So this new ‘Pensioner bond’ for the over 65s is indeed a good thing. But note the interest rates, which are not set yet, are still only thought to be 4% for a 3 year bond.
Given the average size of pension saving pots it’s not going to give our parents a massive salary but pensioners will be allowed to put up to £10,000 into each type of bond and precise details will be confirmed Autumn this year.
2) Increase in ISA allowance
This is another great result for our parents who have money to save. They can currently only save £5,760 a year tax free in a cash ISA. Now they can put up to £15,000, tax free into a NISA, and it can either be cash or shares which will significantly increase the interest income that our parents can earn.
Ros Altmann pensions and investment expert, and former advisor to the Treasury and Prime Minister, welcomes the news the budget brings calling it a “pensions and savings revolution”. She’s keen to stress the importance of the new ISA allowance for pensioners who can now “shelter more money from tax without being forced to take more investment risk”.
3) Cashing in the pension pot
This is the most radical and far reaching part of the budget, and has huge implications, not just for our parents, but for us as children and perhaps for our children as well. Pensioners will have the freedom to cash in as much or as little of their pension pot as they want, removing the need to buy an annuity. On the positive side for our parents, if they haven’t bought an annuity already, this opens up a world of possibilities.
The International Longevity Centre (ILC) warns this move by government could be a mixed blessing. While the removal of annuity requirement will provide some with “additional flexibility” for their pension money, for others annuities have protected their money from misuse and have helped “reduce the risk of living in poverty towards the end of life”.
The Citizens Advice Bureau also voiced their concerns for the finances of current and future retirees advising caution for those seeking to invest their pension fund. They’re urging the government to make “access to trusted, independent advice” freely and readily available to help people “make informed decisions about their pension” and to avoid pensioners falling into the trap of inappropriate investments.
Our parents can now cash in their pension and invest it where they like. With a growing unease surrounding the unsatisfactory nature of annuities this is an amazing development. Annuities give bad returns and they die with your parent. No passing them on to us or their grandchildren. This feels like very good news. They could then invest in all kinds of other ways. Stocks and shares? Buy to let?
Your Mortgage Decisions director Dominik Lipnicki says there’s likely to be a surge in buy-to-let investment as “it is clearly a good option for someone to be able to use the cash they’ve saved over their working life to earn a rental yield that outweighs normal savings rate”. Things are looking up for parents with a penchant for property and DIY.
The stocks and shares route, however, can take time and energy especially if our parents are managing their own portfolio. As our parents get older they become less inclined or able to manage such investments and this needs to be thought through.
But the elephant in the room for us children is would we rather help our parents manage such pots of money, that one day we might benefit from? Or would we prefer to expend no energy and then see all of our parents hard earned money end up with some insurance company? It’s not wrong to want to benefit from our parents’ hard labours, in the same way as it is not wrong to want to help our children.
Finally, we also need to really also understand the tax implications of this option, because they are considerable.
We believe the overall message is a positive one. Pension savings are becoming more flexible and our parents will be able to do what they want with their money unrestricted by stocks and shares options that were part of ISAs and annuities. Happy day!
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