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The big pension changes in 2024 and how to plan for them

2024 will see some huge changes to pensions, not least the much-publicised abolition of the Lifetime Allowance (LTA). So how do you prepare for a rapidly changing pension landscape? With a general election around the corner and the likelihood of a changing Government how can you plan for changes in legislation that could well be scrapped later down the line?

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Lifetime Allowance

Taxation on pension funds has been a hot topic since the 2023 Spring Budget when the Chancellor announced his intention to abolish the ‘Lifetime Allowance (LTA)’. The LTA is the total value that someone can accrue within a pension over their lifetime without incurring certain tax charges. Under LTA rules you could face a tax charge of up to 55% on pension savings above £1,073,100. So, for people with large pension pots, the prospect of abolishing this allowance was welcomed.

The announcement also signposted the introduction of two new allowances which will restrict the amount of tax free lump sums which could be paid under the new pension regime from 6 April 2024.

The new Lump Sum Allowance is the upper limit on the tax-free cash someone can take from their pensions during their lifetime and is capped at 25% of the previous LTA (£268,275). 

The second allowance, the Lump Sum and Death Benefit Allowance will restrict the tax free lump sum which can be paid from your pension funds to your beneficiaries if you die before your 75th birthday. The Lump Sum and Death Benefit Allowance is set at £1,073,100 and the new regulation does not have any provision for these to increase over time to keep pace with inflation. 
If you had previously registered for one of the many forms of protection against the Lifetime Allowance and have not broken the conditions for maintaining your protection you will benefit from a higher Lump Sum and Lump Sum and Death Benefit Allowance. 

To account for benefits taken between 6 April 2006 and 5 April 2024 a transitional calculation has been provided so that individuals can calculate their remaining available Lump Sum Allowance and Lump Sum and Death Benefit Allowance.
There is a secondary calculation which can be undertaken for individuals who did not receive the full tax free cash lump sum entitlement of 25% when pension benefits were taken previously which may enable them to receive an increased Lump Sum and Lump Sum and Death Benefit Allowance. It is advisable to take financial advice when undertaking these calculations as they can be complex.

As soon as the Chancellor announced the abolition of the LTA, Labour announced that they would reintroduce the LTA if they are elected following the impending General Election with the current Prime Minister, Rishi Sunak, suggesting this will happen in the second half of this year. 

The number of people paying tax for breaching the LTA has been increasing in recent years (See Figure 1) , and the reintroduction of the limit after a period of overcontributing will push this number even higher. If the LTA is reintroduced at its previous level, it is estimated that around 250,000 people will be over the limit. 

Figure 1: Tax Paid for breaching lifetime allowance, Source: HMRC, 2024

Many are concerned that bringing back the cap will push senior NHS doctors into an early retirement. One of the key motivations for scrapping the LTA initially was to deter NHS doctors from retiring early to avoid tax bills.

Could a Labour government reverse the rules?

In the run up to the election we could see a sudden flurry of savers rushing to draw down on their pensions before the potential reintroduction of an LTA. To prevent this, Labour may decide not to go ahead with the reversal. 

Now that the legislation has been passed and HMRC have almost completed the implementation of the changes, tax experts have said it will be more difficult for policymakers to reverse the rules. This uncertainty leaves savers in a tricky position, as they try to second-guess the next move by a government.

So, do you make the most of the current pension rules or stay cautious in case Labour reverses the changes? In the past when the LTA has been changed HMRC has introduced protections for those who breached the new lower limit. Therefore, if the cap is reintroduced savers who are over the limit might be able to protect their pot. It is hard to predict how a new government might behave but many are hopeful for some form of protection.

If you are thinking about crystalising your pension early to avoid issues with a Lifetime Allowance tax charge, given the complexity of the matter, you should first consult your financial adviser.

Annual Allowance

It is also worth noting that the pension annual allowance changed from £40,000 to £60,000 on the 6th April 2023. Although there is not a limit on the amount that can be saved into pensions each year, there is a limit on the amount that can benefit from tax relief. The ‘Annual Allowance’ is the limit that an individual can contribute to a pension personally in any given tax year, whilst benefiting from tax relief. 

For example, someone receiving a salary of £40,000, would only receive tax relief on personal contributions up to £40,000, but someone on a salary of £80,000, would only attract tax relief on contributions up to  £60,000. It is important to note that lower limits apply to high earners or individuals who have already accessed some of their pension funds flexibly.

State Pension

The state pension is due to receive an 8.5% rise this month, taking it from £10,600 to £11,502 a year. This is the second largest percentage rise in the last 30 years. It is worth remembering that this isn’t the case for everyone who is entitled to the state pension, and there is no guarantee that the next government will retain the current “triple-lock” status afforded to the State Pension. 

You can read more about specific pension details published in the Autumn Statement here

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

Gender Pensions Gap continues

The new report from the Pensions Policy Institute revealed that the gap in pension value between men and women is still significant, with 67% of pensioners in poverty being women.

According to the report, a girl would need to start saving from 3 years old to match the pension of a man who began at 22, and a woman in her late 50s has approximately a third of the retirement savings of an average man of the same age.

This difference means that women are more likely to struggle financially in retirement than men. Even though the gender pensions gap shrank by 7% between 2006 and 2020, according to official figures, it remains a gender-based issue that continues to put pressure on the financial equality between the sexes to this day.

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Only this week, there have been protests by Women Against State Pension Inequality (WASPI) -  a voluntary UK-based organisation founded in 2015 that campaigns against the way in which the state pension age for men and women was equalised. They call for the millions of women affected by the poorly communicated change in pension age for women to receive compensation. The Parliamentary and Health Service Ombudsman ruled that those affected should be compensated. Depending on the numbers affected, the total bill could end up being in the billions of pounds – more than £10bn if all women born in the 1950s are compensated. The Prime Minister's spokesperson said that the Government would be taking time to consider the report, and it is unclear whether any actual payout will take place.

What is the gender pension gap?

The gender pension gap is the difference in pension savings, and then retirement income, between the genders. The research shows that men have substantially larger pension pots than women as they approach retirement, resulting in a significant difference in retirement security between the genders.

For men and women just beginning their career, the gender pension gap doesn’t exist. After all, we all start with an empty pension pot. Then men gradually take the lead until their early 30s where the gender pension gap actually shifts in the other direction – for those eligible for auto-enrolment – with women having larger pension savings than men.

After 35 is where the real gender pensions gap begins to emerge in favour of men. There is a 10% gender pension gap between the ages of 35 and 39. By late 40s, this has expanded to a huge 47%, according to the Government’s Gender Pensions Gap report.

Why does the gender pension gap exist?

There are a number of factors that contribute to the startling gap between the genders in pensions wealth.

Firstly, the gender pay gap, which naturally contributes to the difference due to women taking home less pay on average and therefore contributing less into their pensions. 

Women historically perform the bulk of unpaid labour in society. For example, women are more likely to put their careers on hold while raising a family and they are more likely to work part-time, especially during the initial period of parent life. Data from the Office for National Statistics (ONS) showed that 38% of women were working part-time compared to just 14% of men in 2022. And while this is changing, with paternity leave becoming more common, it remains that women statistically are the ones that sacrifice their hours, and therefore their pensions contributions, in order to help raise a family. 

Additional factors at play that contribute to the pensions gap include: career paths, gender pay discrimination, how pensions are split following divorce, to name but a few.

But the bottom line is, if you’re a woman, you’re statistically more at risk of having significantly less pension wealth than you should for a healthy retirement.

The key to avoiding these shortfalls is to plan in advance. Considering how all of these factors can affect your pension wealth down the road, planning accordingly can go a long way to mitigating some of these inherent disadvantages. Specifically, a female-focused retirement planning approach is the most effective way to secure a comfortable retirement.

If you’d like to find out more about how to navigate potential pension shortfalls, or are simply interested in finding out more about how you can best plan for the future of your pension, why not give us a call on 0333 323 9065 or book a free non-committal initial consultation with one of our experts to find out how we can help.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Spring Budget 2024

The Spring Budget 2024 confirmed some rumours, such as the introduction of a British ISA, and at the same time, contained a few surprises too. 

The main points are summarised below along with a reminder of some of the other changes coming into effect in April 2024.

Some measures are potentially subject to change until enacted into legislation.

If you have any questions or would like to speak to one of our expert financial advisers about the changes announced, contact us to arrange a free initial consultation.

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Pensions

Abolition of Lifetime Allowance (LTA) from 6 April 2024

A further Pension Schemes Newsletter / Lifetime Allowance Guidance Newsletter is expected this week but no further detail was issued as part of the Budget itself. Further information will be issued once it’s available.

State pension

Triple lock means new state pension and basic state pension will increase by 8.5% in April 2024. Full new state pension figure will be £221.20 per week.

Investments

Individual Savings Accounts (ISA)

The annual subscription limits all remain at their current levels in 2024/25, i.e.

A new British ISA is to be introduced from a date to be confirmed. This will give investors an additional £5,000 ISA allowance each tax year, so on top of the current £20,000. There is a consultation paper in place to obtain feedback from ISA managers, but the idea is for allowable investments to include UK equites and potentially UK corporate bonds, gilts, collectives. 

As previously announced at the Autumn Statement, the government is to make changes to ISAs to simplify the scheme and widen the scope of investments that can be included in ISAs. To simplify the scheme the government will:

  • Allow multiple subscriptions in each year to ISAs of the same type, from 6 April 2024
  • Remove the requirement to make a fresh ISA application where an existing ISA account has received no subscription in the previous tax year, from 6 April 2024
  • Allow partial transfers of current year ISA subscriptions between providers, from 6 April 2024
  • Harmonise the account opening age for any adult ISAs to 18, from 6 April 2024
  • Digitise the ISA reporting system to enable the development of digital tools to support investors

Reserved Investor Fund

The Reserved Investor Fund is a new type of investment fund designed to complement and enhance the UK’s existing funds rule. This meets the industry demand for a UK-based unauthorised contractual scheme, with lower costs and more flexibility than the existing authorised contractual scheme. The introduction date is still to be confirmed. 

Taxation

Income tax

All income tax rates and bands remain at their current levels in 2024/25. See our latest tax tables 2024/25.  

National insurance (NI)

National Insurance is paid by people between age 16 and State Pension age who are either an employee earning more than £242 per week from one job or self-employed and making a profit of more than £12,570 a year.

Following on from the NI cuts made in the Autumn Statement when the 12% rate of employee NI reduced to 10% from January 2024, the government is cutting the main rate of employee NI by 2p from 10% to 8% from 6 April 2024.

They are also cutting a further 2p from the main rate of self-employed National Insurance on top of the 1p cut announced at Autumn Statement and the abolition of Class 2.

This means that from 6 April 2024 the main rate of Class 4 NICs for the self-employed will now be reduced from 9% to 6%.

Child Benefit charge

The adjusted net income threshold for the High Income Child Benefit Charge (HICBC) will increase from £50,000 to £60,000, from 6 April 2024.

For individuals with income above £80,000, the amount of the tax charge will equal the amount of the Child Benefit payment. For those with income between £60,000 and £80,000, the rate at which HICBC is charged is halved, and will equal one per cent for every £200 of income that exceeds £60,000.

New claims to Child Benefit are automatically backdated by three months, or to the child’s date of birth (whichever is later). For Child Benefit claims made after 6 April 2024, backdated payments will be treated for HICBC purposes as if the entitlement fell in the 2024/25 tax year if the backdating would otherwise create a HICBC liability in the 2023/24 tax year.

In his Budget speech, the Chancellor announced that the plan is to move assessment for the HICBC to a system based on household income from April 2026. This is to remove the current unfairness meaning that a couple who each have income below the threshold, so could in 2023/24 have £49,000 pa each (£98,000 pa in total), wouldn’t be subject to the HICBC whereas another household with one person with income of £51,000 for example would.

Dividend allowance

As we are already aware, the dividend allowance reduces from £1,000 to £500 on 6 April 2024. Dividend tax rates remain the same at 8.75% in basic rate band, 33.75% in higher rate band and 39.35% in additional rate band (and 39.35% for discretionary trusts).

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Capital gains tax (CGT)

Annual exemption reduces from £6,000 to £3,000 on 6 April 2024 (a maximum of £1,500 for discretionary/interest in possession trusts – shared between all settlor’s trusts subject to a minimum of £600 per trust).

CGT rates remain as they currently are apart from the higher CGT rate for residential property gains (the lower rate remains at 18%):

  • 10% for any taxable gain that doesn’t fall above the basic rate band when added to income and 20% on any gain (or part of gain) that falls above the basic rate band when added to income
  • For residential property gains these rates increase to 18% and 24% (formerly 28%) respectively
  • Discretionary/interest in possession trustees and personal representatives pay at the higher rates (20%/24% (formerly 28%))

Simplifications for trusts and estates

From April 2024 trustees and personal representatives of estates will no longer have to report small amounts of income tax to HMRC and taxation of estate beneficiaries will be simplified, as shown below:

  • Trusts and estates with income up to £500 will not pay tax on that income as it arises
  • The £1,000 standard rate band (effectively basic rate band) for discretionary trusts will no longer apply
  • Beneficiaries of UK estates will not pay tax on income distributed to them that is within the £500 limit for the personal representatives

Stamp duty land tax (SDLT)

SDLT Multiple Dwellings Relief is being abolished from 1 June 2024. This applies to purchasers of residential property in England and Northern Ireland who acquire more than one dwelling in a single transaction or linked transactions. 

Changes to the taxation of non-doms

The concept of domicile is outdated and incentivises individuals to keep income and gains offshore. The government is therefore modernising the tax system by ending the current rules for non-UK domiciled individuals, or non-doms, from April 2025. A new residence-based regime will take effect from April 2025.

From April 2025, new arrivals, who have a period of 10 years’ consecutive non-residence, will have full tax relief for a 4-year period of subsequent UK tax residence on foreign income and gains (FIG) arising during this 4-year period, during which time this money can be brought to the UK without an additional tax charge.

Existing tax residents, who have been tax resident for fewer than 4 tax years and are eligible for the scheme, will also benefit from the relief until the end of their 4th year of tax residence.

Liability to inheritance tax (IHT) also depends on domicile status and location of assets. Under the current regime, no inheritance tax is due on non-UK assets of non-doms until they have been UK resident for 15 out of the past 20 tax years. The government will consult on the best way to move IHT to a residence-based regime. To provide certainty to affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the UK IHT regime. Decisions have not yet been taken on the detailed operation of the new system, and the government intends to consult on this in due course.

Furnished holiday lets (FHL)

The FHL tax regime, which relates to short-term rental properties, is to be abolished from April 2025.

Currently, if an individual lets properties that qualify as FHLs:

  • The profits count as earnings for pension purposes
  • They can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, relief for gifts of business assets and relief for loans to traders)
  • They’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures

Raising standards in the tax advice market

A consultation has been issued to discuss the government’s intention to raise standards in the tax advice market through a strengthened regulatory framework. It sets out three possible approaches to strengthening the framework: mandatory membership of a recognised professional body, joint HM Revenue and Customs (HMRC) – industry enforcement, and regulation by a separate statutory government body. The consultation also explores approaches to strengthen the controls on access to HMRC’s services for tax practitioners.

This has relevance to anyone who may receive or provide tax advice or offers services to third parties to assist compliance
with HMRC requirements. For example, accountants, tax advisers, legal professionals, payroll professionals, bookkeepers, insolvency practitioners, financial advisers, customs intermediaries, charities and other voluntary organisations that help people with their tax affairs, software providers, employment agencies, umbrella companies and other intermediaries who arrange for the provision of workers to those who pay for their services, people who engage workers off-payroll, promoters, enablers and facilitators of tax avoidance schemes, professional and regulatory bodies, and clients, or potential clients, of all those listed above.

The consultation runs until 29 May 2024. 

VAT

The VAT threshold is increasing from £85,000 to £90,000 from 1 April 2024, the first increase in seven years. See our tax tables 2024/25 for more details. See our tax tables 2024/25 for more details.

If you’d like to discuss any of the changes announced in the Budget or would simply like to explore ways that you can minimise the amount of tax you pay on your wealth, why not get in touch and speak to one of our expert team of advisers. We’re offering anyone with £100,000 in savings, investments or pensions a free financial review worth £500.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate tax advice.

Hunt’s politically charged budget

Hunt’s politically charged budget gives the voting public a second National Insurance cut in six months, but will it be enough to save the Tory party in the upcoming General Election?

Chancellor Jeremy Hunt delivered what could be his last Spring Budget (on 6 March 2024), with a further 2% National Insurance cut making the headlines, but there were other measures introduced which could have an impact on your finances.  So, what was announced?

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National Insurance

Following the 2% National Insurance reduction announced in the Autumn Statement last November, a further 2% National Insurance reduction was announced.  This will again affect earnings between £12,570 and £50,270 p.a. and will take effect in April 2024 in the pre-election giveaway that was widely anticipated following speculation in the press.  This will save workers up to a further £753 p.a., on top of the up to £753 p.a. saving as a result of the reduction announced in the Autumn Statement.

Child Benefit

It was announced that the High Income Child Benefit Charge (HICBC) will be replaced by a household income based system in April 2026 following a consultation.  In the meantime, from April 2024 the threshold above which the HICBC starts to apply on a tapered basis will increase from £50,000 to £60,000 and the top of the taper will increase from £60,000 to £80,000 in a move that Mr Hunt will hope will please working families.

Savings/Investments

Following speculation prior to the Autumn Statement, a British ISA was announced. This will be a further £5,000 tax free ISA allowance for investments into British companies, which will be available in addition to the standard £20,000 ISA allowance.

A new British Savings Bond will also be made available through National Savings and Investments (NS&I), which will offer a fixed rate over three years, though the rate payable has not been announced.

Pensions

Regarding the lifetime allowance, currently 0% and due to be scrapped in April 2024, there were no further changes announced. However, Mr Hunt did not miss the opportunity to reference Labour’s plans to reintroduce the allowance, stating “Ask any Doctor what they think about Labour’s plans to bring it back, and they will say “don’t go back to square one'.”

There were also new rules announced requiring Defined Contribution and Local Government pension funds to disclose how much UK equity exposure they have relative to their international equity exposure.  This could prove controversial given the funds’ mandates will be to produce the best risk adjusted return they can for investors, irrespective of their asset allocation.

Property

It was announced that higher rate Capital Gains Tax (CGT) rates on property sales will be reduced from 28% to 24% in April 2024, in a move that the government claims will be revenue generating.  The Furnished Holiday Lettings (FHLs) regime will also be abolished. 

‘Non-doms’

The current ‘non-dom’ rules, a tax advantageous regime for those who are non-UK domiciled (their ‘permanent home’ is outside the UK), will be replaced by a residency based system from 2025.

Inheritance Tax

After strong rumours that Inheritance Tax would be scrapped before last year’s Autumn Statement, it was not mentioned in the Chancellor’s budget statement.

Conclusion

In what was always going to be a politically charged speech given the proximity to the general election, Chancellor Jeremy Hunt will hope he has done enough to convince voters to give the Conservative Party another term in office in his Spring Budget.  In what the Labour Party leader Keir Starmer described as a ‘Last Desperate Act’; the speech was filled with warnings about the potential implications of a future Labour government (the budget speech transcript on the gov.uk website has ‘political content removed’ 27 times!).  

However, workers, families, those selling second homes and those already benefitting from last year’s Lifetime Allowance changes may see themselves as in a better position than they were previously, and they could see a future Labour Government as a risk to the longevity of the recently announced changes.  

If this is to be the case, there could be a limited opportunity to plan over the next few months.  So now is the time to seek advice, to make sure you are doing all you can to protect you and your family’s wealth. If you'd like to learn more about how you can minimise the amount of tax you pay on your wealth, why not get in touch and speak to one of our experts for a free initial consultation or please speak to your adviser if you would like to discuss any of the changes detailed above.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office.

The Financial Conduct Authority (FCA) does not regulate tax advice.

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New pension opportunities, but you may need to act fast!

In the 2023 Spring Budget, Chancellor of the Exchequer Jeremy Hunt took many by surprise with his chosen policy changes, particularly in regard to pension allowances. Not only was the Annual Allowance increased from £40,000 to £60,000 and the more restrictive Tapered Annual Allowance increased from £4,000 to £10,000, but it was also announced that the Lifetime Allowance would be abolished.   

Consequently, and taking into account a looming election and possible change of government, now could be an opportune time to consider whether you are aiming to maximise your pension contributions prior to the end of the current tax year to take advantage of these tax benefits. 

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What is the Annual Allowance?

The annual allowance is the maximum amount of pension savings an individual can make each tax year without an annual allowance allowance charge applying.

As noted above, from the start of the current tax year, the annual allowance was increased to £60,000, and you can receive tax relief on your personal contributions up to 100% of your relevant UK earnings (including salary, bonuses, commission). 

However, high earners could be subjected to a tapered annual allowance, which gradually reduces their annual allowance to a minimum of £10,000 for those with taxable income over £260,000.

Personal pension contributions are eligible for tax relief at an individual’s marginal rate of income tax. This means that a basic rate taxpayer will receive a 20% uplift on the money they contribute to their pension. A higher or additional rate taxpayer can then also claim an additional 20% or 25% via their self-assessment tax form, resulting in an overall potential tax saving of 40% or 45%! 

Employer or Company contributions are also paid gross and can receive corporation tax relief as a business expense.

What is ‘Carry Forward’ and does it apply to me?

Unlike with an ISA, whereby if you do not contribute the full ISA allowance of £20,000 by the 5th of April in a given tax year then this unused allowance is lost forever, this rule does not apply to pensions. The Government introduced the carry forward rules in April 2011, allowing individuals to utilise any unused pension annual allowance from the previous three tax years. 

Those with a tapered annual allowance can also still use carry forward if they have any unused annual allowances remaining in previous three tax years.

In order to carry forward any unused annual allowance from these tax years, you must:

  • Be a member of a UK-registered pension scheme and had a qualifying pension (this does not include the state pension) since the 2020/21 tax year.
  • Have used up your entire annual allowance in the current tax year.
  • Have remaining unused annual allowance in previous tax years. 
  • Have sufficient relevant UK earnings in the current tax year for a personal contribution.

Lifetime Allowance & Transitional Protections  

Due to the tax advantages of making pension contributions, the Government previously placed a limit on the amount of pension benefits an individual could accumulate over their lifetime, without incurring a tax charge. This tax charge is known as the Lifetime Allowance (LTA) charge and applied to individuals with pensions valued over £1,073,100. 

However, with the UK Government announcing that the LTA charge would be removed from 6 April 2023 and then the LTA abolished from 6 April 2024, this means there is an opportunity for those who are near to or who have exceeded the £1,073,100 threshold to consider recommencing pension contributions. 

Historically, the Government has provided individuals with the opportunity to apply to protect their LTA before any changes in legislation. Certain types of transitional protection were introduced with the stipulation that you could no longer make any further pension contributions, but this restriction was then also lifted for those with existing protection before 15 March 2023.

Therefore, this has presented another potential opportunity, as those previously unable to make any contributions due to the risk of losing their protection, may have a significant level of unused annual allowance from previous tax years.

Use it or lose it

With wage growth reaching 7.3% for the period between August to October 2023 (according to the ONS), the tax band freeze means people are technically paying more income tax than ever before. Therefore, it would be prudent to look for ways to maximise the tax-efficient legalisation currently on offer. 

Aside from the fact that any unused annual allowance from the 2020/21 tax year will be lost after 5th April 2024, there is no predicting if or when changes will be made again to this legislation. It seems as if the UK population collectively hold their breath at the sign of any Budgets which have seen a vast array of changes to pension rules over the years. 

Whilst the most recent changes were positive for pension savers, it is important to consider the implications of the impending election in the next 6-12 months; if there is a change in government then this policy change could be reversed. With that and all the above in mind, it is worth exploring your options and taking appropriate action concerning your carry forward allowance; use it before you lose it! 

Pensions can be a complicated and daunting matter to navigate, from obtaining the relevant information from your pension providers to a thorough understanding of ever-changing UK legislation. Therefore, please do reach out to a financial adviser if you would like help making the best use of your savings and pension allowances. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The Financial Conduct Authority (FCA) does not regulate tax advice.

The importance of Cash

There’s no getting away from it, costs have risen exponentially. With a growing cost of living crisis throughout the country, the need for cash retention to act as a buffer in these circumstances remains vital for everyone. This increase in costs will likely mean most people will need to try and save money where they can. Nevertheless, while cash is a crucial component of a well-rounded financial strategy, it's essential to strike a balance. Allocating too much cash for an extended period could expose your wealth to inflation risk, where the purchasing power of your money will decrease over time. It is therefore imperative to assess your overall financial goals, time horizon and risk appetite when deciding how much to keep in cash versus how much to invest in other assets.   

There are many reasons to hold money in cash, so we look to explore the importance of cash and its inherent benefits within personal finance, whilst also considering the common risks associated with cash investments. Of course, managing your savings is a highly personalised process, and how much you save should reflect your individual circumstances. 

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Emergency Fund 

The term ‘emergency fund’ or ‘buffer’ refers to money set aside for the sole purpose of being used in times of financial distress. The fund provides a financial safety net to cover any unexpected, and typically costly, expenses that may arise such as those following a loss of job or unexpected tax bill. The amount you should target for an emergency fund depends on a number of factors, including your financial situation, expenses, lifestyle, and debts. Typically, consideration may be given between three to six months of normal expenditure in cash, to be drawn from in the event of an emergency. This is considered a prudent financial practice because it helps avoid unnecessary debt and financial stress.

Top Tip: Starting off small is better than not starting at all! 

The Stock Market 

While investing in the stock market offers great potential opportunities for accumulating wealth and financial growth, it is important to be aware of the fundamental downsides and risks, and striking the right balance between investments and cash has proven particularly relevant over the past few years with investment markets going through a turbulent time. 

Although investors are attracted to the idea of growing their wealth through stock market investments, this should always be looked at as a long-term strategy given the risks associated. 

Up until November 2021, there were very few options for your lower risk portion of your wealth, as interest rates were extremely low. However, since the recent interest rate hikes many investors are turning their attention towards setting aside some cash into savings account and are benefiting from some of the highest returns in almost two decades. Unsurprisingly, the last few years have witnessed huge inflows of cash into savings, particularly fixed time deposits, with investors looking elsewhere from the stock market in providing safer and guaranteed returns.

Nonetheless, whilst saving rates have risen, cash has been a depreciating asset, after inflation, with ‘real returns’, remaining negative over the long term. So, for many, it is fundamental to have a comprehensive financial plan in place, to ensure your investment and cash allocations are aligned to meet your objectives and goals.

When it comes to investing, however, one particular benefit of holding some money in cash is managing sequencing risk with your investments. This refers to the impact of the timing of investment returns on a portfolio, particularly when withdrawals are made. If an investor needs to sell assets to cover income or emergency expenses, this can significantly affect the overall portfolio value. As such, the benefit of holding some money in cash is that you help reduce the chances of becoming a forced seller during an investment market downturn. By having this safety measure in place, you can help cover some expected or unexpected expenditure without negatively impacting your long-term investment strategy.

If you are interested in exploring what savings accounts have to offer, please check out the Savings Champion website, which compares the best accounts on the market.

Retirement

Holding cash as you approach retirement plays a vital role in providing financial flexibility, security and peace of mind when we consider aforementioned risks with invested pension provisions. 

As we have covered, sequencing risk can be a major issue for investors. This risk is more common during retirement, as you are far more dependent on your retirement income through your invested pension pots. Significant market downturns alongside taking pension income could be detrimental on your long-term retirement goals, where cash reserves are not in place, as you could be realising losses that could impact the value of your future pension provisions. 

Furthermore, healthcare costs are increasingly forming a large part of unexpected costs during retirement. Health spending per person steeply increases after the age of 50, so having cash buffers in place to cover immediate healthcare needs is important. 

Using cash in place of drawing from your pension can also have tax benefits, as some pensions sit outside the scope of inheritance tax. This means that the assets held within a pension fund may not be subject to inheritance tax when passed on to beneficiaries. However, given the complexity of inheritance tax laws, it is recommended to seek advice from professionals who have the expertise to guide you through your estate and pension planning.

If you’d like to learn more about how cash can best play a part in your wealth strategy, why not get in touch and speak to one of our experts. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Investment returns are not guaranteed, and you may get back less than you originally invested. Past performance is not a guide to future returns.

The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning or tax advice.

Savings Champion and their associated services are not regulated by the Financial Conduct Authority (FCA).

Why we all need a digital death file

Are you the one who deals with the finances in the home? Would your loved ones know where to look if something were to happen to you?

Traditionally, writing a will would be the crucial difference between having your final wishes granted when it comes to the distribution of your assets after death. But is it enough in the new digital world? 

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We, like most of the world, rely on technology. It connects us to friends, fulfils our shopping needs and most importantly it gives us access to our financial accounts and all manner of private and confidential documents. Gone are the days when a loved one passes that you’re searching through the cabinet to find old statements and building society savings books. Now, with what appears to be an ever increasing number of people online, it’s a virtual search you need to undertake. So how do you store your documents? In a separately labelled email folder? On your hard drive?  Maybe you saved them to the cloud in an online filing system? However they are saved, the question is are they easily accessible when you pass away?

According to Statista, a global statistic gathering company, more than 90% of adults in the UK used online banking in 2022, for the combination of speed, convenience and ease of use. With the rise of a cashless payment system, it really does show how the digital world has taken over in recent years.  

What is the TPO digital filing cabinet?  

All clients of The Private Office have access, at no additional cost, to our online portal, TPO Wealth. Here, you can store all personal documents in a safe and secure space. Where this portal is useful is, with your consent, we are able to grant access to your accountants and solicitors to access your relevant information, such as tax folders and other personal documents to make it a seamless and effortless experience for you. This can be particularly useful for the self-employed.  

As of March 2022, the Office for National Statistics (ONS) states there are a grand total of 4.2 million people who are self-employed – that’s 13% of the working population! Most self-employed people operate with an accountant to help with filing tax returns and completing their annual accounts. However, this all requires paperwork which needs to be kept on top of, so it’s important to collate all of this into one easy-to-use and secure place. 

Navigating the death of a loved one is one of life’s biggest challenges, without the additional complexity of trying to track down and locate all the relevant documents to manage their estate.  While you are able to name a ‘digital executor’ within your will, unfortunately that doesn’t mean consolidation of all your personal and important documents.   

Here’s a list of some of the types of things our clients share on TPO Wealth, both for personal filing and to share with their other professional contacts:  

  • Tax Information 
  • In Case of Emergency 
  • Will 
  • Invoices and fees 
  • Details of professional contacts 
  • Insurance details  

With TPO Wealth, your loved ones can reach out to your adviser and know everything is stored in one place, which many of our clients have found to be a great help at a difficult time.  

What about if you become incapacitated? 

Aside from the death of a loved one, there are other instances where information may be required, such as critical illness or incapacity. With the average time for a Lasting Power of Attorney (LPA) to be processed and granted in the UK taking between 20-21 weeks, according to Clare Fuller of Compassion in Dying, searching through paper filing or numerous accounts could be the difference between your loved ones being able to afford your care or not. This increases the need for your loved ones to be able to access your finances almost instantly and seamlessly.   

The added value comes where your adviser can reach out to your accountants and solicitors on your behalf as well as granting loved ones access to your TPO Wealth account and accounts within Power of Attorney (POA) rights.   

TPO Wealth doesn’t stop at just secure storage of important files, you can view all your investments and savings accounts too. It has a built-in property calculator where you can estimate the value of your main residence and any other properties, as well as being able to track the value of your net worth. You are able to securely message your adviser and provide any necessary signatures through the portal.   

The flexibility in making the portal what you need is the benefit. Storing any file you wish on the portal could make it the one-stop-shop you need for a secure filing system of non-financial related files as well!  

If you’d like to learn more about how TPO Wealth could help you keep your important details secure and organised, why not get in touch

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

TPO Wealth is only available to clients of The Private Office.

The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice. 

Are you overcontributing to your pension?

When building up your pension it is important to be conscious of what limits apply in order to maximise the full tax benefits.

Thousands of people across the UK are experiencing tax charges for overcontributing to their pensions and most don’t even realise. According to HMRC over 50,000 people reported pension contributions that exceeded their ‘Annual Allowance’ (AA) in 2021-2022. This number has been skyrocketing since 2010 and has increased by 10,000 people since 2020-2021, when only approximately 40,000 exceeded their Allowance (Please see chart below). 

Figure 1. Number of individuals and value of pension contributions exceeding the AA reported through SA 2006 to 2007 to 2021 to 2022, Source: UK Government

Often people don’t even realise that they are overcontributing until it is too late. So, why are so many people being caught out?

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What is an Annual Allowance?

Although there is not a limit on the amount that can be saved into pensions each year, there is a limit on the amount that can benefit from tax relief each tax year. An individuals ‘Annual Allowance’ is the limit that you can contribute to your pension in any tax year whilst benefiting from tax relief. The current annual allowance is £60,000, however, you can only receive tax relief up until your net relevant earnings. Net relevant earnings are the total earnings from salary, bonuses, benefits in kind and trading profits for self-employed individuals in a tax year. So, if your salary is £40,000 for example, you would only receive tax relief up to £40,000, but if it is £80,000, in most cases, you would only receive tax relief up to £60,000 in one tax year. 

What if I exceed my Annual Allowance?

If you exceed this allowance in a tax year, any contributions above the limit will typically be subject to an annual allowance tax charge. This excess will be added to your taxable income and be subject to income tax at your marginal rate. In some cases, you might be able to ask your pension scheme to pay the charge from your pension. This is known as Scheme Pays and means your pension would be reduced, but this is not always possible.  

Why are people overcontributing?

Although the annual allowance sounds straightforward, there are some caveats that make understanding it a lot more complex. Where your net relevant earnings are more than £60,000 a year and have been a member of a registered pension scheme for more than three years, you may have the ability to use carry forward allowances. If you have not used your full annual allowance from any of the previous three tax years, you can carry this allowance over to the current tax year. This can cause confusion and miscalculations regarding exactly how much more an individual can contribute using carry forward.  

Those who have a high income are also subject to more complex rules with regards to their annual allowance. For every £2 of adjusted income (i.e. total taxable income before any Personal Allowances and less certain tax reliefs) that an individual earns over £260,000 their annual allowance is reduced by £1, to a minimum of £10,000. This means that anyone with an income of £360,000 or more has a reduced annual allowance of £10,000. 

Another caveat that trips people up is that, in some cases, the annual allowance reduces to £10,000 per tax year when an individual begins drawing down or withdrawing from their pension. This is often triggered for those who are flexibly accessing a defined contribution scheme. It is worth noting this is not the case for all withdrawals, for example when taking a Pension Commencement Lump Sum (PCLS) or annuity. When this reduced allowance comes into effect, carry over cannot be utilised anymore. This can often catch people out and cause them to overcontribute because they think they have more allowance than they do. 

It is also worth remembering your annual allowance takes into consideration all contributions to all of your private pension schemes. Therefore, it is not only your personal contributions that count towards the annual allowance, but your employer contributions as well. For those who are fortunate enough to have a Defined Benefit (DB) scheme, otherwise known as a final salary scheme i.e., a pension that traditionally pays out a guaranteed income every year in retirement, calculating the remaining annual allowance is more complex. Any further accrual in a Defined Benefit scheme in a tax year contributes to the annual allowance. These additional complexities make calculating the annual allowance year on year more difficult to understand. As a result, many people find themselves overcontributing and incurring a tax charge without even realising. 

Taxation on pension funds has become a hot topic since the 2023 Spring Budget announcement about the intention to remove the ‘Lifetime Allowance (LTA)’. The LTA is the total contributions that one can make to a pension over their lifetime without incurring certain tax charges. Those who weren’t overcontributing prior to this, for fear of exceeding the LTA, have more incentive to re-commence contributions. However, with a general election expected in the autumn of 2024, these changes could be reversed. 

If you’re concerned, we can help. With more people than ever exceeding the annual allowance, it is important to be aware of the many factors that need to be considered when calculating how much you should be contributing to a pension. If you have any questions about the annual allowance, or think you might be at risk of a tax charge due to miscalculations; then please get in touch with your Financial Adviser or consider seeking advice.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The information in this article is based on current laws and regulations which are subject to change as at future legislations.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The Financial Conduct Authority (FCA) does not regulate tax advice.

How to make your child a millionaire before 40!

Most parents would like to ensure their children have a strong financial footing when they are older, but don’t always know the best way to do this. There are many ways to support your children financially throughout their lifetime, but what if there was a way to make them a millionaire before they even reached retirement age? Here we look at the best ways to put money aside for your children and how you can maximise the benefits of compound interest to make your child a “millionaire”!

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The first step to saving for your children’s future is understanding your saving options. Here are the most common options that benefit from tax-free growth: 

Junior ISA(JISA)

From the day a child is born you can put money into a JISA for them. The current contribution limit is £9,000 per tax year (or £750 per month) and you have the choice of a Junior Investment ISA or a Junior Cash ISA. The most important benefit of a JISA is that any gains made, or interest earned will be tax-free!

If we assume you receive an average annual net return of 5% per year and you save the maximum of £9,000 every tax year, from the day your child is born until they turn 18, you will have contributed a total of £162,000 to their account. However, due to the magic of compound interest (where you earn interest on interest), they will have a pot of over £265,000 saved in a tax-efficient wrapper, what a great 18th birthday present!

At their 18th birthday they can transfer their JISA into an Adult ISA to continue to receive tax-free interest/ investment returns.

Junior Self-Invested Personal Pension (Junior SIPP)

Setting up a pension up for your children may seem like you are overly preparing but this can actually give your children a significant head start. The maximum you can currently save into a Junior SIPP is £2,880 per tax year, and the UK government will add tax 20% tax relief of £720 per tax year, which would bring the total contribution to £3,600. If you can contribute to your child’s Junior SIPP for 18 years and again assuming a 5% growth rate, you will have contributed £51,840 but their pension pot will be worth £106,340 due to the added tax relief. If your child doesn’t contribute to the pension again, by age 57* they could have a pension pot worth around £712,986. Similar to the JISA, any gains made within the SIPP are exempt from tax, and based on current pension rules, you can take up to 25% as a tax-free lump sum upon reaching retirement age. 

Recent statistics released by the Office for National Statistics (ONS) stated how the average pension wealth for all persons in the UK is £67,800 at age 57*, highlighting how starting to save early can set your child up for their future and give them a greater opportunity in retirement or even to retire early. 

How to make your child a millionaire!

And this is how to do it! If you do the following and assume a 5% growth rate per annum:

  1. Open a JISA before your child’s first birthday and contribute £9,000 every year until age 18. This results in a total contribution of £162,000 (18 years x £9,000).
  2. Open a Junior SIPP before your child’s first birthday and contribute £3,600 (including tax relief) to the Junior SIPP every year up to their 18th birthday. This totals 18 years x £2,880 (or £3,600 with tax relief) which equals £51,840 (£64,800)

This would mean you will have contributed a total of £226,800 (including tax relief) to the JISA (£162,000), and Junior SIPP (£64,800). At age 18 when you stop contributing, they could have a total net worth of £372,191 when taking into account compound interest and growth. If they leave this money invested and continue to achieve 5% per year growth, by age 39 they could have a total net worth of just over £1million (£1,036,911), although the funds in the pension would not be accessible until age 57*. 

At that point the pension fund could have grown to £712,986, while the ISA, could be worth £1,782,465 if it remained untouched too - an extraordinary total of almost £2.5m. That is a gift worth giving.

The power of starting to save early

Using the same assumptions as above, with a 5% annual growth rate and maximising both Junior SIPP and JISA contributions until age 18:

  Starting from date of birth Starting at age 5 Starting at age 10
JISA Value at age 30 £477,430 £300,604 £162,056
Junior SIPP value at age 30 £190,972 £120,242 £64,823
Total Value at age 30 £668,402 £420,846 £226,879

This shows the benefits you can provide by starting the process of saving early for your child through compounding the interest or investment returns. This is a representation of how you can save for your children and assumes maximum contributions are made at each birthday, but we understand the circumstances for each parent and child will be different and may require different forms of financial planning, such as monthly contributions instead of lump sums.

Despite the examples above, it is never too late to start. If you would like to understand how, The Private Office can structure savings and investments for you and your children to help provide the whole family with a strong financial future. So why not get in touch for a free initial consultation

* Based on current pension regulation, where the normal minimum pension age is increasing to age 57 from April 2028. 

If you would like to know more about this topic, one of our Partners Kirsty Stone appeared on BBC Radio 4 Money Box live, giving her suggestions in a programme all about saving for children.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

All the calculations in this article assume that lump sum contributions are made for 18 years, from birth, unless otherwise stated, to the 17th birthday and are not adjusted for inflation.

The Financial Conduct Authority (FCA) does not regulate tax or cash advice.

The growth rates provided are for illustrative purposes only.  Investment returns can fall as well as rise and are not guaranteed.  You may get back less than you originally invested.  Investments may be subject to advice fees and product charges which will impact the overall level of return you achieve.

Living to 100 years - are you financially prepared?

The number of individuals aged 100 or older in England and Wales has reached an all-time high. 

In September 2023, the Office for National Statistics (ONS) released statistics showing that over the past century, the number of centenarians living in England and Wales has increased 127-fold, shown in Figure 1 below. Figures are reported to have hit a record high of 13,924 centenarians in 2021; of this number of centenarians, 11,288 were women and 2,636 were men. 

Figure 1. The number of centenarians in the population increased rapidly from the second half of the 20th century, Source: Historic Census data (1991 to 2021) from the Office for National Statistics

ONS report the UK ranking as the seventh country worldwide for highest number of centenarians and in 2021, the ONS reported that there has been a 24.5% increase from 2011 of centenarians living in England and Wales. 

Although an ageing population is a major achievement of modern science and healthcare, the rise in the UK’s ageing population raises concerns around financial planning and retirement readiness. 

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So, how can living longer affect your own financial planning and retirement readiness? 

Whilst the news that an increased number of individuals living longer in England and Wales is good news at the surface level, the challenge to this is that there is a greater need for people to acquire sufficient pension savings to fund a longer retirement.  

This issue was identified by the World Economic Forum in 2019, where their findings showed that people may be expected to live longer than the pot of money they have saved for retirement by between 8 to almost 20 years on average. Han Yik, Head of Institutional Investors Industry at the World Economic Forum, stated that “The real risk people need to manage when investing in their future is the risk of outliving their retirement savings”.  

Earlier this year, the below estimates were calculated by Interactive investor, using the Pensions and Lifetime Savings Association (PLSA) Retirement Living Standard: 

A 65-year-old living to Age 84 would require a starting fund value of £212,000.

Whereas a 65-year-old living to Age 100 would require a starting fund value of £324,000. 

These figures indicate that someone expecting to live to 100, compared to the current average life expectancy would need around a further 54% in the starting value of their retirement savings.  

It is important to note that these calculations assume that the individual is entitled to the full State Pension of £10,600 p.a. and they also own their home, therefore having no rent or mortgage costs. 

Whilst the UK Government provides the State Pension to qualifying individuals, which can provide a solid foundation for retirement, this needs to be supplemented to ensure a genuinely comfortable later life. Although it is technically possible to live on the state pension, additional incomes sources are crucial for a more comfortable and enjoyable retirement. And that’s before the likelihood of further costs to consider such as at-home Care or Care Home needs.  

How can you be better prepared for your financial future? 

Starting your financial planning as soon as possible brings many benefits including possible higher return on your investments, time to weather market volatility and ability to take more risks. 

A key tool used when giving financial advice and looking ahead to your financial future is cash flow modelling. Cash flow modelling helps you to visualise what your future could look like, and then more importantly, what needs to be done before then. For example, it helps you answer questions such as:

  • “How much do I need to start saving in order to retire at age 60?”,"If I was to require Care, would I be able to afford it?”, etc. 

While we can make sensible assumptions, the one difficult thing to predict is one’s life expectancy. With the general population living far longer, it’s important to take a cautious approach and always overestimate, which is why we usually plan our cash flow models to age 100. 

A good place to start planning your future is by understanding where you are now within your financial planning journey and what your life goals and expectations might be. A useful tool to get a basic understanding of this is our retirement calculator. From your own inputs, you will be able to forecast an estimate of the pension income you will get when you retire and receive a target retirement income to aim for based on your choices, taking into account your salary. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The Financial Conduct Authority (FCA) does not regulate tax advice or cashflow modelling.