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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Watch out for changes to pension contributions, dividend allowance and ISA transfers

Ironically as the world became destabilised by the twin forces of Brexit and Donald Trump – not to mention a UK general election, mounting global tensions over North Korea and an emboldened Vladimir Putin – 2017 was a year of relative tranquillity for pensions.

Aside from the cut in the amount savers who have accessed taxable income from their pension can subsequently pay in each year from £10,000 to £4,000 (the Money Purchase Annual Allowance) the UK’s retirement rules enjoyed a period of relative stability.

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Indeed, the November Budget was one of the quietest in memory for pensions, with the Chancellor confirming a rise in the lifetime allowance by £30,000 to £1,030,000 (in line with Consumer Price Index (CPI) inflation) and the uprating of the state pension by 3% (again simply protecting the payment from inflation).

Given the set-piece was preceded by feverish speculation about potentially dramatic cuts to pension tax perks as part of an attempt redressing the balance between older and younger voters, this came as welcome relief to savers (particularly higher and additional-rate taxpayers).

It’s possible a Government with bigger fish to fry will once again leave pensions and savings alone in 2018 – and the decision to only have one major fiscal event a year (the Autumn Budget) should reduce the likelihood of tinkering.

That said there are a few things savers should look out for next year:

Automatic enrolment contributions going up

If you’re in a workplace pension scheme and paying in 1% of your salary, prepare for your contributions to rise. From 6 April 2018 the minimum total contribution will increase from 2% to 5%, with 3% coming from you (including tax relief) and 2% coming from your employer.

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 contributions (not to mention pension tax relief).

The dividend allowance going down

A cut in the amount of dividend income you 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, that converts into a tax bill of £225 for a basic-rate taxpayer who pays in £5,000, £975 for a higher-rate taxpayer and a whopping £1,143 for an additional-rate taxpayer.

If you’re affected, it’s worth considering moving some (or all) of your dividend paying investments into a tax wrapper like an ISA or a SIPP, where you can enjoy unlimited tax-free dividend income.

Help to Buy / LISA transfer deadline: 

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.

To recap, savers aged between 18 and 39 can pay in up to £4,000 a year into a Lifetime ISA and receive a 25% top-up from the Government. You can keep paying in until age 50, and can take the money out tax-free either to buy your first home, after your 60th birthday or if you fall into terminal ill-health.

Until 6 April 2018 savers can transfer their Help to Buy ISA into a Lifetime ISA without using up their Lifetime ISA allowance. Someone who had contributed the maximum to a Help to Buy ISA – £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 Lifetime ISA and also contributed the £4,000 Lifetime ISA limit they would receive a 25% bonus on the entire amount – or £2,100 – meaning their total pot would be worth £10,500.

It’s worth noting that only the value in the Help to Buy ISA as at 5 April 2017 will be eligible – so anything paid in after that date will count towards the £4,000 limit for this tax year.

More inflation?

Inflation has returned to the economy on the back of record low interest rates, with the latest Consumer Price Index figure recorded at 3%. Inflation is a silent killer that slowly eats away at the value of savings and investments, so it’s worth keeping an eye on it and assessing whether you need to take more investment risk to protect your portfolio.

This is particularly important for anyone with savings in low or zero interest paying bank accounts, or Cash ISAs – products which in the current economic environment guarantee a real-terms loss.

Tom Selby,

Senior Analyst, AJ Bell

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