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I’LL make no bones about it, if pensions aren’t your thing, this may not float your boat.
The government recently announced changes to pensions, to again simplify something they have simplified countless times in a way that makes it impossible for the average person to have even the remotest clue what to do or where to go.
The never-ending changes can create a state of apathy where you think, what’s the point?
Indeed, the lead opposition party in the UK stated it would be altering a key part of Jeremy Hunt’s change (reintroducing the lifetime allowance). I assume they must be very confident of victory because that will go down like a sneezing fit in an elevator during covid.
Advisers and customers alike shouldn’t wait on this potential U-turn change unless it is obvious why, because most ‘promises, leaks and changes’ often don’t actually occur, and if they do not happen, you may well miss out. You can only act on what is in front of you right now, not what may or may not happen, so it’s a good idea to get yourself in front of your adviser as soon as possible to consider your options after the changes.
Those with pension pots of in excess of £1 million will undoubtedly benefit from the proposals of abolishing the lifetime allowance. The annual allowance hike will also benefit those earning between £100,000 and £260,000.
For most pension savers however, the change in lifetime allowance (LTA) will make no difference at all.
If you haven’t paid any contributions into your pension, you could carry forward up to three years maximum pension contributions and save up to £81,000 of tax by making the maximum £180,000 pension contributions.
The abolishment of the lifetime allowance is also a real benefit for inheritance tax. Up to now, you could pass your pension to your beneficiaries free of inheritance tax up to the lifetime allowance, so this opens that up completely.
With that in mind, when spending, think about using other assets that are inside your estate first.
It isn’t fully clear exactly how you can benefit from all the changes in the budget as the legislation for 2024/2025 will be in next year’s finance bill. Add into that a general election and all the ‘promises’ that will go with that, and you can see how apathy does set in.
But the rules for 2023/24 are known. In years gone by when you set up your pension you were offered a tax-free cash of 25 per cent of the fund. That was one of its greatest selling points.
Many advisers considered a pension mortgage as a great way to repay a mortgage, and while this is true, retrospective changes to pensions make that a bit of a roulette. The idea was that you made a pension contribution and received tax free cash. At retirement you took out the tax-free cash lump sum of 25 per cent and that repaid your mortgage. ‘The taxman pays your mortgage’ was the typical headline.
Changes to the pension mean there is a headline limit of just £268,275, i.e. 25 per cent of the lifetime allowance. With the lifetime allowance removed, we might rub our hands thinking of access to a higher figure, but the budget document states that the tax-free cash will remain at the current level of £268,275 and be frozen thereafter. Charming.
The legislation changes for 2024/25 will put the finer detail on that, but if it remains the same it will slowly reduce the benefit of tax-free cash, especially if inflation runs as high as it has been.
Rights to tax free cash could be more or less than the headline figure of course. Those with protected lifetime allowances, could get more by accessing up to 25 per cent of their protected LTA. If you have a scheme specific tax-free cash protection, you could also get more than the 25 per cent.
There, I said it would be heavy enough!
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question about your pension or pension fund, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net
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