Lowes Magazine Issue 118

PLANNING

TAX

CHANCELLOR OF THE EXCHEQUER RISHI SUNAK’S March 2021 Budget turned out to be a big freeze as he announced tax rates, allowances and exemptions would be put on hold until 2026. It may have been difficult for the Chancellor to increase tax rates and cut allowances and exemptions at this budget without impacting the wider economy, yet he somehow had to start raising revenues in order to meet the ever mounting debt (£355 billion of debt in the first year of the pandemic and a potential £204 billion or more to be added in 2021) and the economy generating expenditure announced at the same time in the Budget. What he has done therefore, is to freeze personal tax rates for five years. The result of this will be to implement what is termed fiscal drag, which, as the economy recovers and incomes and investment returns rise, will gradually draw more and more people into paying higher rates of tax as well as become liable to pay inheritance tax, capital gains tax and so forth. In effect what the Chancellor has done is to find a way over time to raise more revenue through taxes without actually raising tax rates. The freezing of tax rates the Chancellor forecasts will raise an extra £990m by tax year 2025/26. Accordingly, tax planning will become far more important for more people over the next few years, if they are to mitigate the effects and ensure they do not pay more tax than they need to. 2021 Budget tax implications

Fund value now that will exceed Lifetime Allowance given set investment returns (assuming no further contributions are made) Investment growth 4% a year 5% a year 6% a year (net of charges) Current fund value with 10 years to retirement £833,000 £757,000 £689,000 Current fund value with 20 years to retirement £686,000 £567,000 £469,000 Assumes LTA stays as £1,073,100 until 5/4/26, increases at 2% a year thereafter Figures rounded Current fund value which will exceed Lifetime Allowance (with ongoing contributions of 10% a year of £80,000 salary) Investment growth 4% a year 5% a year 6% a year (net of charges) Current fund value with 10 years to retirement £758,000 £685,000 £620,000 Current fund value with 20 years to retirement £546,000 £438,000 £351,000 Assumes LTA stays as £1,073,100 until 5/4/26, increases at 2% a year thereafter Salary grows by 2.5% a year Figures rounded How savers could get caught by the frozen pension Lifetime Allowance According to pension provider Canada Life, a current pension pot of £469,000, with no further contributions, could breach the pension lifetime allowance in 20 years (if the LTA is frozen until April 2026 and then increases by 2% on average each year thereafter). A current pension pot worth £351,000, with ongoing contributions of 10% a year from someone earning £80,000 could breach the LTA in 20 years (if the LTA is frozen until April 2026 and then increases by 2% on average each year thereafter). A pension value of £1,073,100 today would secure an annual income of around £28,000 a year at age 65.

LOWES CONSULTANT MICHAEL STOWE outlines one of the areas where a client requires advice and Lowes is able to help. On this occasion, where a client wishes to pass on a pension to a beneficiary other than a spouse. First and foremost we take out a pension How we have helped clients Whether the beneficiary can access the pension without an income tax charge depends on the age 75 rule – see box. There are various considerations here, with which Lowes Consultants can help. Of utmost importance, is ensuring the assets outside the pension are sufficient enough to provide the required lifestyle without the pension payments. We have sophisticated software and processes that can make a proper and professional assessment of an individual’s circumstances and plot the potential for a sum of money to meet someone’s needs over their remaining lifetime.

Reviewing our pensions Lowes Consultant Daniel Waugh says: Perhaps one of the most contentious issues arising from the freezing of allowances is in relation to the Pensions Lifetime Allowance (LTA). This allows an individual to accrue up to £1,073,100 in a pension and benefit from tax relief.

plan to provide us with an income in retirement – hence the government incentivises pension contribution with tax relief. However, in current circumstances, often the importance of providing for family has risen up the agenda. While most people tend to bequeath their pension to their partner/spouse, sometimes, where there are sufficient other assets to support the spouse, a client will want to pass the pension fund to someone else they care about, such as adult children or grandchildren. And there can be several good reasons to look at this, where it may be needed. On death the majority of our assets fall into our estate and, where they exceed an individual’s nil rate band, currently £325,000 (plus up to £175,000 Residential Nil Rate Band in specific circumstances), they are subject to inheritance tax (IHT) – unless they are passed to a spouse or civil partner. However, in the vast majority of cases a pension can be passed to anyone without any IHT liability and in set circumstances without an income tax charge. Where the circumstances are right, this can make pensions very useful tools in passing on of wealth between the generations. It can makes sense, therefore if there are sufficient other assets to support the spouse, to pass the pension fund to someone else the client cares about, such as adult children or grandchildren. They receive it IHT-free and the money is kept out of the spouse’s estate when IHT is calculated.

These can forecast how long assets are likely to last using criteria such as inflation, projected investment growth and so on, set against income needs at various life stages – in retirement for example, we tend to spend more in early retirement, less as we grow older and maybe more again in later years if we need care.

Any money paid in over the top is subject to a tax charge. It is controversial because in 2020 many senior NHS staff working long hours during the pandemic, who paid a percentage of their earnings into a pension with an employer contribution too, were in danger of breaching the LTA limit. This tax charge effectively made it counterproductive on a financial level for them to put in the longer hours. A temporary measure was introduced by government at the time but this issue is now likely to raise its head again, and not just for NHS staff, over the next five years. LTA becomes more complicated where an individual may have several pension pots and a mix of final salary and personal (defined contribution) pensions. Lowes Consultants can help with financial planning strategies to help clients who are in danger of breaching the LTA.

If these circumstances may apply to you, your Lowes Consultant can talk through the financial and tax implications with you.

The age 75 rule The age 75 rule is that if a pension holder dies prior to age 75 the pension fund may be passed on to the nominated beneficiaries free of tax. If they die at age 75 or more, then the money the beneficiaries draw down from the pension will be subject to a tax charge which is based on their income tax position at that time.

Tables source: Canada Life (March 2021)

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