Q3 2023 ISSUE 29
In This Issue
- Purposeful Financial Decisions To Tackle Inflation
- IHT Hits The Mainstream
- What’s Changing With Your Pension?
- Are You A New Tax Year Front Runner?
- The Impact Of Age On (Your) Life Insurance
Official statistics show the headline rate of inflation peaked at a 41-year high of 11.1% last October, and although economists expect it to continue falling for the rest of this year, the rate has so far remained stubbornly high.
Over the last year, the elevated rate of inflation has had a far-reaching effect on people’s financial circumstances, but research1 suggests the impact is not widely understood, with over half of UK adults failing to grasp how rising prices eat into the buying power of their savings.
Taking time to review your financial choices can ensure you continue to make appropriate decisions that will limit inflation leaving a lasting impression on your financial future. For example, inheritance is one area where high inflation can have a profound effect. When combined with the continuing nil-rate threshold freeze, soaring prices inevitably mean more estates are likely to be dragged into the Inheritance Tax net. Careful planning can limit any future liability and preserve people’s ability to pass on assets.
Cost-of-living pressures are leading many people to cut back on pension contributions to make ends meet, without realising the lasting damage such decisions can make. Analysis2 based on various assumptions (about factors such as salary, investment growth and pension contribution rates) shows that if someone opts out of pension contributions for five years in their 20s it could reduce their final retirement pot by £114,000 at age 66.
It is often worth revisiting what initially inspired you to set your financial goals in the first place. Reconnecting with those original motivations can encourage you to stick to your plans and help maintain control over your financial destiny. We can implement a plan to limit inflation’s impact on your future financial wellbeing.
1Aviva, 2022, 2Standard Life, 2023
Recent data from HM Revenue & Customs (HMRC) has shown that Inheritance Tax (IHT) receipts for the 2022–23 tax year totalled £7.1bn, up £1bn from the previous tax year. With receipts consistently rising, this significant uplift can be attributed in part to ‘a combination of the recent rises in asset values and the government’s decision to maintain the IHT nil rate band thresholds at their 2020 to 2021 levels up to and including 2025 to 2026,’ according to HMRC.
Over the next five years, IHT is expected to bring in £38bn for the Treasury, as detailed in the Spring Budget. This means annual receipts should exceed £8bn by 2027-28, with 6.7% of deaths expected to trigger an IHT charge, versus 3.76% of UK deaths in 2019-20.
Previously regarded as a tax on the wealthy, record receipts have prompted suggestions that the tax has now become mainstream, with elevated house prices and frozen thresholds having an impact despite the main residence nil-rate band introduced in 2017.
The good news…
Expert planning can help you legitimately mitigate IHT, so you can pass on assets to your family as you’d intended. Depending on your unique circumstances, there are different strategies you can implement such as considering placing assets into trust, making use of exemptions, making gifts during your lifetime, and thinking about leaving something to charity. With reliefs and exemptions on gifts to consider and the interaction with other taxes, IHT is complex. With many more estates likely to be subject to IHT over the coming years, taking expert advice has never been so important.
Several changes to pensions were announced during the Spring Budget. Regarded as the most significant since pensions freedoms in 2015, the changes, expected to provide greater flexibility and opportunity, have largely had a positive reception. The overhaul is intended to make it more straightforward for individuals to accumulate a bigger pension pot and not be penalised by taxes.
The changes primarily impact high earners, those with generous company pensions and those planning to aggressively fund their pensions later in life. The government hopes that the changes will incentivise people in certain high demand, high earning professions such as NHS consultants to delay retirement.
Some of the main changes took effect from 6 April 2023, and include:
- The Lifetime Allowance (LTA) charge was removed, with the LTA (currently £1,073,100) itself expected to be formally abolished (likely to be April 2024), allowing people to save more into their pension over their lifetime without facing tax charges for exceeding it
- The standard Annual Allowance (AA) increased from £40,000 to £60,000 (max 100% of earnings), allowing many individuals to pay more into their pension each tax year and receive tax relief on it. Individuals are still able to carry forward any unutilised allowance from the previous three tax years. Increasing the AA will particularly benefit workers approaching retirement who may have neglected pension saving in the past, who will be able to pay more into their pension each year and receive tax relief
- The ‘adjusted income’ threshold for Annual Allowance tapering increased from £240,000 to £260,000 and the minimum tapered Annual Allowance increased from £4,000 to £10,000 (meaning that individuals with annual adjusted income of £360,000 or more will have an Annual Allowance of £10,000). The tapered Annual Allowance is the reduced pension Annual Allowance that is applied to those who now have an ‘adjusted income’ over £260,000; for every £2 earned above the £260,000 threshold the normal Annual Allowance is reduced by £1
- The Money Purchase Annual Allowance (MPAA) increased from £4,000 per tax year to £10,000, to encourage those drawing a pension to continue working. This is the amount you can pay into your pension after you have accessed pension benefits, and still enjoy tax relief. The additional MPAA means anyone already using their pension but continuing to work, or looking to return to work, will be incentivised to do so as they can increase the size of their pension pot and receive tax relief.
To ensure you make the most suitable decisions with your pension and to maximise your pension provision without encountering tax issues, professional advice is essential.
Investing early in the tax year can offer several benefits:
- It gives your investments more time to grow tax-free or tax-deferred, benefiting from compounded returns
- There is time to spread your contributions throughout the tax year, making budgeting easier
- It can help you avoid a last-minute rush to make contributions before the end of the tax year, which can lead to missed opportunities or mistakes.
Goal setting and staying power
Think about what you want for yourself and your family in the future. By considering your financial goals, we can develop a financial plan that aligns with those goals. Maintain discipline and keep focused on your long-term objectives, even during market fluctuations.
We can work with you to identify your financial goals and establish plans so that you can get ahead early in the tax year, providing powerful strategies for building wealth and achieving financial security.
When determining the cost of life insurance, age is a key factor. In general, the younger someone is when they purchase a policy, the cheaper regular premiums are likely to be because the risk to the insurer is lower, as younger people are statistically less likely to die during the term of the policy.
It makes sense that as you age, the cost of new life insurance cover generally increases because the likelihood of death increases, especially true for people who have developed health issues or who engage in risky behaviours including smoking or extreme sports.
For example, a 65-year-old smoker with a history of health problems is likely to pay significantly more than a 25-year-old non-smoker in good health for the same level and duration of cover. Insurers will also consider your age when determining the length of the policy term, with longer terms generally being available to younger people. Although maximum age limits vary, many insurance companies offer a maximum term of around 40 years.
Age is just one factor affecting the cost; the insurance company will also consider your occupation, family medical history, overall health, lifestyle and the length of policy.