Budget 2024: What Financial planning implications are there for your pension?

It is said that the Baby Boomer generation is now the wealthiest generation in retirement there has ever been. It would be crass not to acknowledge that there is a growing wealth gap within this generation between those with savings/financial resources and those without who will be frustrated to see their winter fuel allowance evaporate. In this piece, we focus on those of you who have private pensions and savings and how Rachel Reeves’ Budget might affect you.
 

For those approaching retirement, we now need to be cognisant of how much you put into pensions versus, say how much you save to ISAs. ISAs played second fiddle to pensions for a longer time owing to the immediate tax benefit and longer-term premise of being out with your estate for IHT. In recent years we had often tended to draw down on pensions last, after ISAs and other savings to reduce the IHT liability. The playing field has now been levelled somewhat, notwithstanding the abovementioned income tax benefits. Do remember though that when you take money out of pensions, one-quarter is tax-free, and three-quarters is taxable at your marginal rate. We want to work with you to maximise your retirement income. This sounds impossible for those used to a high standard of living, but in fact we can be clever about how and when we take the tax-free cash from your pension – this doesn’t, in fact it shouldn’t, be taken all at once. With a good pension product you will have the flexibility to take the tax free cash for the first 10 years of retirement when you’re likely to spend a lot more enjoying yourself, then when your spending needs reduce this dovetails nicely with the fact that anything you draw from the pension will be taxable, hopefully at basic rate. We can use your ISAs to supplement a tax-free income (tax man doesn’t want to know about them) and as I’ll mention below there are further things you can do depending on your own situation.

A separate strategy for those nearing retirement or beyond is to once again after so many years of being the proverbial chocolate teapot, look at annuities! Yes, beyond your own demise the chunk of funds you used to buy the annuity won’t pass down the generation, but anything above the £500k* threshold you are losing 40% of it now anyway! (*This assumes you qualify for the basic £325k plus the £175k residence nil rate band). This requires careful consideration from an income tax perspective to ensure it works well for you. Let’s be clear, with the benefit of advice it’s unlikely you would sacrifice your entire pension pot in favour of an annuity so again, how times have changed when this was very much the default.

For those with more material assets and those already in retirement, this budget has implications for you. Now that pensions are brought into your taxable estate for IHT, I suspect the use of Trusts/Bonds will be prolific.  Too many clients leave this far too late in life to make it worthwhile, but in basic terms by putting money in a Bond structure you are mainly ensuring all the future growth on that (and don’t underestimate how much that will grow compounded over the next 20-30 years!), is out of your own estate for IHT purposes. You can still have a degree of control over the Trust and they come in different flavours depending on one’s taste to gift funds away entirely to future designated beneficiaries or retain an option to have access yourself. However, there are all sorts of things that can be done with these like provide a tax-free income (which is often just you taking your original capital back say 5% for 20 years). What’s more, if your taxable estate is >£2m you start to lose the £175k residence nil rate allowance and so on the amount between £2m - £2.7m it is an effective tax rate of 60%...similar to the income tax trap mentioned earlier!

Another option, to protect wealth is life insurance. You would likely choose a level of cover that is equivalent to the future IHT bill. You could leave the kids to deal with all of this, but especially where property is concerned it isn’t much fun waiting for the property to be sold to pay the tax bill etc, and remember anything you do spend is of course reducing your estate and so think about everything being 40% cheaper!

Finally, there are lots of way to gift funds to grown-up children and family and friends. A financial planner will help you fully understand if you can afford to or should be starting to gift funds, which sometimes comes in the form of say paying your adult-children’s insurances say where it isn’t necessarily a cash gift.

We could go on and on. Capital gains tax rises, property cost increase, this was always going to be an impactful budget. For further help navigating this budget reach out to the team at Financial Planning by TaxAssist.