DECEMBER 2014 AUTUMN STATEMENT

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1 DECEMBER 2014 AUTUMN STATEMENT SUMMARY The key announcements by The Chancellor providing opportunities for financial planning advice are outlined below. PENSIONS Summary of all the pension changes to apply from 6 April 2015 Since the announcement of the 'Freedom and Choice in pensions' reforms in the March Budget, details have emerged piecemeal. Following the confirmation in the Autumn Statement of a change to the taxation of survivor's annuities, it now appears we have all the key pieces in place. The Chancellor announced that where the member purchased a joint life or guaranteed term annuity and dies under age 75, and where no payments have been made to the beneficiary before 6 April 2015, their beneficiary will be able to receive any future payments tax free. Post April 2015, it will also be possible to set up joint life annuities to cover the member and any beneficiary, rather than being restricted to the member and a spouse/civil partner or dependant, as is currently the case. Death Benefits The new rules have just a single distinction between deaths pre and post age 75. There's no difference in treatment if benefits are crystallised or uncrystallised, or paid to a dependant or non-dependant. Pre age 75 payments to the member's nominated beneficiary are free of all tax whether taken as a lump sum or as income. Pre age 75 beneficiary annuity payments and guarantee payments are paid tax free. Post age 75 drawdown income payments to a nominated beneficiary are subject to income tax at the beneficiary s marginal rate. There are no restrictions on the level of withdrawals. For post age 75 death benefits, there is a temporary alternative to pay a one off lump sum taxed at 45%. Post age 75 lump sums will be taxed at the beneficiary's marginal rate from 2016/2017. Similar treatment applies to annuities where the original annuitant dies after the age of 75. These rules apply to all payments made post April 2015, so can apply if the member died before then. However, payments must be made within two years of the scheme being notified of the death. The lifetime allowance (LTA) still applies, so if benefits haven t been tested against LTA any excess is subject to an LTA charge in the normal way. The nominated beneficiary can pass any unused drawdown funds onto a successor on their death. The same tax treatment will apply, also depending on the age at death of the beneficiary. This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person.

2 Flexi-access Drawdown (FAD) All new drawdown plans taken out from 6 April 2015 will be flexi-access drawdown (FAD). No limits on income levels. 25% tax free cash from designated drawdown fund (subject to available LTA). Balance can remain invested, or paid as a lump sum - marginal rate of income tax applies, or used to provide flexible income - marginal rate of income tax applies, or any combination. Once any income taken, 10,000 money purchase annual allowance applies (see below). Pre April 2015 flexible drawdown automatically becomes FAD. Capped Drawdown No new capped drawdown arrangements can be set up post April Existing plans can remain in place and continue with reviews and GAD limits. Can convert to FAD on member's request. Automatically convert to FAD if income exceeds 150% GAD. Retain standard 40,000 annual allowance where income remains within GAD limits. It will be possible to transfer existing capped drawdown plans from provider to provider. Uncrystallised Funds Pension Lump Sum (UFPLS) This is a new concept - a lump sum drawn directly from uncrystallised money purchase pensions. 25% of the lump sum is paid tax-free. The balance of the lump sum is taxed at the member's marginal rate of income tax. Once a UFPLS is taken, the 10,000 money purchase annual allowance applies (see below). Unlike FAD, it isn't possible to access available tax free amount in one go then take flexible income. Some restrictions apply to members with primary protection, enhanced protection or lifetime allowance enhancement factors affecting tax free cash entitlement. Money Purchase Annual Allowance To prevent widespread abuse of the new flexibility, a new anti-avoidance measure will be introduced - the Money Purchase Annual Allowance (MPAA). The MPAA will be set at 10,000 a year from 6 April The Money Purchase Annual Allowance applies: when income is taken from flexi-access drawdown (FAD), when income above GAD limits is taken post 5 April 2015 from a capped drawdown fund, when an uncrystallised funds pension lump sum (UFPLS) is received, when a payment from a reducible lifetime annuity (this is another new flexible option) is taken, from 6 April 2015 for those already in flexible drawdown, who currently have no annual allowance. Doesn't apply: where an individual commences FAD, but doesn't receive any income i.e. just takes tax-free cash, where an individual is in capped drawdown (ie pre 6 April 2015) and doesn't receive income above 150% GAD after 5 April 2015, when small pots are accessed.

3 MPAA only applies to money purchase contributions. Someone who's affected can still fund a defined benefits scheme up to the normal annual allowance limits, plus any carry forward allowance. MPAA can not be carried forward. Annual allowance The standard annual allowance remains 40,000 for 2015/2016. Carry forward remains possible for those in money purchase arrangements not caught by the MPAA restrictions and those in defined benefits arrangements. Lifetime allowance and Individual protection The lifetime allowance remains 1.25 million for 2015/2016. Those who are eligible for Individual Protection must apply online by 5 April Tax relief There's no change to the rate of tax relief for member contributions, which will continue to be based on the individual s highest marginal rate. One hoped for change didn't come about. The Chancellor confirmed that tax relief still can't be claimed on pension contributions once the member is over 75. It's clear that the changes originally announced under the Freedom and Choice agenda in the March Budget are reshaping the whole pensions market. Retirement choices will be more complex in future, potentially increasing the market for regulated advice. The increased flexibility at retirement has been generally welcomed and removes one of the perceived disadvantages of pensions saving. Along with the increased take up of workplace pensions via automatic enrolment, it should encourage greater pensions savings generally. As expected, the consultation process since March has thrown up many issues. Some of these have been resolved, such as equalising the improved treatment of death benefits between annuities and drawdown. However, the final detail of the proposals is still being worked out as the Taxation of Pensions Bill makes its way through Parliament. Individuals aged 55 and over may want to consider designating some funds for capped drawdown before 6 April If their drawdown product allows, they'll be able to designate further funds in the same arrangement post April 2015 and remain within the capped drawdown regime. This means they can retain the full annual allowance for contributions, while being able to take a drawdown income within the GAD limits although slightly more restrictive anti tax free cash recycling provisions will apply. INCOME TAX In 2015/2016 the income tax personal allowance will see another substantial increase of 600 to 10,600. This is 100 more than was previously announced in the Budget. The basic rate threshold reduces to 31,785 for 2015/2016. Those entitled to the full standard personal allowance will pay 40% tax on income above 42,385. The threshold for higher rate income tax increases by 520. This is the first time in five years it has increased in line with the rate of inflation. The starting rate band for savings income increases to 5,000 for 2015/2016. Income in this band will be taxed at 0%. The savings rate band is reduced by an individual's taxable non-savings income. The 100,000 personal allowance income limit and the 150,000 additional rate tax threshold remain unchanged for 2015/2016. As the personal allowance will increase to 10,600 the age-related allowance is no longer applicable to those born after 6 April Those born before 6 April 1938 receive a personal allowance of 10,660. The married couple s allowance (MCA) increases to 8,355 (minimum 3,220) for 2015/2016. Relief is restricted to 10%. MCA is only available where one spouse / civil partner was born before 6 April 1935.

4 The age allowance income limit increases by 700 to 27,700 for 2015/2016. From 2015/2016, up to 1,060 of the unused personal allowance will be transferable from one person to their spouse or civil partner, provided neither pays higher rate tax. The transferrable amount will be set at 10% of the personal allowance each year. A further substantial increase in the personal allowance means that higher earners can achieve even greater benefit by using pension contributions to reduce adjusted net income above 100,000. For someone with gross income of 121,200, a pension contribution of 21,200 costs just 8,480, attracting tax relief of 60%. The large increases in the personal allowance over the last few years means that age related allowances are no longer relevant for those born after 6 April The introduction of a 5,000 0% savings rate band will benefit many retired individuals with small pension incomes. CAPITAL GAINS TAX As previously announced, the annual exempt amount will increase to 11,100 for 2015/2016. Trustees will be entitled to a maximum of 5,550. The 18% and 28% rates of capital gains tax remain, as does the interaction with the amount of the taxpayer's unused basic rate income tax band (if any) to determine at which rate tax will be paid. Non-residents disposing of UK residential property will face a CGT charge on gains realised on or after 6 April The Government recently published its response to consultation and will publish further information and guidance in due course. Two changes to Entrepreneurs Relief (ER) were announced preventing a claim for goodwill when a business is transferred to a related close company - and permitting gains which are eligible for ER but are instead deferred into other tax efficient investments to remain eligible for ER when the gain is realised. TAX EFFICIENT INVESTMENTS ISAs ISAs will retain their tax-free status when passed on to a spouse or civil partner following death. The Government will legislate to allow an additional ISA allowance for a surviving spouse or civil partner when the ISA saver dies which will equate to the value of their ISA holdings at the date of death. The annual ISA subscription limit for 2015/2016 rises to 15,240 from 15,000, in line with movement in the Consumer Price Index (CPI). The limit can be invested wholly in cash, stocks and shares or any combination between the two. Savers aged can subscribe up to 15,240 into a cash ISA in 2015/2016 but are not permitted to open a stocks and shares ISA. A saver may only open a maximum of one cash ISA and one stocks and shares ISA each tax year. Junior ISAs and Child Trust Funds The annual subscription limit applying to Junior ISAs and Child Trust Funds also increases in line with CPI - to 4,080 for 2015/2016. The ability for a widow or widower to inherit their partner s ISA without losing its tax-free status will be sure to add to its appeal as a cornerstone of personal saving. It follows the significant increase to ISA subscription limits earlier this year. INHERITANCE TAX (IHT) AND TRUSTS

5 As previously announced, the IHT nil-rate band is frozen at 325,000 until 5th April Following consultation, the planned 'settlement nil-rate band' will no longer go ahead. Instead measures will be introduced to tackle tax avoidance through the use of multiple trusts e.g. Rysaffe planning. The Government will also look to simplify the calculation of trust periodic and exit charges. Scrapping of the proposed 'settlement nil-rate band' will be a relief to some: the supposed simplification would have introduced a particularly complicated set of rules. However, the Government's attack on Rysaffe planning will continue with draft legislation expected in the Finance Bill. STAMP DUTY The chancellor announced a major reform to the calculation of stamp duty. Rather than the relevant rate being charged on the full purchase price it will now only apply on the proportion of the purchase price within each band. The rates will also be changed and are Transaction value Rate Up to 125,000 0% 125, ,000 2% 250, ,000 5% 925,001-1,500,000 10% 1,500, % So for example a house costing 300,000 would be charged 5,000 ( 2% + 5%) whereas under the current system it would be charged 9,000 ( 3%). These changes are due to take effect from 4 December The change takes away a significant distortion in the housing market as it created artificial price ceilings around the current bands. The Government estimates that 98% of house purchasers will pay a lower amount under the new rules whilst those buying the very highest value houses will pay significantly more. The changes may make buy to let purchases more attractive as they will reduce the costs involved. TAX AVOIDANCE To tackle aggressive tax-avoidance, the Government will look to strengthen the Disclosure of Tax Avoidance Schemes (DOTAS) provisions further and will set up a task-force to enforce the DOTAS regime. For increased transparency, HM Revenue & Customs will be able to publish information about tax-avoidance schemes and those that promote them. The remittance basis charge Non-domiciles - those resident but not domiciled in the UK - can elect to be taxed on the remittance basis. If they do, only income and gains that are remitted to the UK are subject to tax. This favourable tax treatment will continue to be available, as will the charge to access it: the remittance basis charge. The current charges are 30,000 for those who have been UK resident for 7 out of the previous 9 years and 50,000 for those who have been UK resident for 12 out of the last 14 years.

6 The 50,000 charge will increase to 60,000. In addition, those that have been UK resident for 17 out of the last 20 years will be subject to a new charge of 90,000. There will also be a consultation on whether the remittance basis charge, once an election has been made, should apply for a minimum period of 3 years. STATE BENEFITS, TAX CREDITS AND THE MINIMUM WAGE Basic State Pension (BSP) The BSP will increase in line with the triple lock guarantee by 2.85 a week (2.5%) in 2015/2016. A single pensioner will get a week ( 6, a year). Child Benefit Child benefit for 2015/2016 increases by 20p to a week for the first child and by 15p to a week for other children. Child Tax Credit (CTC) The family element of CTC remains at 545 for 2015/2016. The child element increases by 30 to 2,780; the disabled child addition increases by 40 to 3,140 and the severely disabled child addition increases by 20 to 1,275. Working Tax Credit (WTC) The basic element of WTC increases by 20 to 1,960 for 2015/2016. The couple and lone parent elements both increase by 20 to 2,010; the 30 hour element increases by 10 to 810, the disabled worker element increases by 35 to 2,970 and the severe disablement addition increases by 20 to 1,275. Up to 70% of eligible childcare costs can be recovered up to a cap of 175 a week for one child and 300 a week overall (no change). Universal Credit Universal Credit will be expanded nationwide through 2015/2016. Legacy benefits will start to close to new claims from Universal Credit is replacing income based Jobseeker's Allowance, income related Employment and Support Allowance, Income Support, Child Tax Credit, Working Tax Credit and Housing Benefit. National Minimum Wage (NMW) From 1st October 2014: 6.50 per hour - main rate for workers aged 21 and over per hour - workers aged 18 to per hour - workers aged under 18 and above school leaving age per hour - apprentice rate for apprentices under 19 or 19+ and in the first year. Remember the minimum wage when planning with salary / dividend / pension profit extraction and salary exchange / sacrifice.

7 Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. This information is based on announcements made in the December 2014 Autumn Statement which may change before becoming law. Scottish Widows plc. Registered in Scotland No Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /14

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