Now that the experts have had time to fully digest the implications of the Spring Budget, Andrew Chastney, Senior Paraplanner at Canaccord Genuity Wealth Management, takes UK High Net Worth Individuals through what they need to know.
The March 2023 Budget was eventful. Not as eventful as last September’s Budget, for sure. But eventful, nonetheless. And there has been lots to work through from the industry’s perspective. Now we have had time to digest it and understand the impact, we have some more insight into what it will mean for savers and investors.
Retirement planning is a highly complex area and the Budget has, for the moment at least, added to this. It is a tricky area for people to navigate and understand how it might affect them, so the importance of expert guidance can’t be underestimated. What were the standout points from the Budget and what do they mean for you?
.
The headlines were all about pensions
The ‘rabbit out of the hat’ moment was the abolition of the pension lifetime allowance (LTA), which delighted many campaigners who had been rallying to have it lifted since it was introduced in 2006.
The ‘rabbit out of the hat’ moment was the abolition of the pension lifetime allowance (LTA), which delighted many campaigners who had been rallying to have it lifted since it was introduced in 2006
The LTA is the maximum pensions savings an individual can benefit from during their lifetime, prior to being subject to the LTA tax charge of 55%, if withdrawing a lump sum, or 25% if drawing a taxable income. While rumours of a sharp increase in the allowance had been gathering momentum, the news of the total abolition of this part of the tax regime was unexpected. And it has big implications whether you are saving for a comfortable retirement or looking to take benefits from pension savings you have already built up.
However, it does come with a note of caution. Labour has suggested they might reverse some of the changes if they get into power at the next election. For anyone who has been lucky enough to have protected their lifetime allowance at a previous higher level, on the condition that they did not make any further pension contributions, the effect of doing so now seems unclear. Any action that could jeopardise these valuable protections should be considered very carefully, for example, if you were to make any additional contributions. A new form of pension protection might well be on the horizon if the regime is reintroduced. At present we simply don’t know.
Any action that could jeopardise these valuable protections should be considered very carefully, for example, if you were to make any additional contributions. A new form of pension protection might well be on the horizon if the regime is reintroduced. At present we simply don’t know
Rebuilding pensions benefits
Top Tip
This piece illustrates just how valuable an exercise it is to go through all the implications of each Budget (and interim statement) with a fine-toothed comb – and to bear in mind that a new government could change course entirely. Putting in place a well thought-out and yet flexible plan for maximising your wealth is something that requires a little ground work and then regular tweaks after discussions with your adviser.
If you would like to have a professional in your corner in a world of wealth management change, take our take our short wealth manager matching questionnaire, fast and free.
Lee Goggin
Co-Founder
Why pensions are one of the best ways to invest for retirement
Pensions have had a lot of bad press in the last few decades, compounded by various governments tinkering with pension legislation over the last 20 years. But we have always believed pensions are a particularly attractive way to invest. Why is that? There are a number of benefits. One is the tax relievable contributions you can make, at your highest marginal tax rate. They are also attractive because of the income and capital gains tax-free returns within pension plans. Another benefit is that there is usually no inheritance tax following death. The removal of the lifetime allowance tax regime is the icing on the cake.
But we have always believed pensions are a particularly attractive way to invest. Why is that? There are a number of benefits. One is the tax relievable contributions you can make, at your highest marginal tax rate
We are still awaiting the full details – as ever the devil will probably be in the detail – but there are two points that stand out at the moment.
- The changes took effect on 6 April, although the lifetime allowance regime remains on the statute book, and pension providers will still ‘test’ benefits against this allowance. The key change is that a tax charge won’t be happening.
- A tax-free cash upper limit of £268,275 has been set. This is the amount up to which many of us can take a tax-free lump sum from our pension. It is 25% of the lifetime allowance, as at the time of the Budget. So, this part of the previous regime continues to be relevant. Above this limit, lump sum withdrawals will usually be taxed at the individual’s marginal income tax rate, as is the case for regular income withdrawals. However, where one of the forms of pension protection is already in place, any entitlement to a higher level of tax-free cash remains. We are awaiting full details of how this complex area will work in practice.
While this will mostly benefit higher earners, the government is presumably hoping this will encourage some of us to work longer and particularly, encourage medical professionals to do so. However, the law of unintended consequences should not be ignored, and this could encourage more of us to retire early if we can accumulate more benefits at an earlier stage.
However, where one of the forms of pension protection is already in place, any entitlement to a higher level of tax-free cash remains. We are awaiting full details of how this complex area will work in practice
Individual Savings Accounts remain key
The Individual Savings Account (ISA) allowance remains frozen at £20,000, and the Junior ISA at £9,000, which means a reduction in the real value of these tax breaks. Despite this, we still consider these to be a central part of any tax-efficient savings and investment strategy, given the opportunity to save in an environment free of income tax and capital gains tax (CGT).
With a reduction in the CGT allowance to only £6,000 for individuals from 6 April, as was announced last year in the Autumn Statement, investing within an ISA and a pension becomes even more valuable for many people
With a reduction in the CGT allowance to only £6,000 for individuals from 6 April, as was announced last year in the Autumn Statement, investing within an ISA and a pension becomes even more valuable for many people.
Is it time to take advantage of the saving incentives?
The Chancellor held back in terms of what he could do in this budget. As such, he has focused on ‘supply side’ reforms to the economy, with the objective of providing more incentives to work and, for firms, to invest. Overall, it was a cautious budget and one we welcome for the additional incentive to save for a secure retirement.
Before you think about making any changes to your pension plan – whether you are saving for retirement, at retirement or in retirement already – it’s important to wait for full details to be confirmed and then get some help from an expert to see how the changes could affect you
But it’s a highly complex area. And everyone has a different situation. Before you think about making any changes to your pension plan – whether you are saving for retirement, at retirement or in retirement already – it’s important to wait for full details to be confirmed and then get some help from an expert to see how the changes could affect you.
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
