The move to bring most unused pension funds and death benefits within the value of a person’s estate for inheritance tax (IHT) purposes from 6 April 2027 was the biggest pension change in last month’s Budget.

And while the implementation is more than two years away, it is already the subject of many questions from advisers and clients.

Much of the focus has, understandably, been on the impact on pension savings and the potential change to the order in which people take retirement income from different wrappers in future.

But it’s also worth considering the wider impact this change may have on general IHT planning.

The new rules could have a significant impact on the finances of those who have saved hard during their lifetimes

A number of clients may have established a position where at least 10% of the net estate is left to charity. If this is set up correctly, then a reduced IHT rate of 36% will apply.

In order to claim the 36% rate of IHT, the amount going to charity must equal at least 10% of the overall chargeable estate, which is the value after the nil-rate band (NRB) and any other reliefs and exemptions have been applied.

After April 2027, if a significant pension asset falls into the estate, that could fundamentally alter the calculations involved and mean any existing arrangements may not be sufficient to qualify for the lower IHT rate.

Another area that may be affected is the availability of the residential nil-rate band (RNRB).

Passing pension funds to a spouse or civil partner may give more opportunities to remove the funds from the estate before second death

The RNRB is £175,000 and will be frozen at that level until at least April 2030 (along with the £325,000 NRB). It’s available to those passing on a qualifying residence on death to their direct descendants. However, a taper reduces the amount of the RNRB by £1 for every £2 the net estate is more than £2m. That means estates of £2.35m or greater don’t benefit from the RNRB.

Currently, a client may have an estate valued below the £2m figure, so the RNRB is available in full. But, if, after April 2027, a pension is added into the estate, that may take some above the £2m level and see the RNRB reduced.

Small self-administered schemes (SSAS) are another area that could be affected by these changes. Often these schemes hold a commercial property used by the sponsoring employer.

Following death of one of the members, often schemes are set up so the value of that property is cascaded to beneficiaries who are already members of the SSAS. That can help preserve a key asset, removing any need to sell the property.

If, after April 2027, a pension is added into the estate, that may take some above the £2m level and see the RNRB reduced

However, if, after 2027, an IHT charge is due, that may impact that set up and mean there aren’t enough liquid assets to pay the IHT bill from the pension, potentially forcing a property sale. Sipps holding commercial property may likewise have some increased liquidity issues following death.

The inclusion of pensions within IHT will mean more people will be subject to the tax, and it could have a significant impact on the finances of those who have saved hard during their lifetimes.

Wills and savings plans may need to be reorganised. Planned sources of retirement income may need to be altered. Those who were using the pension purely as a vehicle to pass funds to the next generation may need to re-consider some aspects. For example, taking tax-free cash around age 75, which means (at worst) that amount is only subject to IHT, rather than IHT and income tax.

It is already the subject of many questions from advisers and clients

And passing pension funds to a spouse or civil partner may give more opportunities to remove the funds from the estate before second death.

But this change isn’t happening until 2027, so there is a long time for details to emerge about how this will work in practice. While its understandable many people have questions and a desire to take action, there isn’t an immediate need to make plans now. But it is an area to keep a close eye on.

Andrew Tully is technical services director at Nucleus

The post Andrew Tully: IHT planning points hardest hit from Budget bombshell appeared first on Money Marketing.

In a speech at the end of July, new chancellor Rachel Reeves warned the economic landscape Labour inherited was in a worse shape than it had expected.

While this isn’t an unexpected comment from any new government, it does highlight a likelihood of some increased taxes in the upcoming Budget on 30 October.

However, we shouldn’t forget there are some previously announced policies from the former government that will have a positive financial benefit. These are likely to be quietly continued or introduced as a first step to help boost Labour’s spending plans.

One of those due to be implemented from 6 April 2025 is the abolition of the tax benefits for furnished holiday lets (FHLs).

While this ongoing freeze will see many people pay more tax, there are some planning opportunities available

Currently, landlords of FHLs can claim capital gains tax (CGT) reliefs and plant and machinery capital allowances for items such as furniture and other fixtures, while their profits can count as earnings for pension purposes.

From April 2025, these tax benefits are due to be removed.

While we await the full details within draft legislation, people might want to start reviewing their current arrangements if they are affected, so action can be taken once the new rules are confirmed. This may mean some clients looking to sell properties soon.

And in respect of pensions, advisers will want to review contributions to ensure clients have enough UK relevant earnings to justify them without FHL income. Or look to reduce future pension contributions and consider alternative savings options.

The last government froze all income tax thresholds at 2021/22 levels and that was set to continue until at least April 2028. The new government has shown no indication it will reverse this policy.

Changes to how UK resident but non-domiciled individuals will be taxed going forward are also due to be introduced from April 2025

This means many more people will be pulled into higher rate or additional rate tax or enter the effective 60% band between £100,000 and £125,140 as the personal allowance is removed.

To demonstrate the impact of this fiscal drag, the Office for Budget Responsibility said if thresholds had been uprated in line with inflation, the personal allowance would be £15,220 in 2024/25, while the higher rate threshold would have increased to £61,020.

While this ongoing freeze will see many people pay more tax, there are some planning opportunities available. Employees can consider making personal pension contributions or gift aid donations to charity to reduce taxable income. Moving pension contributions to a salary sacrifice basis is another option that could be helpful from a tax perspective.

Where one spouse is in a lower tax band, married couples may have opportunities to redistribute income, or transfer income-producing assets. There can be further planning opportunities for those who run a business with their spouse. If you are in partnership, for example, it may be possible to review the profit-sharing ratio. If you are self-employed, increasing wages for a spouse who works in the business is another possibility, provided this is justifiable in terms of the work done.

Given the poorer financial position that the new government says it has inherited, it’s highly likely these will all be brought forward

Changes to how UK resident but non-domiciled individuals will be taxed going forward are also due to be introduced from April 2025.

The remittance basis of taxation, where UK resident non-doms only pay tax on income and gains they remit to the UK, will be abolished and replaced with a residence-based regime. Individuals who opt in to the regime will not pay UK tax on foreign income and gains for the first four years of tax residence, after which they will be treated as a UK resident on an arising basis.

The government will also change the current domiciled-based inheritance tax system to a new residency-based scheme, which will affect non-UK domiciled individuals and some trusts.

In these areas, there may be some actions clients could take in advance of the new rules being introduced. For example, considering how investments are held and if they can be changed either by ownership or the assets themselves.

While there is a huge focus on the potential tax changes that could arise from the Budget, these previously announced changes shouldn’t be overlooked. Given the poorer financial position that the new government says it has inherited, it’s highly likely these will all be brought forward. But there is the potential for some planning to start now to help those affected clients deal with the impact.

Andrew Tully is technical services director at Nucleus

The post Andrew Tully: Don’t let Budget madness overshadow tax changes already creeping ahead appeared first on Money Marketing.

We are now in a new world of pension tax and, for the first time in nearly 20 years, there is no need to check benefits taken against the lifetime allowance (LTA). That is a welcome simplification, especially for those individuals who have taken no benefits.

However, it was always going to be a challenge to deliver a change of this magnitude in the time available. And the government was unwilling to consider any delay to implementation with a general election looming.

Unfortunately, those fears have been realised, with HM Revenue & Customs issuing a newsletter update last Thursday, within which it asks pension schemes to advise some clients to delay taking benefits or transferring until it can fix incorrect legislation.

Making such a major intervention at such a late stage demonstrates how poorly these changes have been implemented. And it puts schemes, advisers and, particularly, clients in a very difficult position.

HMRC suggests delaying taking action for any case that involves the following:

• Scheme specific tax-free cash protection
• Transfer of cases with enhanced protection
• Enhanced protection and primary protection where there are protected lump sum rights of more than £375,000
• Payment of lump sum death benefits in respect of funds that crystallised before 6 April 2024
• Transfer from drawdown to a qualifying recognised overseas pension scheme (QROPS)
• Transfer to a QROPS which involves pre-April 2006 benefits.

We don’t yet have a timescale for when the legislation will be fixed and a green light given to these cases. To draft the correcting regulations and get them through parliament may take two or three months. People can, if they choose, take benefits under the current legislation rather than waiting, although that could have negative consequences and they may end up paying more tax.

This means advisers and clients face some difficult decisions.

Lump sum death benefits paid from funds that were crystallised before 6 April 2024 should be entirely tax-free if the member died before age 75. However, the legislation is incorrect and currently these would be measured against the member’s remaining lump sum and death benefit allowance (LSDBA). The government will bring forward legislation to resolve this issue and people could choose to wait until this is done.

However, if the amounts involved won’t trouble the LSDBA there may be no great harm in taking benefits now under the current legislation. Or, rather than paying as a lump sum, pass money through beneficiary drawdown if that is possible. These may be tricky decisions for beneficiaries to make, especially during emotionally difficult times. Advice will be needed.

Those with enhanced or primary protection who have lump sum rights above £375,000 have a choice. Take tax-free cash up to £375,000 now, in which case the member may forgo their protected entitlement, or delay payment of their cash so they can receive their full entitlement once legislation is corrected.

That may well depend on how much the protected tax-free lump sum is and if there is a particular need to take funds now.

Individuals with scheme specific tax-free lump sum protection (a right to take more than 25% tax-free cash from back in April 2006) are also affected. The formula for revaluing their entitlement and adding 25% of the pot built up since 2006 is wrong. These people may want to delay taking benefits until the legislation is corrected.

Some transfers to QROPS will need to be deferred, where the transfer is from a drawdown pot or contains any pre-2006 benefits. These should be fairly rare.

While these obstacles only affect a minority of individuals, it could make a big difference to those affected. Some may be reaching their intended retirement age or have made plans to take benefits. HMRC suggesting, at this very late stage, that action should be delayed is not in any way ideal. Especially given some people may have made plans or given commitments based on the tax-free cash and/or income they were due to receive.

The wider point is it demonstrates the need for longer-term thinking around pensions and long-term savings from government and regulators. Constant tinkering and rushed changes have a negative impact on confidence, and further erodes trust at a time when people need to be saving more for later life.

Setting up an independent long-term savings commission to depoliticise and develop proposals for pension and savings policy would hopefully bring much needed consistency and stability, and deliver greater levels of trust and engagement.

Andrew Tully is technical services director at Nucleus

The post Andrew Tully: Making sense of HMRC mess post-LTA abolition appeared first on Money Marketing.

I firmly believe in the value of advice. Professional regulated advice works and we need to find ways to encourage more people to access it.

However, the advised cohort will only ever be a small minority. Many others need help and education, so we also need to find ways to deliver this to the millions saving.

That’s why the Financial Conduct Authority and HM Treasury discussion paper on the advice guidance boundary is vital.

Targeted support could be a positive step forward, and I expect many firms to adopt this, should it be introduced. It will help consumers gain greater understanding of what actions people like them are taking. It’s an opportunity to improve consumers’ financial wellbeing, as firms will be able to proactively bring matters to the attention of consumers and suggest options that could improve their circumstances.

I don’t believe the model set out will be widely adopted, which may be a missed opportunity

However, it’s important consumers are clearly informed of the difference between targeted support and regulated advice, particularly around consumer protection. This may also be an opportunity for firms and the FCA to highlight the benefits of regulated advice, which we know is often a positively life-changing relationship.

There are some tweaks to the proposals I believe are important. Requiring a charge to be paid and asking people to make a clear positive choice to receive targeted support doesn’t seem necessary.

Lack of consumer engagement with financial planning is widespread and is the reason why auto-enrolment and other default propositions have been introduced. Firms should be able to offer communications and protections to all customers, and targeted support may help to meet some Consumer Duty obligations.

The simplified advice regime needs to be commercially viable for firms

Having said that, I don’t believe targeted support should go so far as to suggest a single new product for a customer, which is one of the options included in the discussion paper. This feels very close to advice and a step too far for guidance.

Another key area the discussion paper covers is simplified advice. I don’t believe the model set out will be widely adopted, which may be a missed opportunity.

The advice market is currently undergoing significant change. There is a large amount of consolidation taking place, there is a focus on customer outcomes given the implementation of Consumer Duty, and there is an increasing focus on ongoing adviser fees. This is leading many firms to review how they effectively service different customer segments.

The monetary threshold to access simplified advice has been set by looking at the FSCS compensation figure, which I don’t believe is the most relevant factor

Simplified advice could be an option that further accelerates some firms towards widening their service channels. However, there are some barriers in the current proposals that could prevent its widespread adoption.

The simplified advice regime needs to be commercially viable for firms. That may mean allowing a wider range to determine consumer suitability, not just fully qualified advisers. The Financial Ombudsman Service (FOS) needs to be fully involved with the development of these proposals and ideally issue guidance.

If firms believe FOS will measure them against the parameters for full advice even though they have undertaken a more focused or simplified service, at a lower cost, then widespread take up will not happen, as firms will potentially be taking on the same level of risk but charging clients less.

The FCA should work with interested firms to discuss whether and how simplified advice could be changed

The monetary threshold to access simplified advice has been set by looking at the Financial Services Compensation Scheme compensation figure, which I don’t believe is the most relevant factor. Instead, it should be set at a level where people are less likely to be able to afford full regulated advice, which is likely to be higher than the £85,000 proposed.

I understand the FCA’s reticence to extend simplified advice to decumulation decisions. However, there is a huge need for those approaching retirement to get help. The complexity of retirement and tax planning can’t be overstated and, without help, many people will make poor decisions.

Given the success of auto-enrolment, and the general increase in defined contribution pensions, there will be a mass of savers in the next 10 to 20 years who will need to make decisions as they approach and go through retirement. There are many persuasive reasons for people not to engage with their retirement, both practical and psychological. So we need to offer compelling options to help.

Any moves that result in the wider use of simplified advice would also serve as a ‘stepping stone’ to more people taking full advice

The FCA should work with interested firms to discuss whether and how simplified advice could be changed so it can deliver good outcomes for those approaching and in retirement.

And hopefully any moves that result in the wider use of simplified advice would also serve as a ‘stepping stone’ to more people taking full advice.

Andrew Tully is technical services director at Nucleus

The post Andrew Tully: Will FCA miss an open goal with simplified advice? appeared first on Money Marketing.

With an election due by January 2025 at the latest (and likely sooner than that), this Budget had thankfully little on pensions, focusing instead on investment in the UK and some tax cuts.

In the headline announcement, the government shaved a further two percentage points off National Insurance (NI) rates. This follows on from a similar cut in January, announced in the Autumn Statement.

That means the main rate of employee NI, which was 12%, fell to 10% in January and from April will drop to 8%. The self-employed will benefit, too, with the main rate of Class 4 NI reducing from 9% to 6%, as well as the abolition of Class 2 NICs.

These changes may affect salary sacrifice schemes in place for pensions or other benefits such as company cars. While there will still be a saving for employees, it won’t be as significant as a year ago.

The consultation will run until June, which would suggest April 2025 is the aim for launch

The High Income Child Benefit charge (HICBC), which has faced criticism for its unfairness, will see some immediate changes. Currently, individuals effectively start to lose Child Benefit at a rate of 1% for every £100 earned above £50,000, with the tax charge equalling Child Benefit for anyone earning above £60,000.

From 6 April, the starting threshold will increase to £60,000 and the rate at which HICBC is charged is halved to 1% for every £200 earned above this level. That means only those earning £80,000 or more will see Child Benefit withdrawn in full.

That doesn’t remove the inherent unfairness that one household with a single earner who earns just above the threshold loses Child Benefit, whereas a household with two earners each just below the threshold keep it, despite their household income being significantly higher.

To try to solve that issue, the government plans to administer HICBC on a household basis from April 2026 and will consult on the detail. Considering household income rather than on an individual basis would be a significant shift in tax policy.

Some of these changes are due to be introduced in April 2025 or later. We do, of course, have the small matter of an election between now and then

In the meantime, don’t forget payment of a pension contribution reduces earnings for this purpose. So, as well as normal pension tax relief, regaining some or all the Child Benefit can give effective tax relief of more than 60%.

A number of measures aim to increase investment in the UK. British Savings Bonds will launch in April through National Savings & Investments. This product will offer a guaranteed interest rate, fixed for three years, and provide opportunities to save while investing in the UK.

The government will consult on a new British Isa designed to invest in UK-focused assets. This will offer a £5,000 allowance in addition to the existing Isa allowance of £20,000. The consultation will run until June, which would suggest April 2025 is the aim for launch.

Yet another potential type of Isa means we’re in danger of them becoming too difficult and complex for people to understand. Multiple different variants put barriers in the way of customers. I’m also not sure this will drive the outcomes the government hopes to achieve.

This Budget had thankfully little on pensions, focusing instead on investment in the UK and some tax cuts

If an individual invests in UK shares via a British Isa or a British Savings Bond, many may adjust their wider investment portfolio to take that into account, for example by selling some UK equity investments held elsewhere.

Continuing this theme, the government intends to require defined contribution pension schemes to disclose the breakdown of their asset allocations, including UK equities. The Financial Conduct Authority will consult in the spring around how this will impact retail pension schemes.

Some of these changes are due to be introduced in April 2025 or later. We do, of course, have the small matter of an election between now and then. That begs the question of whether some of these measures will ever see the light of day.

Andrew Tully is technical services director at Nucleus

The post Andrew Tully: Will British Isa see the light of day? appeared first on Money Marketing.

The Finance Bill published at the end of 2023 confirmed the government is pushing ahead with the abolition of the lifetime allowance (LTA) from 6 April.

This is a very short and, I believe, unrealistic timescale to introduce such a major legislative change. For advisers, there isn’t much time to understand the impact, work out which clients may be affected and then consider any action to take.

So, let’s look at what we know. There will be a new lump sum allowance of £268,275. As before, most people can take up to 25% of their pot as a tax-free lump sum and each amount is counted towards the overall £268,275 figure. Those with some form of tax-free cash protection can get a higher amount. For those who have scheme specific tax-free cash protection, the way this will be done in practice is to take the normal 25% off the lump sum allowance even though the individual is actually receiving more cash.

The timescales are demanding and there are several areas where the industry is seeking further clarification and detail

Let’s say I hadn’t taken any benefits before, and I was taking a £600,000 pot where I had protected tax-free cash amount of £280,000. While this is greater than the standard lump sum allowance, only £150,000 (25% of the £600,000) would be deducted off my individual lump sum allowance, leaving me a further £118,275 to use in future.

People with some form of protection such as individual or fixed protection will receive a higher lump sum allowance.

For those individuals who have taken some benefits before 6 April 2024, normally 25% of the previously crystallised amount is deducted from the lump sum allowance. For example, if I had used 80% of my LTA previously, then I would deduct £214,620 (25% of £1,073,100 x 80%) from my lump sum allowance, leaving me £53,655 to use. That would be the case even if an individual had received more than 25% of the crystallised amount as tax-free cash.

More complexity can arise if a client hadn’t taken 25% of the crystallised amount as tax-free cash at the original crystallisation. This may have arisen, for example, if an individual received benefits from a defined benefit scheme. A new certification regime will be introduced where, if an individual can provide the necessary proof, the lower tax-free cash amount they actually received will be deducted rather than the 25% figure.

Further uncertainty comes from the fact the Labour party has said its intention is to reverse this policy should it come into power

The second key allowance is the lump sum and death benefit allowance of £1,073,100. This measures tax-free lump sums paid during the member’s lifetime and lump sum death benefits paid following the member’s death before age 75. Anything paid as a lump sum above this level is taxed as income in the beneficiary’s hands. People with some form of protection will receive a higher allowance.

There are a couple of key points to note here. Previously, if someone crystallised benefits into drawdown and then the individual died before age 75, the whole amount could be paid as a tax-free lump sum. That included any growth between date of crystallisation and date of death, which effectively was never tested against the LTA.

Now, the key date is the date of death – the lump sum paid at death is measured against the lump sum and death benefit allowance and that will include any investment growth during drawdown.

Importantly, any benefits paid as income to a beneficiary following death before age 75 isn’t tested and is paid tax-free. That may mean setting arrangements so should a client die before age 75, funds cascade into beneficiary drawdown. The beneficiary can then take large tax-free income payments at any time. Completing and keeping up-to-date expression of wish forms will continue to be crucial.

It’s clear many clients will need help working out their best options

As highlighted, the timescales are demanding. There are several areas within the Bill where the industry is seeking further clarification and detail. And we shouldn’t forget this is a Bill and so, by its very nature, may be changed on its route to being enacted.

Further uncertainty comes from the fact the Labour party has said its intention is to reverse this policy should it come into power. If the election takes place after April when this legislation is in force, it seems difficult to see a way for that to easily happen. New limits can of course be introduced but those would likely be from a future date.

This is a difficult area with short timescales involved and some ongoing uncertainty. It’s clear many clients will need help working out their best options, while others will benefit from reassurance they are not affected. The benefits of advice are clear to see.

Andrew Tully is technical services director at Nucleus

The post Andrew Tully: The final countdown to lifetime allowance upheaval appeared first on Money Marketing.

The headlines for yesterday’s Autumn Statement were dominated by the cut in the standard rate of employee National Insurance (NI) from 12% to 10%.

Unusually, this will come into force on 6 January 2024 rather than at the start of the tax year. Alongside that, for the self-employed, Class 4 NI will fall from 9% to 8% and compulsory Class 2 contributions will be abolished.

The government confirmed the abolition of the lifetime allowance (LTA) will take effect from 6 April 2024. We await the revised Finance Bill to give us full details of what the new system will look like but it appears that, in place of the LTA, two new lifetime limits will be created.

We run the risk of having a more complex system than previously once these new rules are introduced

A ‘lump sum allowance’ set at £268,275, which will be the maximum someone can take as a tax-free lump sum, unless they have protection, and a ‘lump sum and death benefit allowance’ set at £1,073,100, incorporating both tax-free lump sums someone takes while alive and lump sums paid on death.

Scrapping the LTA was a move intended to encourage more people, especially doctors, to remain working for longer. However, we run the risk of having a more complex system than previously once these new rules are introduced.

Most importantly, the government is pushing ahead with these changes at breakneck speed, giving the industry around four months to change systems and literature, as well as communicate significant changes and their implications to customers and advisers. This is simply not feasible and is likely to result in poor customer outcomes.

The government will consult on giving people the right to have their automatic enrolment contributions paid to a scheme of their choice, rather than the scheme an employer has chosen. Auto-enrolment has been a success in getting more people to save in the defined contribution environment. However, it has created a huge number of small pension pots, which this measure aims to assist.

The cost of the IT required to power this development needs to be considered carefully to make sure it doesn’t outweigh any positive benefits which may arise

To make meaningful positive change to long-term savings habits, we need more people save more into their pension, to understand why they are saving and what for. It is worth exploring whether a pot for life can help achieve those aims.

But we need to make sure any solution doesn’t make life overly difficult for employers. The cost of the IT required to power this development also needs to be considered carefully to make sure it doesn’t outweigh any positive benefits which may arise.

Meanwhile, there are several changes being made to Isa rules. From 6 April 2024, people will be able to hold more than one of a particular Isa in a tax year. For example, a customer could pay into a cash Isa with company A, then a few months later also pay into a cash Isa with company B. This is helpful and will make it easier for people to save.

But we need to go further. Around three in five people invest wholly in cash. While that is a perfectly reasonable starting point for many, over time they are at risk of seeing the purchasing power of their money eroded by inflation.

Allowing cash and investments within the same Isa would allow the potential introduction of ‘nudges’ to help people make the best use of their saving

Allowing cash and investments within the same Isa would allow the potential introduction of ‘nudges’ to help people make the best use of their savings – for example, a gradual move from cash to stocks and shares as people build up a decent cash nest egg.

Isas will also be allowed to hold fractional shares, which is a positive move and may be appealing to younger generations in particular who would like to invest in expensive stocks such as Apple, Tesla and Amazon.

Finally, the government confirmed the state pension will increase by 8.5% in line with the triple lock, despite suggestions it may use a lower figure of 7.8% which was earnings growth excluding bonuses. That means the headline single tier state pension from April 2024 will be £221.20 a week, up from the current £203.85 a week, around £900 a year more.

The maximum basic state pension paid to those who reached state pension age before 6 April 2016 will increase to £169.50 a week from the current £156.20. Although it’s worth remembering other parts of the state pension, such as the graduated pension, protected payments and extra amounts paid due to deferring, will go up by the lower CPI figure of 6.7%.

Despite 110 measures being announced by the chancellor, there were thankfully few surprises for long-term savings. All eyes are now on when we get the updated Finance Bill giving us full details of the new pension tax regime from April 2024.

Andrew Tully is technical services director at Nucleus

The post Andrew Tully: The Autumn Statement headlines I wish we had seen appeared first on Money Marketing.

As many of you will know, I have spent a couple of months in that strange place called ‘the garden’, which has meant spending time with my children and doing a variety of odd jobs around the house.

Perhaps not surprisingly for someone who works in our industry, it also gave me a little time to consider how much savings I need to build up over the next few years to help me have a rewarding retirement when I do decide to stop working completely.

Given I would term myself a pension and retirement expert, some may see it as embarrassing for me to admit I genuinely don’t know how much savings I need!

State pensions are topical but it feels too far away to be in any way confident about how much I will receive

There are a great many unknowns – when I decide to stop working, whether I ease into retirement through part-time working and what my wife decides to do.

State pensions are a topical issue but, for me, it feels too far away to be in any way confident about how much I will receive.

Then there are uncertain outgoings, with children potentially going through university, getting on the housing ladder and so on. That’s before we get to the economic environment and what potential investment return I can achieve on existing and new savings. And there is, of course, the elephant in the room in terms of my life expectancy.

There is no ‘right answer’ to the question of how much I need. If I find this a complex thought process, then what must many other savers experience?

It remains to be seen how comfortable firms will be in pushing towards a more personalised approach

Those who are fortunate to have advisers are in a great place. An adviser can give confidence and reassurance, and use tools such as cash flow planning and stress-testing to illustrate potential outcomes.

For the many who don’t have an adviser, the position is a great deal less clear. There is a huge amount of legislative and regulatory changes being discussed at the moment – hopefully some of these will help individuals plan their later life.

Pension dashboards, while much maligned, will at least give people the ability to view all their pensions in one place and get a view of their overall pension saving (hopefully).

However, it won’t highlight other savings vehicles such as Isas, bonds, mutual funds and property, which may also be used to fund a retirement – and, from a tax perspective, using a combination of these different wrappers may well be the most efficient outcome.

It feels like a variety of individual measures are taking place without any wider strategic view

The discussions on the advice/guidance boundary – with a policy paper expected this autumn – may mean firms can give better and more personalised information to help individuals approaching retirement.

But it remains to be seen how comfortable firms will be in pushing towards a more personalised approach and how far risk and compliance functions may allow them to, given the potential for financial and regulatory penalties if they get it (or are perceived to get it) wrong.

There are a host of other policy developments being considered, including small pots consolidation, the FCA’s work on retirement income and a variety of disclosure changes (following on from other changes last year), as well as the recent changes introducing default funds and cash warnings for many customers.

I am a firm advocate of financial advice and we need to encourage more people to go down that route. However, many individuals won’t be able to access it. Improving engagement and understanding is crucial to help more of these people have a rewarding retirement.

Having one single entity in charge of all retirement change would surely help pull these various strands together

While some of the legislative and regulatory changes will help people to do that, it feels like a variety of individual measures are taking place without any wider strategic view considering the combined benefit these will bring and what gaps, if any, remain.

The hope is we are moving in the right direction. But having one single entity responsible for and in charge of all retirement change would surely help pull these various strands together – and therefore make sure people get help to work out how and when they can retire with sufficient savings for their circumstances.

Andrew Tully is technical services director at Nucleus

The post Andrew Tully: I don’t know how much I need for retirement – how have others got a chance? appeared first on Money Marketing.

Consumer Duty rules are now in force for all new products and services, as well as existing products which remain on sale or open for renewal.

These rules set higher expectations for the standard of care firms provide to consumers.

The hope would be that any new policy or change to existing policies by any government department or regulator would be viewed through this lens.

Unfortunately, it’s not clear how much the customer is at the heart of several announcements lately. The recent Mansion House accord is a case in point.

The government has agreed with many of the UK’s largest defined contribution (DC) pension providers that at least 5% of default funds will be allocated to unlisted equities by 2030.

This is a definitive statement with no caveats that a provider or investment house simply couldn’t make

It seems clear this may help the UK as a whole and encourage wider investment in UK plc. However, when we look at individual consumers, the position is much less clear.

The government said: “Reforms to DC pension schemes will increase a typical earner’s pension pot by 12% over the course of a career.” This is, of course, a definitive statement with no caveats that a provider or investment house simply couldn’t make.

It is possible investing in these assets may provide a better return for a customer, even after the higher charges they are likely to pay. However, there is undoubtedly higher risk for consumers as well.

As this will be part of a default fund, most people will be completely unaware of the greater risks being taken by part of their pension investment, as well as the lack of diversity given the private equity investments are likely to be UK-centric rather than global.

This type of development highlights the need to do more to educate members on the risks and benefits of particular decisions, especially given the vast majority will remain invested in default funds.

The system is weighted too far towards HMRC and not towards trying to make sure a more accurate amount is deducted in the first place

Value for money is another area where concerns arise. It is clear work needs to take place on value for money, however the targeting seems slightly surprising.

Most people in the industry would acknowledge that higher charges are more likely to arise within older pension schemes. Most schemes set up in the last 10 years or so have relatively low charges. There are, of course, exceptions but if the idea is to target the area of greatest potential harm, then older schemes would seem the obvious focus, as there is the greatest scope for improving value for money.

The Department for Work and Pensions acknowledges this in its response to the consultation, saying: “We agree that savers in older schemes may be at greatest risk of poor value for money”. However, it believes there are difficulties applying the framework to older schemes so has delayed that to a later phase, initially targeting workforce default arrangements.

Another example would be the amount of total tax which has been overpaid, then refunded, on flexible lump sum pension withdrawals since 2015, which now exceeds £1bn. It is understandable why HM Revenue & Customs (HMRC) prefers this system.

Gathering more tax upfront and returning overpayments at some future point is a sure-fire way of making sure enough tax is collected. But the system appears to be weighted too far towards HMRC and not towards trying to make sure a much more accurate amount is deducted in the first place.

It is clear work needs to take place on value for money, however the targeting seems slightly surprising

Most people will accept these things can’t be exact to the penny but asking lower paid workers to pay thousands more in tax than they should – with the excuse that they will get a refund at some point – frankly isn’t good enough.

Consumer Duty can hopefully be a force for good in our industry and improve the position for many customers as well as the reputation of the financial services sector.

But we can’t make exceptions. The pension funds into which people are saving are theirs for retirement. That should be the priority. Pushing people into illiquid higher risk investments (largely without their knowledge) or targeting ways to improve value for money only in modern schemes (because that is the simplest option) looks a lot like putting the customer secondary, rather than at the heart of what is being done.

Andrew Tully is an independent consultant

The post Andrew Tully: Government could learn a thing or two from Consumer Duty appeared first on Money Marketing.

The total income tax which has been overpaid, then refunded, on flexible lump sum pension withdrawals since 2015 now exceeds £1bn.

And it is worth a reminder this is only the refunds driven by the completion of forms P50Z, P53Z and P55.

A great many other people either won’t know these forms exist or won’t complete them, meaning HM Revenue & Customs will sort out any tax overpayment directly with the individual.

These are substantial numbers and this is a significant issue. Eight years on from the introduction of the pension freedoms, we really need to find a better way of dealing with tax on lump sum withdrawals which doesn’t continually overtax savers.

Over £48m was repaid in Q1 2023, up massively from the £22m in the same quarter of 2022

Some may argue this isn’t a big issue, as people are refunded the tax, hopefully by the end of the tax year and potentially sooner if they complete the relevant form. However, this fails to consider the impact overpaying tax can have on people, many of whom may not be working or have limited other income.

Take the following example. Here the individual takes £13,333 from their pension. After taking 25% tax-free cash, there is a taxable amount of £10,000. The tax due under emergency tax on that withdrawal is close to £3,000.

Given many people taking money out are basic rate taxpayers or non-taxpayers, they will be significantly overpaying tax.

Most people withdrawing funds from their pension are likely to be doing it for a specific reason – to help with a particular expense.

While they may have made some plans, they are unlikely to be withdrawing funds many months before the expense arises. When the amount received is significantly lower than expected and needed, some may be forced to ‘double dip’ by taking a further pension withdrawal.

There are around 15,000 forms completed each quarter in addition to the many who don’t complete forms but need HMRC to adjust tax

That double dipping means many may be withdrawing more from their pension than they need, to cope with a cash flow problem. This doesn’t help with their overall retirement planning.

There is also a huge cottage industry within HMRC processing these refunds. If we dig into the most recent figures a little more, it shows over £48m was repaid in Q1 2023, which is up massively from the £22m in the same quarter of 2022.

And it is the second highest quarterly withdrawals we have seen, with the £45m repaid in Q4 2022 not far behind. That means there are around 15,000 forms completed each quarter in addition to the many individuals who don’t complete forms but need HMRC to adjust their tax.

If we could find a better way of collecting tax on lump sum withdrawals, it must be more efficient for HMRC, as well as a much better experience for pension savers.

The Office for Tax Simplification, before it was scrapped, identified lump sum pension withdrawals as an area greatly in need of simplification, saying it wanted to work with HMRC to identify options other than using emergency tax codes. However, the government never took this recommendation any further.

Asking lower paid workers to pay thousands more in tax than they should isn’t good enough

It is understandable why HMRC prefers this system. Gathering more tax upfront and returning overpayments at some future point is a sure-fire way of making sure enough tax is collected. But the system appears to be weighted too far towards HMRC and not towards trying to make sure a much more accurate amount is deducted in the first place.

Most people will accept these things can’t be exact to the penny but asking lower paid workers to pay thousands more in tax than they should – with the excuse they will get a refund at some point – frankly isn’t good enough.

The industry is being asked to measure all actions through the lens of Consumer Duty. If HMRC was to do likewise, there is no doubt this measure causes foreseeable harm and puts a barrier in the way of consumers pursuing their financial objectives.

Andrew Tully is technical director at Canada Life

The post Andrew Tully: How does pension overtaxing pass while we bust a gut on Consumer Duty? appeared first on Money Marketing.

Today’s Budget was a seismic event for pensions tax, seeing the most significant changes since the pension freedoms were announced in 2014.

The lifetime allowance (LTA) has been abolished completely, with big increases to the annual allowance (AA) and money purchase annual allowance (MPAA), as well as tweaks to the tapered annual allowance (TAA).

Lifetime allowance

The biggest change is that LTA abolition. Many workers over 50 left the labour market during the pandemic and the government wants to encourage people in this group to return to employment and extend their working lives. It believes abolishing the LTA entirely will help ensure individuals such as doctors are not disincentivised from remaining in the workforce.

The change reverses a decade of declining LTA, which discouraged higher earners from saving. However, tax-free cash will be limited for most people to the current maximum level of £268,275.

The change will hugely simplify pensions

This caveat means the abolition isn’t quite as positive as it first appears. While the harsh 55% LTA tax is being removed, benefits above the tax-free cash level will be subject to income tax.

But the ability to use pensions to cascade unlimited amounts of wealth tax efficiently to the next generation has been hugely enhanced, especially if the beneficiaries can pay lower levels of income tax.

The change will hugely simplify pensions, with many layers of complexity including checking benefits against the LTA removed entirely. However, the government says those with suitable protections will be able to receive higher amounts of tax-free cash, which does mean some complexities will continue to exist.

Annual allowance

The AA is increasing by 50% to £60,000 a year. In an additional boost for those in the public sector, open and closed public service pension schemes for a given workforce will be considered linked for the purposes of calculating the AA charge, with effect from 6 April 2023. This may allow members to offset any negative real growth in closed schemes against a larger increase in an open scheme.

Many higher paid workers will benefit from the boost to the annual allowance

These measures combined are estimated to cost over £1bn over the next five years.

This is a significant increase to the AA, which will particularly help those in defined benefit (DB) schemes with long service who get a promotion, as well as those whose earnings fluctuate.

As a policy clearly designed to encourage public sector employees to remain in work – primarily those in the National Health Service – it will be interesting to see how effective this change will be.

Come what may, many higher paid workers will benefit from this boost to the allowance.

Tapered annual allowance

There are also changes to the TAA, with the minimum TAA increasing from £4,000 to £10,000 from 6 April 2023. The adjusted income threshold for the TAA will also be increased from £240,000 to £260,000 from 6 April 2023. This helps those with the highest earnings save slightly more into their pension.

Money purchase annual allowance

The MPAA will increase to £10,000 a year from April 2023, significantly up from the current £4,000. This is a policy where we have lobbied for change and we’re pleased chancellor Jeremy Hunt has listened.

These are massive changes for the industry and many will be looking to advisers to help them

It will help many people who have had to access their pension due to the cost-of-living crisis, redundancy or the pandemic boost their pension saving, and fully benefit from their employer’s pension contribution without fear of triggering a tax charge.

While this is a small change to the rules, it can make a big difference to those affected and could even save the Treasury some money through increased employment, economic productivity and tax receipts.

Taken together, these are massive changes for the industry and mean many people will be looking to advisers to help them work out what they should be doing to maximise the benefits.

Andrew Tully is technical director at Canada Life

The post Andrew Tully: Biggest Budget for pensions since freedoms announced appeared first on Money Marketing.