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Balancing the nation’s books

The new government has faced the challenge of assessing the state of public spending and has identified a significant spending gap in the nation’s finances. This gap underscores the complexities of balancing the nation’s books while striving to implement growth-oriented policies. The Autumn Budget will likely address these challenges head-on, proposing measures to stimulate economic activity while ensuring fiscal responsibility.

The outcomes of this Autumn Budget will have far-reaching implications, potentially influencing everything from tax rates and public services to business investment and consumer confidence. As such, it is a pivotal moment that will shape the economic landscape in the months and years ahead.

Economic stability and growth

Following an ambitious King’s Speech, the new government’s first budget will seek to announce initiatives for growth alongside the activation of plans to balance the books across the spectrum of personal and business taxes and employment policy. But what could the new Labour government mean for your finances?

Prime Minister Starmer’s Labour manifesto emphasised wealth creation. The manifesto aimed to grow the economy and ‘keep taxes, inflation and mortgages as low as possible’. To fulfil those plans, Labour may have to make changes that could affect taxes, allowances, and various investment schemes and rules. Given the pledges made in the manifesto, doing so may prove challenging.

Pledges and challenges

Although the manifesto is not legally binding, it best indicates Labour’s government plans. Here, we highlight what the pledges could mean for your finances.

Pensions

Ahead of launching its manifesto, Labour announced that it would drop plans to reintroduce the lifetime allowance, a cap on how much people can save into their pensions before paying tax. Importantly, Labour committed to upholding the pensions ‘triple lock’, which ensures that the State Pension will continue to increase yearly in line with the highest of three factors: wage growth, inflation or a minimum of 2.5%. This policy is designed to protect the purchasing power of retirees and ensure they can maintain a stable standard of living in retirement.

In the Autumn Budget, there are rumours the Chancellor could look to change pension tax relief, with speculation that this might be one of her targets. One option for Reeves is to cut pension tax relief to 20%. This would be no change for basic rate taxpayers. But it would be a considerable reduction for higher and additional rate taxpayers, who receive 40% and 45% relief on some or all of their pension contributions.

However, further clarity on the scope of this and the challenges they are looking to address has yet to be made available. In the meantime, making the most of all your pension allowances is essential to build your financial resilience in retirement.

Inheritance Tax

Although Inheritance Tax has been widely discussed recently, it was a noticeable absence from the Labour manifesto. It contained no comments on future Inheritance Tax rates or reliefs (such as Business and Agricultural Relief).

VAT

The Labour manifesto confirmed that it intended to introduce VAT on private school fees and will end business rates relief for the schools, with such measures estimated to raise around £1.5bn for the government. The delay until 2025 gives families additional time to consider their options and improve their planning. Families typically have a finite number of financial planning options that can be used to meet additional expenditures, namely reducing other expenditures, increasing earnings, targeting higher returns (with the additional risk that comes with this), looking to borrow and gifting from relatives.

Income Tax

Whilst Labour had pledged not to increase taxes on working people (including Income Tax at the basic, higher and additional rates), this does not preclude utilising fiscal drag to increase Income Tax revenues. Fiscal drag occurs when inflation and income growth push taxpayers into higher tax brackets, which will remain frozen until at least 2028. This policy results in higher taxes for affected individuals, even though the tax rates themselves have not changed.

One area to watch could be taxes on dividend income. These have not been mentioned and may be outside the scope of the pledge as a non-working source of income with its own Income Tax rates. Moreover, Labour has pledged to reform the taxation of carried interest, which is a share of profits from a private equity, venture capital or hedge fund. The manifesto did not specify exactly how Labour would close the carried interest ‘loophole’, but the intent is clear: private equity is the only industry where performance-related pay is treated as capital gains. Labour will look to close this loophole.

Capital Gains Tax (CGT)

The Labour manifesto did not specifically mention CGT rates, and the party’s senior figures have said that they have no plans to reform these rates – with the exception of their proposed policy on carried interest. That said, future increases have not been ruled out entirely.

National Insurance contributions

Labour supported the Conservatives’ cuts to National Insurance in the 2024 Spring Budget, and its manifesto outlined a commitment not to raise current rates. However, Labour may utilise fiscal drag with frozen tax rates until 2028.

As the 30 October Autumn Budget approaches, individuals and families should take proactive steps to manage their personal finances. Anticipating potential changes and being prepared can significantly affect one’s financial wellbeing.

Remember, proactive planning is key to financial stability and peace of mind. Don’t wait until the last minute – take action now to secure your financial future.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL 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.

Paying significant amounts of tax to access pensions

This is because when people fully encash their pension, HMRC taxes anything above their 25% tax-free pension cash as income, subject to the LSA position of the individual, so it’s taxed like an ongoing salary. The analysis shows there are hundreds of people out there paying significant amounts of tax to access their pensions. It’s impossible to know whether their circumstances warranted them being subject to a big tax hit, but for most people, it’s something you’ll want to avoid.

It’s important to remember that most pension income is subject to tax, like other income. Fully encashing a large pot will almost always mean a very large tax bill, sometimes taking away many years’ worth of savings. Often, when people fully withdraw their pension, it is simply to move the money to their bank account. Not only does this mean their savings become eligible for tax, but they’re also potentially giving up investment returns.

Withdrawing retirement savings more tax-efficiently

The good news is that there are ways to make withdrawing your retirement savings more tax-efficient, and it’s possible to spread your withdrawals over many years, which can be more efficient. Taking just one option at retirement, such as cash or an annuity, could mean you miss out on an opportunity to maximise tax efficiency and consider your financial needs in the round.

It’s worth considering a ‘mix and match’ approach to your retirement income, which could help you achieve the best of all worlds – you could, for example, annuitise a portion of your pension fund to cover essential outgoings and leave the rest in drawdown to access as and when you need it. Annuitising is the process of converting a lump sum of money into a stream of regular payments that are made over a specified period of time. Be sure to speak to your pension provider about your options, and we’d strongly recommend seeking advice or guidance when taking your pension.

How much tax will I pay on my pension pots?

First, most individuals will receive 25% of their pension pot tax-free, while the remaining 75% is taxable. The amount of tax payable on that 75% depends on factors such as your tax code, the amount you withdraw at a time and whether you have any other income sources.
It is important to remember that the total amount you can typically take tax-free across all your pension pots is now £268,275 unless you have specific protections in place. Most people cannot access their pension pots until they reach age 55 (rising to 57 on 6 April 2028).

Understanding your Personal Allowance

Everyone is entitled to a tax-free Personal Allowance each tax year, just like when working. For the 2024/25 tax year, the Personal Allowance is £12,570, which has been frozen at this level for several years. Any amount above this will be taxed as earned income according to your tax band. The simplest way to avoid paying excessive tax is to ensure you do not withdraw more from a pension pot than necessary. Taking it in small, regular amounts could help keep your tax bill down.

Remember, you only pay Income Tax on anything over your Personal Allowance. Therefore, if a pension pot is your sole income source, you could withdraw £12,570 from it each tax year without paying any tax. Conversely, taking large lump sums in the same tax year (outside of your 25% tax-free entitlement) could push you into a higher tax bracket.

Combining tax-free with taxable withdrawals

You do not necessarily need to take all of your tax-free lump sum at once. Often, you can take it in chunks over several months or years, provided your pension plan allows this. For instance, you could withdraw from the taxable portion of your pot and top it up with some of your tax-free amount.

Exploring ISAs as an income source

Unlike your pension pots, savings in your Individual Savings Accounts (ISAs) are generally not taxed upon withdrawal. You can contribute up to £20,000 in the 2024/25 tax year (across all your ISAs) and will not pay tax on withdrawals or gains. If you have savings in an ISA, consider using them to supplement your pension income to help reduce your tax burden. Alternatively, you could use your ISA to cover your entire retirement income before touching your pension.

For some, the early years of retirement can be more costly, necessitating a higher income. Hence, using tax-efficient withdrawals from your ISA to cover this period might be sensible. As you age and settle further into retirement, your expenses may decrease. Perhaps you have paid off your mortgage, enjoy less expensive hobbies or your children no longer rely on you financially. This could mean you can eventually afford to live off a more modest pension income, thus reducing your tax liability.

Source data:

[1] Retirement income market data 2021/22 | FCA
[2] Calculated using Which’s tax calculator, Income Tax calculator and salary calculator for 2024/25, 2023/24 and 2022/23 – Which? Figures rounded to the nearest £100.

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

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.

Creating opportunities for financial discussions

Having open conversations from a child’s early years allows parents to share their values and encourages children to formulate their own. It’s not all about numbers. A common misconception is that talking to children about money involves disclosing amounts or elements of the family’s financial life and position that may not be appropriate to share with children or young adults. Instead, the conversation should centre around communicating values and principles for managing money effectively.

The goal is to share with them what’s important to you about money and to equip them with the skills and confidence to manage their own wealth effectively. Identify any pitfalls that you wish for your child to avoid. This could be anything from entitlement to lack of confidence. Think carefully about this and find ways to discuss your views with your child.

Promoting financial confidence through practical activities

To reinforce the concepts discussed, consider incorporating practical activities into your routine. For example, you could start with simple budgeting exercises, setting savings goals for specific items, or even discussing the basics of investing in a child-friendly manner. These hands-on experiences can make abstract concepts more tangible and relatable for children.

Remember, the aim is for your child to feel comfortable and knowledgeable about financial matters. By encouraging an open dialogue, you are setting a foundation for their future financial well-being. Creating an environment where money can be discussed openly ensures that children feel confident seeking advice and making informed decisions about their finances.

Ages 3-6

Label three jam jars: “Spend,” “Save,” and “Give.” Give your child a regular amount of pocket money and divide it between the three jars. As they age, grant them greater autonomy in allocating their funds to each jar. Allow your children to make their own spending decisions for the spend jar. Resist the urge to give them more money once they have spent all their funds until they have replenished the jar.

The saving jar is ideal for storing

tooth fairy money or small monetary gifts from friends and family. As your child matures, introduce the concept of interest rates by occasionally adding a small amount to the pot. You can further incentivise saving by matching their contributions.

For the give jar, involve your child in choosing a charity or beneficiary. Create memorable experiences around their gift, such as volunteering or visiting the charity to see the impact. This often sparks joy and leaves a lasting impression on children.

From an early age, involve children in shopping decisions. For instance, ask them to choose between a branded product and a white-label good, show them the price difference, and prompt them to choose.

As they age, give them money to allocate to a specific category, like fruit. This grants them autonomy over small financial decisions for the family, fostering a sense of pride in their contribution.

Ages 7-10

Introducing the concept of “needs” versus “wants” is a powerful way to help children decide how to spend their money. Start by having your child list their “needs” and “wants” on a back-to-school shopping list, then discuss how to allocate the budget.
Working for “wants” sets goals that children can feel proud of achieving. Ask your child to draw a picture or write down their want, then give them specific jobs to earn money towards their goal. Celebrate their achievement when they reach it!

Give your child a budget for a family event, such as a birthday dinner. Allow them complete autonomy in allocating the budget, including designing the menu, buying ingredients, and deciding whether to have decorations and cake. This activity is a fun way for children to learn about budgeting and making spending decisions on behalf of the family.

Ages 10-15

In our increasingly digital world, visiting a bank can still be a memorable experience for children. It provides an opportunity to understand the concept of choosing a place to store and manage money. Consider opening a minor or joint account, which will give you full visibility over transactions. Select a bank with an intuitive, easy-to-use app to explore with your child.

Help your child deposit gifts and pocket money, allowing them to watch their balance grow over time. Review monthly statements together, discussing interest rates and payments. This hands-on approach can make financial management more tangible and engaging for young minds.
Engage your child in the world of investments by organising a family stock-picking competition. Each family member selects a company they are familiar with—perhaps one that produces a favourite food or toy—and track its performance over several months. Teach your child how to look up share prices using a stocks app on an iPad or similar device.

You don’t need actually to purchase the stocks. Instead, offer to pay dividends or gains made during this period or award a prize to the winning stock picker. This activity introduces essential investment concepts in a fun and accessible manner.

Ages 15-21

Assist your older child in building a budget for school or university. Show them how to anticipate income or allowance, plan for spending needs, and distinguish between fixed and discretionary costs. Transitioning to a less frequent allowance helps them practice budgeting independently.
Encourage them to allocate funds for an emergency fund to cover unexpected expenses. This preparation builds a solid foundation for financial independence and responsible money management.

Involving a young adult in the family’s charitable giving offers a valuable learning experience about investments and family values without revealing the entire financial picture. If there’s a charitable structure or account within the family, involve your child in deciding which charities to support and how much to donate.

Invite them to attend investment meetings or review investment reports, which will provide insight into asset management. This exposure will foster a deeper understanding of financial stewardship and philanthropy, preparing them for future responsibilities.

Empower your child to build their investment portfolio by giving them money or granting control over their Junior ISA (JISA) at age 16 if applicable. Establish ground rules for accessing capital and income to guide their investment decisions. This practical experience equips them with essential skills for managing personal investments and fostering long-term financial competence and confidence.

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 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.

How to apply for Specified Adult Childcare credits

The process of claiming these credits involves transferring them from the child’s parent to the grandparent providing the care. This can ensure that grandparents do not miss out on valuable State Pension entitlements.

It’s essential for grandparents to be aware of this opportunity and to take the necessary steps to apply for these credits. The application process is straightforward but requires understanding the specific eligibility criteria and documentation needed.

Potential impact on retirement income

By claiming these NI credits, grandparents can see a significant boost in their State Pension over time, which can provide greater financial security in retirement. The increase in pension can make a substantial difference, especially given the rising cost of living and other financial pressures retirees face.

Understanding the long-term benefits and taking action to claim these credits can ensure that grandparents are adequately compensated for the vital support they provide to their families.

Claiming Specified Adult Childcare credits

Grandparents or relatives who assist with childcare must complete a form to claim Specified Adult Childcare credits. The child’s parent must also sign the document to confirm that you provided care during a specific period and agree to transfer their credits to you.

Please note that only one credit can be claimed per household. Therefore, you can only claim once if you care for two children in the same household. However, if you look after children from different families, you can make multiple claims.

How the scheme works

Once you have completed the relevant form, the Specified Adult Childcare scheme transfers NI credits from a parent who does not need them to a grandparent or family member providing the care. These credits can help fill gaps in your NI records. However, it’s important to note that this scheme cannot be used if you are over State Pension age.

If you are a working grandparent, you will not require NI credits as you should already receive ‘qualifying years’ on your NI record, which is subject to earnings. Additionally, there is no minimum number of hours you need to have looked after your grandchildren to be eligible for credits. You could benefit from the scheme if you cared for them all week or just one day a week.

During the coronavirus lockdowns, if you cared for your grandchildren via video or telephone, you can still apply for credits for the tax years 2019/20 and 2020/21 despite being unable to do so in person due to government restrictions.

Source data:
[1] Age UK 08/05/24.

Gen X faces unique challenges

Among Gen X, those aged between 45 and 54, one in three (31%) believe it is unlikely they will ever fully retire. This highlights the pressures the ‘sandwich generation’ faces in their 40s and 50s, who may be caring for both elderly parents and their own children while also needing to manage their own expenses.

This group falls between those who benefit from final salary pensions and younger generations who benefit from auto-enrolment. Similarly, more than a quarter (27%) of millennials do not think they will ever completely retire, with 28% of 25—to 34-year-olds and 26% of 35—to 44-year-olds sharing this sentiment.

Millennials and retirement

Older millennials are likely to face similar pressures to those encountered by Gen X, with auto-enrolment being introduced while they were already in their 20s. A gender disparity also emerges among the survey respondents.

Just one in three women (33%) believe they are likely to completely retire, compared to almost half (47%) of men. A quarter (25%) of Britons also say they do not envisage retiring before the age of 70, and almost a third (30%) want to continue earning to maintain their existing lifestyle.

Continuing beyond retirement age

Over a fifth of the total survey respondents, including 13% of those aged 55 or above, do not think they will ever completely retire. However, not all respondents cite constraints on their retirement ability as reasons for staying in the workforce.

One in six (16%) of those who do not think they will ever completely retire say they enjoy working and aim to continue beyond retirement age. This suggests a changing attitude among those in employment towards the notion of reaching an endpoint in their working lives.

Growing importance of family finances

Almost 10% of those surveyed express a desire to allocate part of their pension pot for their next of kin or relatives. This is cited as a reason to remain in the workforce, aiming to build up their savings further.

Additionally, attitudes towards retirement are noticeably changing. The once prevalent idea that retirement is a fixed event occurring on a predetermined date is increasingly becoming outdated. Significant numbers of individuals are now questioning whether they will ever fully retire.

Uncertainty among Gen X

Uncertainty seems most pronounced among the mid-life Generation X cohort. For this group, retirement is close enough to be a consideration but too far away to be a certainty. This demographic is uniquely positioned, balancing immediate financial responsibilities with long-term retirement planning.

The encouraging news for retirement savers is that they now have more control over their futures than ever before. They can choose when to utilise their retirement savings, and modern technology enables them to manage their money conveniently and efficiently.

Technological advancements

Technology has revolutionised the way individuals handle their retirement funds. Savers can now monitor and adjust their investments in real time, ensuring their money always works effectively for them. This flexibility allows for a more personalised and responsive approach to retirement planning.

Record numbers of people are proactively saving for their retirement. By taking control of our savings, we position ourselves more favourably to control our retirement, ultimately creating a more secure financial future.

Source data:

[1] Research was conducted by Censuswide between 25th – 27th March 2024 of 2000 general consumers, aged 16+, national representative sample. Censuswide abide by and employ members of the Market Research Society which is based on the ESOMAR principles and are members of the British Polling Council.

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.

Community ties and financial concerns

While 29% of over-45s are considering downsizing, a significant 70% are keen to stay in their current homes for the rest of their lives. A third (31%) believe that their house is the right size for their needs and a smaller house would not work for them. Furthermore, 25% are already in their “forever home” and have no desire to move.

A notable 23% of respondents feel attached to their community and do not want to leave, while 22% find the mere thought of moving exhausting. Additionally, almost one in five (16%) say that they wouldn’t see any financial benefit from downsizing once the estimated £9,611 costs are considered.

Growing attachment to home with age

Homeowners’ attachment to their property intensifies with age. Among those aged 75-84, 52% said their home provides reassurance because they know how everything works, twice the number of 45-54-year-olds (26%) who felt this way.

Community plays a crucial role as well, with 57% stating that their home boosts their confidence due to familiarity with their neighbours and surroundings. This figure is significantly higher than the 31% of younger respondents (45-54 years old) who shared this sentiment.

Economic drivers behind downsizing decisions

Interestingly, economic factors often drive downsizing decisions more than wanting to live in an age-appropriate property. Almost half (43%) of those looking to downsize or who have already done so cite easier property upkeep as a reason. Meanwhile, 38% aim to reduce the cost of running their home, and 27% seek to improve their retirement finances.

One in five (17%) mentioned that the cost of living had pushed them to consider downsizing, 8% did it to release cash to support their families, and 5% saw the proceeds as a means to repay debt.

Balancing economics and emotional attachments

As people age, downsizing is often suggested to release some of the value tied up in their homes and find a more suitable property. However, this research indicates that their home, along with the community they live in, offers confidence, reassurance, and security. The primary driver behind any potential move tends to be economic necessity.

For some, downsizing is the right answer. For others, finding ways to boost their retirement finances while staying in the home they love—and can afford to adapt—and the community they know is a better option. A home is much more than a roof over your head; it provides security, confidence, and reassurance as people age.

Source data:
[1] Key Retirement Solutions Ltd – research conducted with 1,000 homeowners aged 45-plus – 27.03.24

How can you make financial planning conversations go smoothly?

Your estate

Let’s begin with inheritance, which is a hugely emotive subject. While discussing who will inherit a portion of your estate after you have passed away might seem difficult, doing so could prevent future difficulties or disagreements. You can explain your plans and why you have made certain decisions.

This could also provide an opportunity to consider if your will needs updating. For example, you might need to amend your will to ensure your estate can benefit from the residence nil-rate band, which could reduce your estate’s Inheritance Tax (IHT) bill.

Lifetime gifting

Although you’ll want to avoid giving away money that you might need in the future – towards care costs, for example – you might wish to consider passing on some wealth to future generations within your lifetime. Using pensions, Trusts, and life assurance are just some ways you can do this. This can be complicated, but we can work with you to give you peace of mind that you’ve laid the firmest foundation for your family’s future.
It’s possible to gift tax-efficiently during your lifetime using various allowances and exemptions. For instance, you can give away up to £3,000 per year free from IHT. Additionally, you can make small gifts of up to £250 per person per tax year. Further, tax-free gifts, such as potentially exempt transfers (PETs), become exempt from IHT if you live for at least a further seven years after making the gift.

Power of Attorney

Dealing with a deterioration in mental capacity can be particularly tough on your family. If you can no longer make decisions for yourself, you’ll want to ensure someone you trust is legally in this position. You can put in place a power of attorney, a legal document enabling you to name one or more people to look after your affairs if you lose capacity.

Without this document, an application must be made to the Court of Protection (the sheriff court in Scotland), which can be a complex, costly, and lengthy process for your loved ones.

“When I’m gone” information

Discuss where you’ll safely leave basic details of your bank accounts, savings, investments, and utility providers. Compiling a list of this information is time well spent and could be invaluable to your family if you lose capacity or pass away. Talking to your family about inheritance might seem difficult, but we can help start the conversation and guide you through what may be an emotional process.

Succession planning

Building a succession plan that suits your needs ensures you have laid the firm foundations for your family’s future. It’s crucial to regularly review and update this plan to adapt to any changes in your personal circumstances or legislation.

The planning process leads to understanding each family member’s motivations and personal drivers. This will enable you to assess the direction of your vision and the options available to your family to create a plan for your family’s future.

THE FINANCIAL CONDUCT AUTHORITY DOESN’T REGULATE TRUST PLANNING AND MOST FORMS OF INHERITANCE TAX (IHT) PLANNING. SOME IHT PLANNING SOLUTIONS PUT YOUR MONEY AT RISK, AND YOU MAY GET BACK LESS THAN YOU INVESTED. IHT THRESHOLDS DEPEND ON INDIVIDUAL CIRCUMSTANCES AND THE LAW. TAX AND IHT RULES MAY CHANGE IN THE FUTURE.

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

Importance of financial security

Have you considered the implications financially if someone in your family were unable to earn money, became ill or were to die prematurely? It’s not something we like to think about, but if you have left regular employment and are now either retired or have become self-employed, then any previous protection you received from an employer becomes your responsibility.

Think about the regular items you and your family spend money on – holidays, socialising, club memberships, family events. Paying for these could become more difficult without the right protection in place.

Covering essential costs first

Start by covering your debts and other essential costs, such as mortgage payments, council tax, utilities and food costs. You can then consider additional protection for other priorities.

The main types of protection include:

Healthcare Insurance
Most UK residents are entitled to free healthcare from the NHS. However, some individuals also opt for private medical insurance. Also known as ‘PMI,’ it pays some or all of your medical bills if you’re treated privately. Basic policies typically cover the costs of most inpatient treatments, and more comprehensive policies extend their coverage to outpatient treatments.

Critical Illness Cover
Critical illness cover pays a tax-free lump sum or regular payments upon diagnosing a specified critical illness. A lump sum could help you to take time off, modify the house, pay for medical treatment, or give you time to recuperate or adjust to your new condition. You can also build in children’s cover – a lump sum payout if they are diagnosed with a critical illness could allow you to take unpaid leave to care for them.

Income Protection
Income protection pays out a regular income to replace income you’ve lost through being unable to work due to sickness or disability. You can choose to take cover for a set period of time – for example, one to three years or until age 65 – and delay the start of payments for a number of months, both of which can help keep premiums down. You can also choose your level of cover – usually somewhere between half and two-thirds of your income.

Life Insurance
Life insurance pays out on death and can provide a lump sum or regular monthly payments over a specified timeframe – say, until children reach a certain age. The payments can help pay off or cover a mortgage, pay for school fees and cover lost income.

Protecting your inheritance

In the event of your death, the size of your estate could determine whether your family or other beneficiaries become liable for Inheritance Tax. This tax can place a significant financial burden on your loved ones if insufficient funds are readily available or if adequate plans are not in place.

Importance of strategic planning

Without proper planning, your family may be forced to sell valuable assets, such as the family home, to cover the tax bill. Therefore, it is crucial to consider all available options to protect your estate and ensure that your beneficiaries receive their intended inheritance.

One effective strategy is to set up a Trust for your dependants. A Trust offers several advantages that can alleviate the financial strain on your family. It pays out quickly upon death, eliminating the need to wait for probate to access the funds.

Setting up a Trust

A Trust also falls outside of your estate, meaning there is no Inheritance Tax liability as long as it has been in place for seven years before your death, assuming the 14-year rule isn’t invoked. Additionally, some Trusts allow you to decide exactly how much money goes where and when, giving you greater control over the distribution of your assets.

Another critical component of Inheritance Tax (IHT) planning is considering pensions. Pensions generally fall outside your estate, offering a significant advantage in reducing potential IHT liabilities.

Complexities of pensions

However, the rules governing pensions can be complex, necessitating professional advice. It is essential to inform the pension scheme of the right beneficiaries and keep your nomination forms up to date to ensure your family benefits as intended after your death. It is also important to note that a nomination form is not legally binding on the trustees. The pension trustees have discretion in order to ensure the benefits are outside the estate of the individual for IHT purposes.

Properly managed pensions can offer substantial tax advantages and financial security for your loved ones. Regularly reviewing your pension arrangements is vital to maintaining the effectiveness of your inheritance planning strategy.

Regular reviews and updates

Reviewing and updating your financial plans regularly is crucial to protect your inheritance effectively. Life changes such as marriages and births, or changes in tax laws, can significantly impact your current strategy. Staying proactive ensures that your estate remains optimally managed and protected.

Inheritance planning is a complex field requiring careful consideration and expertise. Seeking professional advice can help you navigate the intricacies of Trusts, pensions and tax implications, ensuring your legacy is preserved for your loved ones.

Clarify your goals

‘Saving enough for retirement’ has likely been on your list of financial goals for some time, but now is the moment to become more specific. Knowing exactly how much you need to save will give you a concrete target. This amount will depend on factors such as your intended retirement age, your retirement plans, projected investment growth and inflation.

A financial adviser can demonstrate how long your savings may last in retirement, helping you understand if you need to adjust your goals or savings habits.

Review your investment portfolio

When you are in your 50s and nearing retirement, ensuring that your investment portfolio maintains a suitable balance between risk and reward is important. The right level of investment risk depends on how you intend to fund your retirement and how far away your target retirement date is.
For those planning to buy an annuity in a few years, moving your pension fund from stocks to lower-risk assets such as cash may be wise. This strategy helps protect your pension pot from potential stock market crashes just before you need it.

Maintain growth potential with diversified assets

If you plan to fund your retirement through income drawdown or other savings and investments, moving into cash too early could mean your money does not last as long as required. Retaining some exposure to stocks allows your portfolio the opportunity for long-term growth. Considering that your retirement could span several decades, inflation will inevitably erode the real value of your savings and reduce your purchasing power.

One way to mitigate the impact of rising prices is to remain invested in the stock market. Historical data shows that the stock market generally outperforms cash over long periods and exceeds the inflation rate. Diversifying your investments across various asset classes can help your portfolio withstand stock market fluctuations.

Focus on your pension

Pensions are an exceptionally efficient method of saving for retirement, particularly when you’re in your 50s. This is largely due to the tax relief you receive on personal pension contributions. For instance, a £1,000 pension contribution costs just £800 if you’re a basic rate taxpayer, £600 if you’re a higher rate taxpayer or £550 if you’re an additional rate taxpayer. Tax relief is essentially free money from the government, significantly enhancing your retirement savings.

Most individuals can contribute up to 100% of their UK relevant earnings or £60,000, or £3,600 if there are no relevant earnings (whichever is lower) into pensions yearly while still benefiting from tax relief until age 75. However, it is important to remember that your pension annual allowance could be lower if you have a very high income or have triggered the MPAA.

Maximising unused allowances

If you wish to save more than your annual allowance, it might be possible to maximise unused allowances from the previous three tax years under carry-forward rules. This strategy can considerably enhance your retirement savings by utilising every available tax benefit.

Make the most of your tax allowances

There are numerous other tax allowances investors can utilise. For instance, you can invest up to £20,000 (tax year 2024/25) into Individual Savings Accounts (ISAs) to benefit from tax-efficient income and growth.

You can withdraw money from ISAs whenever you desire without incurring any tax; this makes ISAs a useful source of income for those retiring before age 55 (the current earliest age at which you can access your pension subject to health and certain occupations). Additionally, ISAs form an integral part of a tax-efficient retirement income portfolio.

Other allowances to consider

Other allowances include the personal savings allowance, dividend allowance and Capital Gains Tax exemption. You can earn up to £1,000 a year in interest without paying tax if you’re a basic rate taxpayer. If you are a higher rate taxpayer, you can earn £500 a year without paying taxes. Additional rate taxpayers don’t receive any allowance at all.

The annual Capital Gains Tax-exempt amount from 6 April 2024 is £3,000. If the total of all gains and losses in the tax year fall within this exempt amount, no tax will be payable. Gains above the annual exemption will be taxable. The exempt amount cannot be carried back or forward. The unused amount is lost if it’s not used, in part or full.

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

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.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX PLANNING.

Assessing your goals

The right decision for you will largely depend on what you want to do with your money and your needs and goals, which we can help you assess. In the meantime, here are some of the main options to consider.

Cash savings account

A cash savings account is a good choice if you want to use your lump sum to fund short-term goals – a holiday or new car, perhaps – or if you’re not quite sure what to do with it yet. By holding your lump sum in a cash savings account instead of investing it in the stock market, you won’t risk your money falling in value just before you need to access it.

If you don’t need your money for several months, you may wish to consider a notice or fixed-term savings account, as these may offer higher rates than easy-access savings accounts. It’s always worth shopping around to find the best rate on your savings, as a difference of only 0.5% could significantly impact large sums of money.

UK Government Bonds

UK government bonds (‘gilts’) could be an attractive choice if you want to use your windfall to fund a medium-term goal. Gilts are secure savings vehicles guaranteed by the government and listed on the London Stock Exchange.

If gilts are held inside an Individual Savings Account (ISA) or other tax-free wrapper, there is no Capital Gains or Income Tax to pay. If held outside of an ISA or similar, gilts are free from Capital Gains Tax when you profit from a trade, but any income you get is subject to Income Tax.

Stock market investments

For longer-term goals, such as retirement or leaving a legacy for the next generation, you may wish to invest a portion of your lump sum in the stock market. Although the stock market is volatile, history shows that it tends to outperform cash and bonds over extended periods. You should be comfortable committing your money for at least five years, ideally longer. This will hopefully give your investments time to recover from any stock market downturns.

One way to reduce risk is to spread your money across different asset classes, such as equities, bonds and cash, as well as across sectors and regions. This is because different assets, sectors and regions tend to perform differently under various market conditions. We can assist you in building a diversified portfolio that suits your needs and attitude towards risk.

Investment ISA benefits

If you haven’t utilised your ISA allowance this year (2024/25), investing your lump sum in an Investment ISA will potentially allow it to grow over the long term while also shielding it from Capital Gains Tax (CGT) and Income Tax. If you sell investments outside of an ISA, you could be taxed on your profits above your annual CGT exemption.

Additionally, if your investments pay dividends or interest, this could be included when calculating your overall Income Tax bill, potentially pushing you into a higher Income Tax bracket. The ISA allowance currently stands at £20,000. It is a ‘use it or lose it’ allowance, meaning you cannot carry it forward from one tax year to the next.

Maximising pension contributions

Another option is to maximise your annual pension allowance. You can invest up to £60,000 or 100% of your UK relevant earnings, or £3,600 if you have no relevant earnings (whichever is lower) into pensions yearly and benefit from Income Tax relief up until age 75. Income Tax relief provides an immediate boost to your personal pension contributions, helping to increase how much money you have at retirement.

In some circumstances, you might be able to ‘carry forward’ unused annual allowances from the previous three tax years. Remember that your pension annual allowance might be lower than £60,000 if you earn a high income or have already flexibly accessed your defined contribution pensions. We can help you determine how much your annual allowance is and whether making a pension contribution is the right choice for you.