ii Budget response: Rich kids and high earners come out on top

The Junior ISA allowance increase could see rich kids with quarter of a million ISA pots at 18.

Today’s Budget was multi-generational, with a more than doubling of the Junior ISA allowance – welcome, but unlikely to have mass appeal given it is aimed at the privileged few. The move on the tapered annual allowance was not restricted to doctors and is welcome - a two-tier pension system would have been unnecessarily complex and a dangerous precedent to set. 

The government has not touched higher-rate tax relief on pensions which will be a relief to many investors striving to make contributions during a relatively short period of lifetime peak earnings.

On Junior ISAs, 

Moira O’Neill, Head of Personal Finance, interactive investor, says: “The more than doubling of the Junior ISA allowance will be a boost for parents looking to invest for their children and also a great way for grandparents to use up their annual gift allowances or making a potentially exempt transfer. 

“In reality, being able to invest £9,000 a year per child is pie in the sky for most families, even when resources are combined across the generations. For the lucky few, the Junior ISA would be worth £265,851 if £9,000 was invested from birth every year with a 5% annual return – by no means guaranteed, but a staggering amount for the lucky few who have money like this to set aside. With a 3% annual return, the pot at 18 would be £217,051.

“We’re disappointed that the Individual Savings Account (ISA) annual subscription limit and the annual pensions allowance remains unchanged for adults who want to prioritise their own financial security ahead of their children. In helping ourselves, we are helping our children after all. And we always have the flexibility to help them too, at our discretion.

“Most people use both tax wrappers to save for retirement and need as much flexibility as they can. With the lifetime allowance for pensions remaining in place, penalising those who benefit from wise investments that grow their money, some uplift to the annual limit would have been beneficial to those worrying about how to provide for their golden years. 

“It’s hard to believe that at one time the pensions annual allowance stood at £255,000, but it was reduced to £50,000 from the 2011/12 tax year and to £40,000 from 2014/15. Meanwhile, the government is proud that earnings growth remains above inflation but isn’t providing the facility for people to put more of those hard-won earnings away for their futures. 

“The total amount you can save each year into all ISAs last increased from £15,240 to £20,000 from April 2017 and three years later some inflationary increase would have been welcome.”

On the lifetime allowance, Moira O’Neill adds:

“The lifetime allowance, the maximum amount someone can accrue in a registered pension scheme in a tax-efficient manner over their lifetime, will increase in line with CPI for 2020-21, rising to £1,073,100. 

“This is still not mega-bucks in the grand scheme of things, and well short of what it used to be, but for many will be enough provide for a comfortable retirement, particularly when added to a full state pension.

“However, the big pension story is the Chancellor has stepped in to help stop doctors and other senior medical professionals being negatively impacted by pension rules.

“The problems started following the introduction of the tapered pension allowance for high-earning professionals in April 2016.

“This tapering reduces the amount of tax relief high earners can get on their pension contributions.

“Many doctors have been breaching the allowance by working overtime to cover NHS shortfalls, and have incurred tax charges. Others have been reducing their working hours or even deciding to retire early.

“The British Medical Association (BMA) has lobbied the government, arguing that if doctors are penalised for covering vacancies or helping reduce waiting times, the NHS will reach crisis point. The Chancellor has shown he has listened. 

“There were concerns that he would leave the rules the same for other high earners, making a value judgement about the nature of some work vs others and creating a two-tier pension system.

“However, according to the budget documents the move on the tapered annual allowance is not restricted to doctors. This is welcome as a two-tier pension system would have been unnecessarily complex and a dangerous precedent to set. 

“From 2020-21 the “threshold income” will be £200,000, so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an “adjusted income” above £240,000.

“For those on the very highest incomes, the minimum level to which the annual allowance can taper down will reduce from £10,000 to £4,000 from April 2020. 

“This reduction will only affect individuals with total income (including pension accrual) over £300,000. 

“Proposals to offer greater pay in lieu of pensions for senior clinicians in the NHS pension scheme will not be taken forward.”

What about modest income families?

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The Chancellor faced a difficult task in delivering a Budget amid the coronavirus outbreak which economic impact on the UK economy isn’t fully known. What was announced was one of the biggest fiscal and monetary stimulus packages that the country has seen in a long time to ‘Get things done” as the Chancellor was keen to drive home in his Budget speech.

"This year’s Budget announcements proves that the devil is in the detail with some of the juicy policies affecting personal finances buried in the Budget document for whatever reason. One of the more eye-catching announcements is the doubling of the Junior Isa and Child Trust Fund annual allowance in the next tax year (2020-21) from £4,369 to £9,000.  

“On the face of it, this is good news for parents seeking to maximise the amount they can save and invest into these tax-efficient accounts to give their child a financial leg up once they reach childhood. But the increase in the JISA allowance is an empty gesture for many parents. In truth, rich kids will get richer as a result of the change, while those living in modest income households are unlikely to benefit.