There were few surprises in this year's Budget - much of it was leaked to the media. While some changes could have a significant effect on your finances, it's very much back to basics when it comes to financial planning.
"There wasn't anything earth shattering in the Budget, with the government looking to simplify some areas of tax," says Carl Melvin, managing director at Affluent Financial Planning. "But from a financial planning perspective, it was a reminder to act now. Take advantage of the allowances and tax breaks in case they're withdrawn."
While the increase in the personal income tax allowance to £9,205 from April 2013 was in line with the government's long-term commitment to raising it to £10,000, the Budget announcement on the age-related allowance was unexpected.
From next April, those reaching age 65 will not receive this allowance, while those already enjoying additional tax-free income will have their allowance frozen until the personal allowance catches up.
"Phasing out the age-related allowance came as a bit of a shock," says Nick Bamford, chartered financial planner and executive director at Informed Choice. "People in retirement will need to carefully review their investment income to ensure they keep income as low as possible."
For example, by switching from income-to growth-generating investments, it's possible to take advantage of the annual capital gains tax exemption of £10,600 rather than add to your income.
To further protect your income, Melvin recommends taking advantage of other tax-efficient investments. "Use your ISA allowance to build up tax-free income," he says. "The removal of the age-related allowance demonstrates how the government can mess with the value of your tax-free income. It can't do this with your ISA though, so make sure you use your allowance where possible."
Although it was feared that the government would scrap higher-rate tax relief on pensions, cut the annual allowance or restrict access to tax-free cash, these tax breaks were left untouched. Instead, with the announcement that the 50% top rate of tax would be cut to 45% from April 2013, high earners were given a year to focus on maximising their pension contributions.
Laith Khalaf, a pensions analyst at Hargreaves Lansdown, says high earners should look to channel as much as possible into their pensions in this tax year. "If you're earning more than £150,000 a year, take advantage of the carry-forward rules to maximise your contributions while you can still get tax relief at 50%," he says.
These rules allow you to carry forward any unused pension allowance, subject to the £50,000 a year maximum, from the previous three tax years. Providing you have made no contributions in these earlier years, you could pay as much as £200,000 into your pension.
The Budget addressed the needs of those on modest incomes by announcing a new, simplified single-tier state pension. Further details and a consultation are scheduled for later this year, but it is expected that it will be based on contributions and pay about £140 a week.
Khalaf says it's broadly a good thing, as it will make it easier to see what you will receive from the state. However, he adds that it will reduce the maximum entitlement. "At the moment, a high earner could build up a state pension entitlement of around £200 a week," he says. "I imagine the government will honour entitlements that people have already built up, but these details will be thrashed out in the consultation being launched later this year."
Another significant move announced in the Budget was the linking of the state pension age to average life expectancy.
Currently, it is proposed that it will increase to age 67 between 2026 and 2028 and rise to 68 between 2044 and 2046. But, depending on the finer detail, the state pension age could rise faster. "The goalposts are moving," says Khalaf. "The only way to insulate yourself from the changes is to make private provisions. If you want to decide when you retire, stash money in a pension now."
At the other end of the age spectrum, there was some relief when the income threshold for child benefit was raised and an eligibility taper introduced.
The government had planned to remove the benefit from households where at least one parent earns more than £42,475, but the threshold has now been raised to £50,000. At this point, eligibility will be reduced at the rate of 1% for every £100 earned and disappear completely by the time someone earns £60,000.
Bob Perkins, technical manager at Origen Financial Services, says that, with some careful financial planning, parents can slip below the £50,000 threshold.
He explains: "Eligibility will be based on adjusted net income. This is your income from employment, savings and investments minus any pension contributions. If you don't earn much over £50,000, consider making sufficient pension contributions to bring your adjusted
net income below the threshold."
There may also be room for manoeuvre with savings and investments. If your partner's earnings are less than £50,000, it may be sensible to put savings and investments in their name. Use ISAs to take advantage of the tax breaks and keep your taxed income down.
SAVINGS AND INVESTMENTS
While the Budget served to remind us of the importance of pension savings and taking advantage of tax breaks, there was little to encourage further saving and investment.
Melvin says the clampdown on the maximum investment plan took away a vehicle higher-rate taxpayers use to supplement their pension savings.
From April 2013, there will be an annual limit of £3,600 on qualifying life assurance policies, including MIPs. "These are often used by high earners who have used up the £50,000 annual pension contribution allowance," he explains. "There were no limits on how much you could pay into these plans and, after 10 years, the proceeds were tax-free. The chancellor has killed them stone dead."
Although the changes don't come into effect until April 2013, policies issued on or after 21 March 2012 will also be affected by transitional rules limiting how much can be paid in. Melvin says anyone who has used these plans to boost retirement savings in a tax-efficient manner should take advantage of other tax breaks.
He says: "Use your ISA allowance and, if you can stomach the additional risk, consider venture capital trusts and enterprise investment schemes."
From a financial planning perspective, it's also important to consider some of what didn't make it into the chancellor's speech.
Anyone worried about inheritance tax planning was left disappointed by the absence of any new allowance or planning opportunities in this area. Instead, the inheritance tax nil-rate band remains frozen at £325,000 until April 2015, after which it is expected to increase in line with the Consumer Prices Index.
This means it's more important than ever to plan ahead. Using the annual allowances to make a wedding gift or a regular gift from taxed income that doesn't affect your standard of living can help reduce future liabilities. Larger amounts can be removed from an estate by making potentially exempt transfers, but these only remain exempt if you live for at least seven years after making the gift.
Bamford agrees. "Whether it's inheritance tax planning or reducing your income to qualify for child benefit, this year's Budget was very much back to basics when it comes to financial planning," he says. "Use your ISA allowance, shift taxable assets between yourself and your partner where necessary and invest as much as you can into your pension."
This feature was written for our sister magazine Money Observer