Business Matters – Issue 30

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Pension predicament

This month marks Pension Awareness Week, the annual clarion call for people to take control of their retirement plans, wherever you are on your saving journey. In our latest edition of Business Matters, we’re focusing on a change impacting many business owners: the abolition of the Lifetime Allowance (LTA).

This change to the LTA – the cap on the total value that you can hold in your pensions without facing a tax penalty – was one of the headline announcements of the Spring Budget in March 2023. It currently stands at £1,073,000, but it has been effectively removed for the 2023/24 Tax Year with the intention for it to be abolished from the 2024/25 Tax Year.

The change will mostly affect senior professionals, who might have previously been tempted to take early retirement or opt out of pension saving if they were close to reaching the limit in order to avoid being subject to a Lifetime Allowance charge at 25% if taken as income or 55% if taken as a lump sum. In theory, these people can now re-start pension saving and get tax relief on contributions of up to £60,000 (or 100% of their salary if lower).

But, while this change should encourage those with larger incomes or pensions funds to engage more with their pensions, is it as clear-cut as it sounds?

The levels and bases of taxation, reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Moving goalposts

Although the move has been lauded for simplifying the pension system and promoting greater awareness of saving for the future, industry experts are sceptical.

Despite HMRC setting up a working group to sort out the detail, it has yet to show how the LTA abolition could work in practice, leaving many unanswered questions. What’s more, with a general election looming, Labour has pledged to reverse any changes if they come into power, in favour of a solution for NHS staff only.

Investors are understandably wary about being caught out and have been left with a number of tricky questions. What should you do if you previously paused your pension contributions to avoid breaching the LTA? Should you crystallise funds in excess of the LTA now while there’s no tax charge? Or could this leave you vulnerable to tax in the future if the LTA is reinstated by a future government? What does it all mean for Inheritance Tax (IHT) planning, given that you can pass pensions to beneficiaries IHT-free upon your death?

These questions will typically require professional advice to help you understand your pension saving choices and secure your short- and long-term financial well-being.

Assessing your position

If you’ve previously been affected by the LTA, it’s worth checking your pension policies and procedures to clarify the details on benefits. And, as always, make sure you’re using a mix of tax-planning tools to save for your future – including pensions and ISAs.

Put your future plans in the spotlight. We’re living much longer than previous generations on average, meaning we’re likely to be spending much more of our later life in retirement. It’s therefore crucial that you make sufficient preparations to safeguard your financial future in later life and reduce the risk of outliving your wealth.

A good financial adviser will be able to help you work out your likely retirement income. They can help you to identify the assets that you hold – including property that you own, your pension, ISAs and, of course, the value of your business.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.

The devil’s in the detail

As well as thinking about your pension savings in the context of the LTA, it’s important to dig into the detail of your pension itself. After all, your financial goals may have changed over time, and you might feel differently about risk.

Ask yourself: Where am I invested? How much is in my pot? Where’s my money actually going and how are the funds performing? Is the current level of risk right for me? Don’t forget to check your pension nomination – who does it pass to when you die?

Leading from the front

Although the LTA changes may not directly affect your employees, the increased dialogue about pension saving can only be a good thing for your team’s sense of financial well-being.

So, this Pension Awareness Week, be proactive and start conversations about pensions. If you offer one as a benefit to your employees, are they aware of it and how tax relief on pension contributions works?

Here are some other ways you can help them feel on top financial form:

  1. Engage with wider discussions about financial well-being and mental health to help normalise these conversations with your team. As well as Pension Awareness Week, there are various opportunities throughout the year for employers to take part in these discussions, such as Talk Money Week and Mental Health Awareness Week.
  2. Promote the financial well-being support you provide, such as workplace pensions, employee assistance programmes, childcare vouchers, season tickets or cycle to work loans, credit union partnerships or pre-retirement support.
  3. Promote the support your organisation offers at key life stages and translate these packages into real conversations so that employees can understand what it means for them.

Navigating the LTA landscape

As an entrepreneur, you’ll already have established strategies to help you reach your business goals. But making these strengths translate to your personal finances can be a challenge, especially when you’re pouring heart and soul into making a success of your company.

In light of the LTA abolition – and the uncertainty surrounding it – regular contact with your adviser is the key to ensuring there’s not a knock-on effect on your future plans. Contact us today!

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.