A timely proposition

Considering gilts for your investment portfolio?

High-interest rates make gilts an attractive option for some investors, especially higher-rate taxpayers who benefit from the tax exemption from capital gains. What exactly are gilts? These UK government bonds, or debt securities, are issued to finance public expenditure. Their appeal lies in their low-risk nature and guaranteed income.

Securing Safe Investments with Gilts

Gilts are considered one of the safest investment options because the British government fully backs them. Think of a gilt as an IOU from the Treasury. Investors receive regular interest payments in return for lending money to the UK government. Most gilts offer a fixed cash payment (or a coupon) every six months until maturity when the final coupon payment is made along with the return on the original investment.

Trading and maturity of gilts

Investors have two options: hold onto the gilts until maturity or sell them on the secondary market, much like company shares. Short-term gilts mature between one to five years, medium-term gilts have a lifespan of five to fifteen years, while long-term gilts exceed 15 years, some even extending up to 50 years. Generally, gilts with longer lifespans command higher interest rates than those maturing soon.

Understanding gilt yields

The annual return an investor gets for holding a gilt over the next 12 months is known as the yield. It’s calculated by dividing the annual coupon payments by the current market price. Various factors influence gilt yields, including the outlook for interest rates, inflation, and market demand for gilts. Interestingly, bond prices and yields move in opposite directions.

The rise of gilt yields

Since the pandemic, interest rates have skyrocketed as the Bank of England tries to control inflation. Interest rate changes significantly impact bond prices, especially when they are forecasted to keep increasing. As interest rates increase, bond prices generally fall, and vice versa. This inverse relationship is due to new bonds issued at higher interest rates offering higher coupon rates and yields than older bonds issued at lower rates.

The tax benefits of gilts

While Income Tax applies to the interest earned from gilts, they are entirely exempt from Capital Gains Tax (CGT). This means there’s no CGT to pay on any profits from selling a gilt or when it matures. This exemption is especially beneficial for higher-rate taxpayers who’d otherwise have to pay a 20% CGT. Moreover, there’s no tax on gilts held in a tax-efficient wrapper like an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP).

Protecting capital with inflation-linked gilts

For investors concerned about inflation, inflation-linked gilts offer a reliable way to protect their capital if held to maturity. The principal and interest are tied to inflation, ensuring investors receive a return that keeps pace with the cost of living.

Gilts and portfolio diversification

Gilts provide a safer alternative during uncertain times, and their low correlation with stock markets makes them an alternative diversifier. By including gilts in a diversified portfolio, investors can mitigate risk and balance their exposure to different asset classes. Remember, gilts with longer maturities are more susceptible to interest rate fluctuations than those with shorter maturities, so investing across a range of gilts can help spread the risk.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

Retirement cash flow modelling

Assessing your current and projected wealth, income and expenses.

Retirement planning is of utmost importance, regardless of your income or wealth. It ensures a steady income stream after retirement and provides financial security for you and your loved ones.

Retirement cash flow modelling can provide numerous benefits to individuals seeking financial security and planning for the future. By assessing your current and projected wealth, income and expenses, retirement cash flow modelling can help you understand your current and potential future finances.

Here are some key reasons why retirement cash flow planning is crucial:

Avoid running out of money:

Planning helps you calculate the savings rate required to support your desired lifestyle during retirement, ensuring you don’t run out of money.

Setting retirement income goals:

This involves determining your retirement income goals and identifying the necessary steps to achieve them. This allows you to plan for various financial sources and secure a comfortable retirement.

Creating a regular flow of income:

A well-structured and regularly reviewed plan enables you to create a regular flow of income after retirement. This fixed income substitutes your pre-retirement salary, ensuring financial stability.

Strategic investment decisions:

Retirement planning involves making strategic investment decisions to achieve specific savings goals. This helps in maximising returns and growing your retirement fund over time.

Financial security:

By having a solid retirement plan, you can provide yourself and your loved ones with financial security. This is particularly important as more than social security benefits is needed to sustain your desired lifestyle.

Enjoying a comfortable retirement:

A comprehensive retirement plan has the potential to allow you to enjoy a comfortable retirement, free from financial worries. It provides the means to pursue your desired activities, travel and maintain a high standard of living.

Reviewing existing pension arrangements:

Regularly reviewing your existing pension arrangements and taking the required steps can significantly affect the amount of money you’ll accumulate for retirement. Seeking professional help can ease the process and ensure you make informed decisions.

How retirement cash flow modelling can work for you

Managing accumulated wealth:

If you have accumulated wealth, retirement cash flow modelling can assist you in effectively managing your financial position and making informed decisions as you retire.

Long-term planning:

Cash flow planning is especially beneficial if you have long-term personal or business objectives. It lets you determine how much you need to save and the returns required to meet those goals.

Care home fees planning:

Cash flow modelling can also be used for planning care home fees, helping you understand the financial implications of such expenses and prepare accordingly.

The retirement cash flow planning process involves:

Assessing your current financial situation, including income, expenses, assets and liabilities.
Understanding your future financial commitments and goals.
Creating a lifetime cash flow modelling plan tailored to your needs.
Providing a comprehensive analysis of your income, expenditure and potential future cash flow.
Working towards achieving and maintaining financial independence.
Adequately addressing the financial consequences of death or disability.
Minimising tax liabilities through effective planning.
Developing an investment strategy for your capital and surplus income.
Identifying Inheritance Tax issues that may impact your beneficiaries.

Answering critical questions

Ultimately, retirement cash flow modelling helps answer critical questions such as whether your savings and assets are sufficient to support your aspirations if you can retire early, if your investment risk is appropriate and if you will have enough money to sustain yourself throughout retirement.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME

Cost of care in later life

Choosing the best option for yourself or your loved ones.

The costs of care in later life can vary greatly and depend on a multitude of factors. Notably, the type of care required, the individual’s financial situation and their location within the UK play a significant role in determining these costs.

Many underestimate the true extent of care home costs and fail to plan for them adequately. However, a comprehensive wealth strategy can provide essential financial preparedness for long-term care. In England, individuals with assets worth more than £23,250 are typically expected to pay their own care home costs unless they have significant ongoing health needs.

Bring peace of mind

It is crucial to consider contingency plans for care costs, whether that involves a care home or care at home. Having funds earmarked for later-life care can bring peace of mind and enable you to choose the best option for yourself or your loved ones.

You can explore various strategies to address care costs, including Inheritance Tax planning and annuities for care home fees. Seeking expert professional advice can help you establish a ‘care costs plan’ that provides peace of mind and eliminates worries about managing care home expenses when the time comes.

Taking a holistic view

If your circumstances change and residential care becomes necessary for you or another family member, taking a holistic view of your overall wealth is essential. By doing so, your professional adviser can create the right financial plan to support you throughout the rest of your life. This may involve care home tax planning for capital maintenance, assistance with inheritance plans, or utilising an annuity for care home fees.

Deciding on the best course of action for care can be stressful, especially when determining how to finance it. It’s natural to feel overwhelmed by the numerous decisions and unsure of where to start or who to consult. However, seeking guidance from professionals experienced in long-term care planning can alleviate this burden and guide you towards a secure financial future.

When it comes to making plans for care at home, here are some steps you can take:

Assess your current situation:

Start by evaluating your or your loved one’s needs for care. Consider the required assistance level, such as medical support, personal care and household tasks. Assess any specific health conditions or limitations that need to be addressed.

Research available resources:

Look into the options and resources available for home-based care. This may include home healthcare agencies, community support services and government programmes. Research the types of care providers, their qualifications and their services.

Create a care plan:

Develop a comprehensive care plan that outlines the specific services needed and the frequency of care required. Include details on medication management, therapy, meal preparation and other specific needs. Consult with a healthcare professional such as your GP, or a care coordinator to assist you in creating an effective plan.

Budgeting and financial planning:

Determine the financial implications of home-based care. Consider the costs associated with hiring caregivers, purchasing medical equipment, modifying the home for accessibility, and any ongoing medical expenses. Review your financial situation and explore options like long-term care insurance or veterans’ benefits.

Seek professional advice:

Consult with a professional financial adviser who can provide guidance on financial planning and long-term care options. They can help you understand the costs, explore potential funding sources and create a sustainable financial plan.

Communicate with family members:

Discuss your intentions and plans with your family or close friends. Involve them in the decision-making process and ensure everyone is on the same page. Consider their availability and willingness to contribute to caregiving responsibilities or financial support.

Remember, each individual’s situation is unique, and it’s essential to tailor your plans according to your specific needs and circumstances. It’s recommended to consult professionals who specialise in eldercare and financial planning to ensure you make informed decisions.

THE COST OF CARE COULD REDUCE YOUR PERSONAL WEALTH SIGNIFICANTLY AND ALTER ANY PLANS YOU MIGHT HAVE TO LEAVE AN INHERITANCE TO YOUR LOVED ONES.

Saving for the next generation

Taking proactive steps in securing your child’s or grandchild’s financial future.

Many parents and grandparents set aside money for the next generation to help with their financial needs. The rising cost of education, housing, and life in general, has created concerns about financial stability for future generations.

Increasingly, parents and grandparents want to ensure their children and grandchildren have the financial resources to navigate these challenges successfully. Additionally, a greater awareness of the importance of financial planning and wealth accumulation has prompted many individuals to take proactive steps in securing their children’s financial futures.

Investing strategically

Starting early and investing strategically will enable you to provide a solid foundation for your child’s or grandchild’s economic wellbeing. The desire to give the next generation a head start in life and empower them to overcome any financial hurdles is a driving force behind why many parents and grandparents focus on setting aside money for children and grandchildren.

When considering the tax implications and how to arrange your affairs best, tax-efficient structures like Junior ISAs (JISAs) or bare trusts can be worth exploring.

Passing assets to young people

A bare trust is commonly used to pass assets to young people. In a bare trust, the assets are held in the name of the trustee (typically a parent or grandparent) until the beneficiary reaches a specific age, in this case 18.

On the other hand, a JISA has a current annual allowance of £9,000 (tax year 2023/24) and anyone can contribute to it. There is no limit to the amount that can be settled in a bare trust, while there are restrictions on JISAs, and a change of beneficiary is not allowed.

Exempt from Income or Capital Gains Tax

Assets held in a JISA are exempt from Income or Capital Gains Tax, providing a significant tax advantage. However, taxes still apply to assets held in bare trusts. If the funds in a bare trust come from the parents, and the return is £100 per annum or more, the Income Tax will be applied to the parent.

If a grandparent contributes, the assets are taxed as belonging to the grandchild, usually resulting in a lower tax burden. Contributions to bare trusts and JISAs are potentially exempt transfers for Inheritance Tax purposes if the donor survives for seven years from the date of the gift.

Paying for school fees

Regarding access to the funds, money can be withdrawn from a bare trust while the beneficiary is still a minor, as long as it is used for their benefit, such as for school fees. Conversely, funds cannot be withdrawn from a JISA until the beneficiary reaches the age of 18, but they can assume control of the account from the age of 16.

One common concern with JISAs and bare trusts is what happens when the child turns 18 and gains asset access. At this point, they have control over the funds, and there may be little that can be done if the money is misused.

Setting aside a portion of savings

Trustees of bare trusts have a duty to inform the beneficiary about the trust’s existence when they turn 18, and income from the trust should be reported on the beneficiary’s tax return, making it difficult to ignore the trust’s existence.

It’s worth considering alternatives to JISAs and bare trusts, such as setting aside a portion of your savings for your children or grandchildren. More complex trust and inheritance arrangements are also available, and you should always obtain professional advice.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

Missing out on unclaimed money that could be in your pocket?

£1.3 billion pension tax relief unclaimed by pension savers over a five-year period.

According to recent research, higher rate and additional rate taxpayers in the UK leave millions of pounds of pension tax relief unclaimed yearly[1]. This amounts to a staggering total of £1.3 billion over a five-year period. This unclaimed money could be in your pocket instead.

Pension tax relief is a government incentive to encourage individuals to save for retirement. It boosts your pension contributions based on your income level, the amount which is being contributed and the type of pension scheme you have. The two main methods of receiving tax relief are relief at source and net pay.

Boost your retirement savings

Understanding how pension tax relief works is important, and seeking professional financial advice ensures you claim everything you’re entitled to. Depending on your tax bracket, you may be eligible for 20%, 40% or even 45% tax relief on your pension contributions. Taking advantage of this relief can significantly boost your retirement savings.

If you are a higher rate or additional rate taxpayer, reviewing your pension contributions and ensuring you maximise your tax relief benefits is essential. Doing so can secure a more comfortable retirement and make the most of the money that should rightfully be yours. It’s important to note that income rates vary in different parts of the UK, so the specific rules may differ depending on where you live.

Tax benefits upfront

The main reason why £1.3 billion is left unclaimed in tax relief is that higher rate and additional rate taxpayers often need to claim the additional tax relief manually. The process can vary depending on the type of pension plan or the setup of your employer’s pension scheme.

If you’re in a ‘net pay’ arrangement, you’ll automatically receive tax relief because your pension payment is deducted from your salary before taxes are applied. This means you receive the tax benefits upfront.

Unclaimed tax relief

On the other hand, if you’re in a ‘relief at source’ arrangement, such as a personal pension plan or some workplace pension plans, your pension payment is deducted from your salary after taxes. In this case, your pension provider will add basic rate tax relief (20%) to your payment and claim it back from the government.

However, any higher rate or additional rate relief must be claimed by you directly from the government. There is so much unclaimed tax relief because many higher and additional rate taxpayers are unaware they need to claim the extra 20% or 25% tax relief on top of the basic rate relief.

There are several options to claim back tax relief if you’re a higher or additional rate taxpayer. Here’s what you need to know:

Determine your pension arrangement:

Firstly, finding out what kind of arrangement you’re a part of is important. You don’t need to take any action if you’re in a net pay arrangement. However, if you’re part of a relief at source arrangement, follow the steps below.

Complete a self-assessment tax return:

To claim extra tax relief, you can complete a self-assessment tax return. This can be done online, and the deadline for online tax returns is typically 31 January each year. Alternatively, you can contact the government directly to claim the tax relief.

Be aware of deadlines:

If you choose to submit a paper return, the deadline will be earlier, usually 31 October. It’s important to keep track of these deadlines and set reminders to ensure you submit your claim on time.

Receive your tax relief:

Once you have claimed the tax relief, you will either receive it as a rebate at the end of the year or through an adjustment to your tax code. The specific method of receiving the relief may depend on your individual circumstances.

Additionally, suppose you didn’t use your full pension contribution allowance over the previous three tax years. You can combine this unclaimed tax relief to make a one-off, large pension contribution. To meet the criteria, you must have contributed less than £40,000 to your pension last year (including tax relief), been a member of a pension scheme for the past three years and NRE (non-relevant earnings) would need to be sufficient to cover the contribution.

You can use your unused allowance to make a larger contribution this year. The annual pension allowance until 5 April 2023 was £40,000 per year. The annual pension allowance increased to £60,000 in July this year following the Spring budget changes.

Source data:
[1] Standard Life – Millions unclaimed pension tax relief – published 10/07/23.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

YOUR OWN PERSONAL CIRCUMSTANCES,
INCLUDING WHERE YOU LIVE IN THE UK, WILL HAVE AN IMPACT ON THE TAX YOU PAY. LAWS AND TAX RULES MAY CHANGE IN THE FUTURE.

Investment bonds

How bonds’ structure and tax advantages can help you pass on wealth.

Investment bonds offer several benefits that some investors may be missing out on, and have become even more beneficial due to recent changes in tax regulations following the Chancellor’s decision to reduce the Capital Gains Tax (CGT) Allowance from £12,000 to £6,000 this year and to £3,000 in April 2024.

Minimise Inheritance Tax

These changes will likely appeal to investors who want to minimise Inheritance Tax (IHT) liabilities when passing on wealth. The IHT nil-rate threshold has remained at £325,000 since 6 April 2009, with no indications of future increases. As a result, more individuals are considering trusts to keep their money outside their estates.

Investors who have already utilised their ISA allowances and other tax-efficient wrappers, or those who have received substantial windfall payments, such as inheritances, could benefit from using investment bonds. Investment bonds primarily fall into two categories: onshore and offshore. The key difference is their tax treatment, which can significantly impact returns.

Onshore Bonds

Onshore bonds are subject to UK Corporation Tax. However, this tax is offset by your provider, which means you, as an investor, do not have to worry about it directly. While this may seem like an advantage, it’s important to note that the tax could lower your return compared to an offshore bond.

Offshore Bonds

On the other hand, offshore bonds are issued from outside the UK. The returns from these bonds roll up gross of tax in the funds, with the exception of Withholding Tax. This can potentially offer higher returns compared to onshore bonds, depending on your personal tax situation.

Understanding of the tax rules

Despite these advantages, the research reveals that only a minority of investors fully understand investment bonds. However, there is potential interest among certain demographics. For example, 18% (9 million) of non-bond investors would consider investing in bonds. This interest is particularly prevalent among mass affluent consumers, those with children aged between 0 to 10, and individuals with a household income of £100,000 and above.

It is worth noting that only 10% of UK adults claim to have a clear understanding of the tax rules regarding bonds. This lack of knowledge could hinder investors from fully capitalising on the benefits offered.

Not subject to Capital Gains Tax

One of the key advantages of investment bonds is that they are not subject to CGT. Onshore bonds are treated as having already paid 20% tax on any gains when calculating a chargeable gain. In reality, the actual tax deducted is likely to be less than this amount.

In addition, investment bonds can be beneficial for IHT planning. If held in a trust, they can be exempt from IHT after seven years. However, despite this potential advantage, only a quarter of bondholders have written their bonds in trust, which means the bonds would still be considered part of their estate for IHT purposes.

Chargeable event occurring

Investors can withdraw up to 5% of their initial investment each year without triggering a chargeable event or incurring immediate tax liability.

Furthermore, top-slicing relief is available to reduce tax liability when a chargeable event occurs. This relief can eliminate or significantly reduce any tax liability, which can be advantageous for individuals in the accumulation phase and those preparing for retirement. For example, someone may be a higher rate taxpayer while owning the bond but can become a basic rate taxpayer when encashing it.

Make informed investment decisions

Investment bonds also offer options for assigning them between spouses. From a tax perspective, the assignment is generally treated as if the new owner had always owned the bond. This can be particularly beneficial if one spouse is a basic rate taxpayer, as they may have no tax to pay upon encashment.

Overall, investment bonds present numerous advantages, including tax benefits, that investors should consider. However, it is crucial for individuals to fully understand these benefits and the tax rules associated with bonds in order to make informed investment decisions.

Source data:
[1] LV= research – Don’t forget the benefit of bonds –published 23 May 2023

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

ESTATE PLANNING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

Building a reliable income stream for your golden years

Make sure you maximise your retirement income through annuity shopping.

When it comes to using your pension pot, buying an annuity is one option that provides a regular and guaranteed retirement income for either your lifetime or a fixed term. However, it’s important to note that purchasing an annuity is typically an irreversible decision.

Do you know that shopping around for an annuity could earn you £15,000 more over your retirement?[1] Recent analysis has shed light on the benefits of exploring your options regarding annuities. Therefore, it becomes crucial to carefully consider your options, select the appropriate type of annuity and strive to secure the best possible deal.

Valuable tool for retirement planning

Annuities are a valuable tool for retirement planning as they offer a reliable and predictable income stream, often lacking in other investment options. Furthermore, certain annuities can be linked to inflation rates, providing stability during periods of economic volatility. This makes annuities attractive for individuals prioritising risk aversion in their pension savings strategy.

The primary difference between annuities and pension drawdown products is that annuities require using the entire pension pot to purchase an insurance product that provides a fixed retirement income. In contrast, pension drawdown products allow flexible income withdrawals with the remaining funds invested.

Balance security and flexibility

Unlike pension drawdown arrangements, annuities do not typically pass down any remaining funds to beneficiaries after the holder’s death. However, it is possible to balance security and flexibility by partially combining annuities with pension drawdown.

According to the analysis, a 66-year-old with a £100,000 pension pot can now purchase an annuity with an annual income of £6,790. This represents an increase of £842 compared to the previous year. The surge in interest rates has resulted in the highest demand for annuities in years.

Importance of shopping around

Data further emphasises the importance of shopping around. It has revealed that the difference between the best and worst annuity rates available can be substantial. For a 66-year-old with a £100,000 pension pot, rates can differ by as much as 9.1%, translating to a potential annual income difference of £622 or a staggering £14,928 over the average retirement period.

The recent focus on annuities can be attributed to rising interest rates, which have a tangible impact on the income of those who have already purchased an annuity. However, it is essential to understand that while record rates are advantageous, they should be considered part of a broader discussion.

Source data:
[1] Research by Legal & General Retail as of 30/6/23 based on a standard lifetime annuity with a rate of 6.79% for a single life with a £100k premium, 66 years old, with a 5-year guarantee and a level benefit paid monthly in advance. Legal & General Retail estimates that an average 66-year-old with a standard level of health will have a life expectancy of 90 years.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

Will you make the right decisions around your pension pot?

Why defined contribution pensions are even more appealing for wealth transfer.

The announcement of the removal of the Lifetime Allowance (LTA) from the 2024/25 tax year in March’s Spring Budget 2023 has made defined contribution pensions even more appealing for wealth transfer. This benefits individuals over 55 who intend to leave their tax-free lump sum intact with their pension to maximise their benefits.

There may be further changes to pension allowance rules. However, removing the LTA charge allows for an unlimited sum tax-free for individuals who pass away before age 75. After the age of 75, the sum will be subject to taxation at the beneficiary’s marginal rate. It is important to note that although the charge has been removed, an LTA check still takes place to work out available tax free cash and the taxation of certain lump sum payments.

Without incurring Inheritance Tax (IHT)

New research reveals that almost a fifth of those aged over 55 (18%) do not plan to access their tax-free pension cash, to enable them to pass on more wealth to loved ones without incurring Inheritance Tax charges[1]. Men are more likely to do this than women, and 38% of workers also plan to leave their tax-free pension cash where it is.

Pensions usually don’t count towards a person’s estate for IHT purposes, and can be passed on completely tax-free if someone dies before the age of 75. With no LTA charge and an increased annual pension allowance, pensions have become attractive for those looking to mitigate IHT. However, nearly three in ten over-55s say they were unaware of this.

Pension as a tax-free lump sum

The research also found that almost half of all consumers (46%) believe that the amount that can be taken out of a pension as a tax-free lump sum should increase in line with inflation.

It is worth noting that since the LTA has been abolished, the amount that can be taken out of a pension as a tax-free lump sum has also been capped at 25% of the old LTA. This means that individuals are currently limited to withdrawing a maximum of 25% of the previous LTA as a tax-free lump sum from their pension, unless any protection is in place.

Here are some tips to help ensure your loved ones benefit from your pension:

Check if your pension offers death benefits:

Not all pensions provide the same level of flexibility when it comes to death benefits. Check with your provider to see if your pension plan allows you to nominate beneficiaries who will inherit your pension savings, as beneficiary drawdown may not be an option.

Specify your beneficiaries:

While making a Will can be beneficial in many ways, it usually doesn’t control who inherits your pension savings. Your pension provider or trustees have the final say in where your pension savings go. Name your beneficiaries directly with your pension provider or employer to ensure your wishes are considered.

Regularly review your beneficiaries:

Life circumstances change, and reviewing and updating your beneficiaries as needed is essential. Major life events like the birth of children, marriages or divorces can impact who you want to receive your pension savings. Ultimately the trustees of a scheme have discretion. So although there are no guarantees, by keeping your beneficiaries up to date, you can ensure that your desired beneficiaries are considered first when it comes to your pension savings should you pass away.

Consider the tax implications:

Pensions can be a tax-efficient way to pass on your wealth since they are not typically subject to Inheritance Tax. With the removal of the lifetime allowance charge, pensions offer an even more attractive option for passing on your wealth to your loved ones. However, it’s essential to consider any potential tax liabilities your beneficiaries may face when receiving your pension funds.

Remember, seeking professional advice tailored to your specific circumstances regarding financial planning and pension matters is essential.

Source data:
[1] Opinium conducted research for Standard Life among 2,000 UK adults aged 18+ between 12–16 May 2023. Results have been weighted to be nationally representative.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

Preserving wealth for future generations

Starting estate planning early and implementing it in stages is desirable.

The UK Treasury has been receiving record-breaking Inheritance Tax (IHT) receipts. IHT receipts amounted to approximately £7.09 billion British pounds in 2022/23, compared with £6.05 billion in the previous financial year[1].

For individuals and families who have to pay it, IHT can be emotionally challenging, often requiring the sale of cherished family assets to settle the tax bill. That’s why starting estate planning early and implementing it in stages is essential. Also, having an open conversation about estate planning with family members is very beneficial but depends on family dynamics and wealth levels.

Minimise tax liabilities

However, families should take proactive measures to minimise the possibility of facing a substantial IHT bill. By planning ahead and seeking professional advice, individuals can ensure their assets are managed to minimise tax liabilities.

Creating a comprehensive wealth strategy involves considering various factors.

Here are some key points to keep in mind

Lifetime cash flow

We can help you assess your assets and income to ensure we support your desired lifestyle throughout your lifetime. By understanding your cash flow needs, we can assist in structuring investments and creating a sustainable financial plan.

Lifetime gifting

Gifting can be a valuable tool in wealth planning, allowing you to reduce a potential IHT tax burden. We can guide you on the various gifting allowances and exemptions available, such as the annual gifting allowance, wedding gifts and gifts from normal expenditure out of income.

Trusts

Most trusts offer flexibility and control over how your assets are distributed. They can also help reduce taxes on inheritance. This excludes Absolute Trusts, where control over assets is discretionary. Working closely with us, you can explore different trust options and understand how they can be incorporated into your wealth planning strategy.

Pensions

Pensions are important in wealth planning, offering tax advantages and the potential for long-term financial security. We can help you navigate the complexities of pensions, including risk assessment, accessing pension funds and maximising tax benefits.

Protection cover

Protecting your loved ones in the event of death or illness is crucial. We can advise on selecting the right protection products to provide liquidity for IHT and other associated costs.

Business relief

Incorporating business relief into your wealth planning strategy can be advantageous if you own a business or have qualifying assets. We’ll help you understand the eligibility criteria and how to leverage this relief effectively.

Financial control and estate planning

Creating a Will ensures that your assets are distributed according to your wishes. Additionally, appointing a Lasting Power of Attorney provides someone with financial control over your assets and peace of mind if you cannot manage your affairs.

Estate planning is not a one-size-fits-all approach. Although there is no requirement to address IHT, proactive planning can minimise the tax burden on families. Seeking professional advice and taking steps early can help reduce the risk of leaving loved ones with a larger tax bill than necessary.

Source data:
[1] https://www.statista.com/statistics/284325/united-kingdom-hmrc-tax-receipts-inheritance-tax/

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

ESTATE PLANNING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND ON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

Key traits for successful wealth-building

Developing an investment strategy tailored to your goals.

Committing to a financial plan is crucial for building wealth and achieving long-term financial goals. When you have a plan, you are more likely to stay focused on your objectives and take the necessary steps to reach them.

Planning allows you to develop an investment strategy tailored to your risk tolerance and financial goals. It helps you understand different investment options, diversify your portfolio and make informed decisions about where to allocate your funds. A comprehensive investment strategy also addresses potential risks and provides contingency measures.

Basic principles to follow for investing and avoiding costly mistakes

Invest early:

Starting early is critical to building wealth. Investing for a more extended period allows for the power of compounding, where your savings generate even more earnings over time.

Invest regularly:

Consistent investing throughout the year is essential. By investing a fixed amount regularly, you can buy more when prices are low and less when prices are high, potentially reducing the average cost of your investment.

Invest enough:

Saving enough today is crucial for achieving long-term financial goals. Knowing how much you need to save now can help you have a sufficient investment portfolio for your future goals.

Have a plan:

It’s essential to have a well-structured plan to avoid making hasty investment decisions based on short-term market movements. Maintaining perspective and long-term focus can help you stay committed to your plan.

Diversify your portfolio:

Diversification is critical to managing risk and improving your chances of success. Investing in various asset classes, geographical markets and industries allows you to tap into different opportunities and potentially create a smoother investment experience.

Building wealth is a long-term endeavour. A financial plan keeps you focused on the bigger picture, reminding you of your long-term objectives even during short-term market fluctuations or economic downturns. It instils discipline and patience, key traits for successful wealth-building.

Remember, these principles provide general guidance, and it’s always important to consult a financial professional before making investment decisions.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.