What the Self Employed and Furloughed Need from The Budget

March 2021
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The two groups hardest hit by the economic fallout of Covid 19 are the 18-24 age group and those over 50, making up the largest groups of the self- employed and furloughed whose work has been shut down. The rate of unemployment increased to 5.1% at December 2020* 

Many of them have been forced to dip into savings to bridge the gap between furlough pay, benefits and their bills.  While, as the Chancellor says, he cannot save every job, he could ease the burden on these groups by abolishing penalties which apply when they access their savings from a Lifetime ISA or a Pension plan.

Lifetime ISA 

The Lifetime ISA (LISA) available to the under 40s, attracts a Government bonus of 25% of the individual’s savings with up to £1,000 a year added to savings of up to £4,000 a year. The saver can access their savings penalty free to buy a first home, after age 60, or if terminally ill. If accessed for any other purpose 25% of the withdrawal is recovered by HMRC. 

The level of this penalty has been temporarily reduced to 20%, amidst criticism that the 25% penalty claws back 6.25% of the individuals own savings as well as the Government subsidy.  Unless the Chancellor acts the penalty will revert to 25% on 6 April. 

Even before the financial strain of Covid was reckoned with, the 25% penalty acted as a disincentive for young people to save and for providers to offer a LISA.

To make matters worse, LISA savings which are specifically designed as house purchase deposits or retirement savings are considered when assessing an individual’s eligibility for Universal Credit. Those with £16,000 or more of savings get no benefit and a scaled down benefit if savings are over £6,000. We would like the DWP to disregard these savings in the same way that pension savings are ignored.  

We ask the Chancellor to keep the penalty for early withdrawal at 20% permanently, so that the taxpayer does not benefit from the financial insecurity which Covid has imposed on many young people. 

Money Purchase Annual Allowance (MPAA) for Pension Savings

Flexible access to pension savings introduced in 2015, enables savers over 55 to access their pension pots by flexibly withdrawing lump sums. While 25% of the fund may be withdrawn as a tax- free lump sum, any amount above this is taxable income. If paid out from a pot worth more than £10,000 it means that future pension savings are restricted to £4,000 per year. 

This rule, known as the Money Purchase Annual Allowance, is little understood by savers. It comes as a cruel blow when they realise that future savings made by them, or their employer, over £4,000 a year, will be taxed. It makes rebuilding retirement savings withdrawn in an emergency much more difficult. 

We would like Rishi Sunak to increase the MPAA to its pre 2017 level of £10,000 a year. This would enable those who have accessed pension savings, to tide them over the current crisis, to rebuild more of their savings with the benefit of tax relief.

Kay Ingram                                    
Public Policy Director                              
March 2021

*ONS Labour Force Survey 23 February 2020. 

1. Freedom of Information requests made to HMRC by Royal London revealed that by the end of 2019 HMRC had levied penalties of £9 million on LISA savers which grew by another £2.95 million in the first quarter of 2020. 

2.HMRC reported 360,000 individuals making flexible withdrawals from their pension plans at the end of 2020, this was 10% up on the previous year with a 6% increase in the total withdrawn year on year. HMRC Flexible payments from pensions January 2021

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts. 

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