How budget savings boost could help you – and the chancellor

At the beginning of his budget speech, George Osborne said support for savers was “at the centre of this budget”.

It certainly was, and the chancellor, well aware that pensioners are more likely to vote than younger people, will be hoping to reap the rewards at next year’s general election.

Pensions

The Treasury is calling it “the most fundamental change in the way people access their pension in almost a century”.

All tax restrictions on pensioners’ access to their defined contribution (DC) pension schemes – the most common schemes offered by employers – will be removed in April 2015.

No longer will people have to buy an annuity (a financial product sold by an insurance company which offers a guaranteed income) when they retire.

They will be free to do what they want with their money, taking all of it in a cash sum if they choose, and pension providers will have to offer them free and impartial guidance.

The tax on cash removed from a pension pot on retirement will be cut from 55 per cent to 20 per cent.

This new flexibility will no doubt appeal to many people, but the National Association of Pension Funds has legitimate concerns.

It says those deciding to take their pensions as a lump sum face “a significant burden of responsibility” in working out how much money they need, given that people tend to under-estimate how long they will live and over-estimate how long their pension pot will last.

What is to stop someone from blowing the proceeds of their pension pot over a couple of years and then having to fall back on the state for support?

The City also made its feelings known: the share prices of leading life assurance firms were hit following Mr Osborne’s decision to give pensioners more freedom over their investments.

ISAs

There are two kinds of tax-free individual savings account (ISA): cash and stocks and shares.

With the former, there is no risk to the money invested. You will never lose what you have paid in, but inflation can eat into, or dwarf, the interest you are paid.

With the latter, your money is at some risk because it is invested on the stock market, but returns can be impressive compared with cash ISAs.

Current rules allow a maximum of £11,520 to be invested in a stocks and shares ISA every year, but only half of this amount in a cash ISA.

From July, savers will be able to invest £15,000 in an ISA or ISAs of their choice. They will also be entitled to move money from existing ISAs to the new ISAs announced by the chancellor.

At the moment, the proceeds of a stocks and shares ISA cannot be transferred to a cash ISA, but money moved in the other direction is allowed.

This anomaly is now changing, which will please people who have reached an age when they do not want to take any risks with their money.

The annual limit for junior ISAs and child trust funds will also rise from £3,720 to £4,000.

Moneysavingexpert.com founder Martin Lewis is cautious, pointing out that increasing the ISA limit to £15,000 will only achieve so much for savers, given that interest rates are at “all-time lows”.

Premium bonds

At the moment, a maximum of £30,000 can be invested in government premium bonds.

Interest is not paid on deposits, nor does your money keep pace with inflation, but investors can win small or large sums of money (up to £1m) every month.

This £30,000 limit is being increased for the first time in a decade, to £40,000 in June and £50,000 in 2015.

Pensioner bonds

Bonds are IOUs: you lend the government or a financial institution some money and receive it back at a specified date with interest paid.

Interest rates tend to be better than ordinary bank and building society savings accounts.

Many pensioners are reliant on interest from savings, but have endured years of pitifully low rates because of the decision by the Bank of England to keep base rate at 0.5 per cent to help Britain through the downturn.

Following the budget, over-65s will have a choice of two new pensioner bonds from January, paying interest at a fixed rate.

The government’s assumption is that these bonds will pay rates of 2.8 per cent over one year and 4 per cent over three years.

A maximum of £10,000 can be invested in each bond, run by National Savings and Investments (NS&I), and interest is taxed.

Savings interest

The 10p rate on income of up to £5,000 from taxable savings will be abolished from April 2015.