After the April 2023 Spring Statement was delivered by chancellor Jeremy Hunt, your wealthy clients might have picked up the phone and requested a meeting with you – and for good reason.
Indeed, not only did Hunt increase the Annual Allowance to £60,000 for most earners, but he also shocked many by announcing that the Lifetime Allowance (LTA) tax charge would be removed immediately.
The LTA stood at £1,073,100 in the 2022/23 tax year, meaning pension wealth that exceeded this threshold could have received a penalty of up to 55% upon withdrawal.
The chancellor went on to say that he planned to abolish the LTA altogether in a future finance bill.
This news came after 2022 research revealed that in the decade between 2010 and 2020, breaches of the LTA had increased by more than 1,000%, PensionsAge reports. The findings showed that, on average, LTA tax charges incurred a bill of more than £40,000 in the 2019/20 tax year.
Now that this tax charge has been cancelled, your clients could have the opportunity to save even more into their pensions without the looming concern of an additional bill.
So, keep reading to learn two timely tips for discussing the LTA tax removal with your wealthy clients.
1. Ensure your clients understand what the removal of the LTA tax charge means for their pension wealth
Although the pension benefits of the LTA tax charge removal may seem clear to you, it’s important to remember that your clients aren’t financial planners and may not know the full story.
So, when discussing what the removal of the LTA could mean for their pension wealth, it may be constructive to take things step by step.
As such, you could start by reminding your client of the limits that the LTA placed on their pension wealth.
For instance, they may have reduced or stopped pension contributions to avoid reaching it when the tax charge was still applied. So, you could emphasise that this is no longer the case, and that they may now be able to contribute into their pension without facing additional tax later.
Here, it may be helpful to mention the Pension Commencement Lump Sum (PCLS). Although the LTA tax charge has been removed, the maximum PCLS has been maintained at its current level of £268,275 – 25% of the previous LTA amount.
As a result, although your clients can amass a large pension pot without an LTA tax charge, they may still need to pay attention to the PCLS when they begin drawing an income from it.
Talking through exactly how the law has changed may help your clients to make the most of the pension opportunities that are now available, without causing them further confusion or worry.
2. Discuss any potential changes to their financial plan
Now that the LTA tax charge is no longer set to be applied to pension wealth over £1,073,100, your wealthy clients may wish to capitalise on this opportunity.
Indeed, it’s worth noting that according to a survey of higher-rate taxpayers, published by Professional Adviser, 16% of people said they had previously stopped paying pension contributions as their funds had neared the LTA.
In contrast, following the chancellor’s removal of the tax, the research found that:
- 23% said they had delayed, or would likely delay, their retirement plans to make further pension savings.
- 10% said they had come out of retirement, and 6% planned to return to work.
- Those who increased their pension contributions did so by an average of £650 a month.
Like some of the survey respondents, your wealthy clients may have avoided paying into their pension for fear of hitting the LTA threshold; now, they can keep saving tax-efficiently for the years to come.
In these conversations, you may wish to highlight some key benefits of increasing pension contributions, such as:
- Tax-efficient estate planning. As pension pots do not usually form part of a person’s estate for Inheritance Tax (IHT) purposes, your clients may now be able to use their pension as a tax-efficient legacy planning tool.
- Boosting their later-life income. The cost of retirement is increasing, with inflation on the rise and many people living longer than ever. As reported in the Times, someone who lives to 100 may need £100,000 more in their pension than someone who lives to their life expectancy. So, your clients could see the LTA tax removal as an opportunity to boost their later-life income, so they can retire with greater peace of mind.
At the same time, it’s important to maintain your clients’ awareness that things can always change. As such, it may be prudent to discuss the following:
- Labour leader Keir Starmer has vowed to reverse this move if his party wins the next election. The next general election is set to happen before 28 January 2025. If Labour wins, Starmer has promised to reinstate the LTA tax charge, the Evening Standard reports. While the future of UK politics is unknown, it may be wise to discuss this possibility with your clients.
- A larger pension may mean a higher Income Tax bill in retirement. While the additional LTA tax penalty is gone for now, if your wealthy clients build up a large pension, they may wish to withdraw more each year in retirement. Doing so could push them into a higher Income Tax band than they anticipated.
Laying all the potential outcomes out for your wealthy clients may enable them to make a more informed choice about their pension contributions, retirement, and legacy plans.
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This blog is for general information only and does not constitute advice. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax or estate planning.
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 tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.