What you need to know (and do)
The spring budget 2023 will impact how much money you’ll have to save or spend, no matter your life stage.
Let’s look at the top 3 money matters affecting ISJ Financial Planning clients: Pensions, Inheritance tax and Capital Gains tax.
A boost for pension savers
You may be one of the budget winners. There’s a boost for wealthier pension savers, but many people will feel an uncomfortable squeeze on their wallets.
Those with significant sums to put away each year will receive a boost from an increase in the pensions annual allowance. This limits how much money people can build up in their pension in any tax year and still benefit from tax relief. The Chancellor, Jeremy Hunt, raised the allowance by 50% from £40,000 to £60,000.
Working beyond 50
The Chancellor has also abolished the lifetime pension allowance (LTA) to encourage the over-50s to extend their working lives. This measure aims to encourage inactive working-age individuals, particularly those with professional skills aged 50 to 64, to return to work. It removes one of the key reasons people decide to retire early or reduce their hours.
Raising the lifetime allowance is significant. You can now carry on working and put more money into your pension. Without an artificial, tax-driven ceiling, you can save as much as you want to support your brighter retirement.
Look before you leap
Labour leader Sir Keir Starmer has announced that his party will reinstate the LTA if elected in 2024. If you’re likely to be affected by changes to the LTA, now is the time to chat things through with your financial planner.
The tax-free lump sum cap remains at 25% of the previous lifetime allowance – not the value of an unlimited pension pot. The maximum you could take tax-free from your pension after 55 (rising to 57 in 2028) is £268,000. Any pension savings withdrawn before age 55 are subject to a massive 55% tax.
Let’s talk if you’re considering taking a lump sum from your pension! As with all things to do with money and pensions, the calculations may not be as straightforward as you’d hope. Together we’ll ensure you have enough money to live the life you want in retirement.
Looking ahead
The nil-rate band – the amount you can leave to your heirs free of inheritance tax – has been frozen for over a decade. This allowance (£325,000) and the residence nil-rate band (£175,000) are now fixed until at least April 2028. Your heirs will pay inheritance tax at 40% on the value of your estate above these allowances. Static tax-free allowances and rising house values inevitably mean that more estates will pay inheritance tax. But it’s not all doom and gloom. Let me explain…
You’ll have heard me say that a pension is essentially a long-term savings plan with tax relief. If you’re employed, your employer will contribute to your pension too. Free money? Yes, please!
Pensions don’t count as part of your estate for inheritance tax calculations. Pensions can be passed on tax-free if you die before age 75. If you die after 75, they are taxed as income when your beneficiary makes a withdrawal.
With the abolition of the pension lifetime allowance, the amount you can save into your pension and pass on without inheritance tax has risen significantly!
Could this massive inheritance tax ‘loophole’ open up new estate planning options?
From the headline announcement, you may be able to save as much as you can afford into your pension, then take it out if you need it; if not, it goes to your heirs tax-free. Until the details are published, let’s take a breath!
Estate planning will be part of your broader, overall retirement planning strategy. As inheritance planning can be complex, it is best to seek professional advice. If you are near the current LTA limits, let’s consider any new estate planning options when we meet for your annual review. With careful preparation, you can ensure that as much as possible of your estate reaches your loved ones.
A silver lining for separating couples
The government has announced that the capital gains tax annual exempt amount will be reduced from £12,300 to £6,000 from 6 April 2023 and to £3,000 from 6 April 2024.
You do not pay Capital Gains Tax on assets you give or sell to your husband, wife, or civil partner unless you are separated and do not live together, or you gave them goods for their business to sell on.
Several changes are proposed to the rules that apply to transfers of assets between spouses and civil partners who are in the process of separating and no longer living together. These new rules should mean that separating couples will be allowed more time to transfer assets between themselves without the risk of being charged CGT. This will be a welcome change. It is believed that any measures announced to come into effect from 6 April but have yet to be enacted will be included in new legislation to be passed after the Spring Budget.
Key Takeaways
Change can be unsettling. Your overall financial plan may need to flex slightly in response to the spring budget. As always, a sensible approach and sound advice are essential.
- The income tax personal allowance was already fixed at the current level until April 2026. It will stay the same (£12,570) for two additional years until April 2028. Frozen tax thresholds mean working people will pay more income tax. Your financial planning expert can be your lifeline through turmoil and change. Read more here.
- On 6 April 2023, the pensions annual tax-free allowance will increase by 50% from £40,000 to £60,000, the Money Purchase Annual Allowance will rise from £4,000 to £10,000, and the Lifetime Allowance charge (LTA) will be removed. The Labour party has pledged to reinstate the LTA if elected. Take advice before you make any changes to your financial plan. Retirement planning is not a one-time event; it’s a lifetime’s journey. Read more here.
- The tax-free lump sum cap remains at 25% of the previous lifetime allowance – so you could take £268,000 tax-free from your pension after 55 (rising to 57 in 2028). Any pension savings withdrawn before age 55 are subject to a massive 55% tax. The calculations are complex. See expert advice.
- The abolition of the pension lifetime allowance means the amount you can save into your pension is unlimited. This has potential for estate planning – you may be able to pass on more to your heirs without inheritance tax. The devil will be in the (legislative) detail. Your financial adviser is an expert and will help you make sound choices.
- Proposed changes to Capital Gains Tax rules should mean that separating couples will be allowed more time to transfer assets between themselves. Expert legal and financial advice is crucial if you’re separating or divorcing. Read more here.
Financial advice is crucial because it can help you make informed decisions about your money and financial future. I can help you create a budget, save for retirement, invest for the future, and more. Importantly, I will help you understand the risks and potential rewards of different financial products and strategies.
If you’re unsure about retirement planning or you’re worried about your current financial plan, then book a no-obligation call with me HERE.
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