Savers and investors have been pummelled by a tidal wave of economic and political uncertainty in the past 12 months, with everything from Brexit to Donald Trump swinging market sentiment on a near-daily basis.
When it comes to pensions and tax, however, 2018 has been a year of relative stability, with most people navigating minor tweaks rather than major overhauls.
But what does 2019 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:
Automatic enrolment contributions hike
The Government’s flagship auto-enrolment reform programme faces another major challenge in 2019, with minimum contributions set to rise from 5% to 8% of qualifying earnings in April.
To put that in perspective, someone earning around £27,000 and paying in the auto-enrolment minimum will see their personal contribution rise from about £500 this year to more than £850 in 2019/20.
While for most people this is still not enough to enjoy a comfortable retirement, we are now getting to the stage where some reluctant savers could start to feel the pinch. Rising average pay during 2018 should help ease the pain, but anyone missing out on a salary hike could well be tempted to prioritise spending today over saving for tomorrow.
Anyone thinking of quitting their workplace pension needs to understand that they will be losing out on both tax relief and their employer contribution, which put together double the value of the money they put in. Put another way, opting out of your pension is a bit like taking a voluntary pay cut – so nobody should do it lightly!
End of Help-to-Buy ISA
From 30 November 2019 no-one can open a new Help to Buy ISA account. However, if you already have one you can keep the account open and carry on paying into it for another decade, and you have until 1 December 2030 to claim your Government bonus.
Alternatively you can transfer the account into the new Lifetime ISA. The Lifetime ISA has a number of benefits, including a higher limit of £450,000 on the value of the property you can buy, a bigger potential Government bonus each year of £1,000 and the ability to save lump sums rather than just monthly.
We would hope that with the scrapping of the Help to Buy ISA next year more providers will start offering the Lifetime ISA, as so far the number has been a bit underwhelming – no doubt dampening awareness and take-up of the new ISA.
Increase in residence nil rate band
While the tax-free amount for inheritance tax purposes has been stuck at £325,000 since 2009, the new residence nil-rate band gives a boost to anyone passing on their home. From April 2017 those with a residential property were given an extra £100,000 inheritance-tax-free allowance, increasing to £125,000 this year and from 2019 this will increase again to £150,000.
However, there is tricky small print with this allowance, as the property must be left to direct descendants, so a child, grandchild, or their spouse. Anyone with an estate valued at more than £2m will also start to lose the allowance by £1 for every £2 they are over this limit.
The recent report on inheritance tax from the Office of Tax Simplification highlighted the fact that many people find this new tax break complicated and confusing, with many arguing that it should be scrapped and the standard nil rate band raised instead. The OTS’s second report on the tax, due out next year, will hopefully address these problems.
Increase in income tax allowances
A huge chunk of the population will effectively get a payrise in April, when the amount everyone can earn before paying income tax is increased from £11,850 to £12,500, while the amount you earn before hitting the higher-rate tax band will rise from £46,350 to £50,000. The Government boasts that this will give a boost for 32 million people.
The devil is in the detail here though, as those benefitting from the higher-rate band increase will be hit by an increased National Insurance bill. Employees pay 12% National Insurance up to an upper earnings limit, after which it is reduced to 2%. This upper earnings limit is linked to the higher-rate tax band, meaning employees will now pay the 12% rate on their earnings between £46,350 to £50,000 – rather than the 2% previously. This move wipes out a big chunk of the tax gain from the income tax breaks.
While the main ISA annual allowance will stay at £20,000 this year, from April the amount people can put into a Junior ISA will increase to £4,368 – or £364 a month for those with regular monthly payments.
Lifetime allowance increase to £1,055,000
The pension lifetime allowance is set for a small uplift next year too, rising from £1,030,000 to £1,055,000 from April 2019 in line with CPI inflation.
After another year when it appeared retirement saving incentives were under threat from the Treasury, savers will be relieved this is the only notable pension tax relief change they have to navigate.
Flat-rate state pension rising to £168.60 a week…
Anyone in receipt of the state pension continues to benefit from the triple-lock, which pegs the payment to the highest of average earnings, CPI inflation or 2.5%.
With average earnings the highest figure in the calculations used for next year, pensioners will enjoy a 2.6% increase in their state pension income from April 2019. That will bring the basic-state pension up to £129.20 per week, while the flat-rate state pension – introduced for those retiring from April 2016 onwards – will rise to £168.20.
This protection is incredibly valuable as inflation slowly creeps back into the economy. It could also find itself cast into the post-Brexit quagmire, with a No Deal exit potentially threatening the state pension incomes of retired British expats living in the EU.
…but state pension age increasing to 66
While the Government gives to older people through the state pension triple-lock, it takes away via increases in the state pension age.
From December this year and running through 2019 the state pension age will gradually increase from 65, eventually hitting 66 by October 2020*. The state pension age is then set to increase to 67 in 2028 and 68 by 2037.
Raising state pension ages beyond 66 could become a political flashpoint next year, with Labour pledging to freeze the Government’s planned hikes and the latest official data suggesting life expectancy improvements have, for the time being at least, ground to a halt.
On the other side of the equation is affordability, with the Government warning capping increases at 66 would cost the state an unfathomable £250billion by 2045. This burgeoning cost is being driven primarily by demographics (namely a growing number of older people) and substantial improvements in average life expectancy over recent decades.
The reality is savers, and particularly younger people, need to prepare for a future where the state provides less of their retirement income. That means setting aside as much as you can as early as you can, and making the most of both the incentives on offer and the magic of compound investment growth over the long-term.
Mortgage interest relief cut for landlords
April will see the continuation of the tax crackdown on landlords, when the tax breaks available for buy-to-let investors are reduced again. Since last year the Government has been gradually removing the amount of mortgage interest landlords can use to offset against their profits. Instead landlords will get a basic rate tax relief reduction, at 20%.
From April last year the landlords could only offset 75% of their mortgage costs against their profits, dropping to 50% in 2018 and this will ratchet down again to 25% next April. The move only affects higher-rate taxpayers, although it also pushes some people into the higher-rate tax bracket, and it has led to many buying up property within a company structure, in a bid to reduce their tax bill.
NS&I slashes rate on Index-linked Savings Certificates
From May next year NS&I will cut the rate paid to the more than 500,000 customers who have Index-linked Savings Certificates. NS&I is switching its benchmark index from the retail prices index to the consumer prices index – which is around 1 percentage point lower.
At the current rates of inflation, someone with a five-year Index-linked Savings Certificate will miss out on about £50 on a £1,000 investment, while someone who had £50,000 invested over five years will lose out on £450.
The savings accounts aren’t on sale anymore, but existing holders can renew their certificates for two, three or five years when they come up for renewal. The accounts do still beat the CPI level of inflation, paying 0.01% interest on top of this rate.
Rail fares increase by 3.1% in January…
Commuters who have faced delays, cancellations and over-running engineering works will be dismayed to discover that their fares will rise by 3.1% from 2nd January.
We have now breached the £10,000 commute mark, as the cost of a season ticket from Coventry to London, including tube travel, will rise from £9,816 to £10,120 next year following the increase.
Commuters whose season ticket is up for renewal before the end of the year can buy another before January 2nd and benefit from 2018’s prices. However, for many the timing will not work out that neatly and they will have to pay the higher rate.
In that case one way to reduce costs is to make use of their employer’s season ticket loan scheme, if they have one, otherwise they can pay for the ticket on a 0% interest credit card to enable them to spread the cost across 12 months – just make sure you pay it off before the end of the interest-free term.
…But the 26-30 railcard will finally launch
After a long trial period and further delays, four million people between the ages of 26 and 30 will finally be able to get their hands on the new Millennial Railcard from January. From midday on the 2nd January people can apply for the railcard, which costs £30 and gives up to a third off most rail fares.
A minimum fare of £12 applies between 4.30am and 10am Monday to Friday, but people can still save money on their daily commute with the card. National Rail says that people will save on average £125 a year with the card.
After being announced in the 2017 Budget, the Government launched a massively oversubscribed trial of the railcard earlier this year, with the 10,000 railcards released as hard to get as tickets to Glastonbury. This means it’s likely to be popular when it does launch. You can apply for the railcard up until the day before your 31st birthday, so anyone who is 30 and has a January birthday needs to get their skates on.
Student loan threshold increases
The amount you can earn before starting to repay your student loan will increase from 6 April 2019. Those who started university in 2012 or after will see the threshold increase from £25,000 to £25,725, after which they will pay 9% of their earnings. The change will save these graduates just over £65 a year. Meanwhile those who studied before 2012 will see their threshold rise from £18,330 to £18,935, after which they also pay 9% of their earnings, with the move saving them £54.
The interest rate charged on the student loan will also change in September, as it does every year. It is based on the March figure for the Retail Prices Index measure of inflation, which this year was 3.3% - taking the maximum rate for those who started university after 2012 to 6.3%.
*You can see more details on the timetable for increasing the state pension age to 66 here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/310231/spa-timetable.pdf
These articles are for information purposes only and are not a personal recommendation or advice.