Why discussing the State Pension triple lock could benefit all your clients

As the tax year end approaches, you may be planning to talk to your clients about changes that could affect their financial plans.

The Capital Gains Tax (CGT) Annual Exempt Amount and Dividend Allowance are both set to halve in April, and several other key tax thresholds will remain frozen. These are factors that are likely to affect your wealthy clients significantly.

One more positive change taking place in the 2024/25 tax year is the State Pension triple lock, which is set to push the State Pension up by 8.5%.

While this may not appear to be the most pressing financial event for clients with substantial wealth, the triple lock is set to increase the full new State Pension from £203.85 a week (a little more than £10,600 a year) to £221.20 a week (around £11,501 a year).

Keep reading to find out why it may be constructive to discuss the State Pension triple lock with all your clients before April 2024.

The triple lock could increase your retired clients’ tax burden in the face of Income Tax threshold freezes

Four Income Tax allowances and thresholds are set to remain frozen in the coming tax year. These are:

  1. The Personal Allowance (frozen at £12,570)
  2. The upper earnings limit for the Personal Allowance (the Personal Allowance will disappear completely if an individual earns £125,140 or more)
  3. The additional-rate tax threshold (frozen at £125,140 after being reduced from £150,000 in the 2023/24 financial year)
  4. The higher-rate tax threshold (frozen at £50,271, which Professional Adviser says could push nearly 1.5 million people into a higher tax band by 2027).

Understandably, these threshold freezes are likely to cause fiscal drag for a number of earners, especially those paying higher- and additional-rate tax.

So, if your retired clients are drawing a significant amount from their private pensions each month, and perhaps taking other forms of income from savings and investments too, their tax burden could be set to increase in 2024.

As such, discussing the State Pension triple lock with your clients could help them understand how an increase in their payments, while positive news overall, may also contribute to this fiscal drag.

There are several routes your clients could take to mitigate or offset an Income Tax rise if they are on the cusp of entering a higher tax band, such as:

  • Drawing less from their pensions, savings, or investments each year, to even out their income after their State Pension payments increase
  • Reinvest their State Pension payments into a personal pension pot and receive some tax relief. If they have triggered the Money Purchase Annual Allowance (MPAA), they may only be able to reinvest £10,000 a year back into their pension pot. Tax-relievable contributions are limited to 100% of their earnings, or £3,600 a year if more, and are only applicable before age 75 is reached.

A conversation about the State Pension triple lock before 6 April 2024 could help your retired clients anticipate changes to their Income Tax liability and prepare accordingly.

Your retired clients may wish to save or invest the additional State Pension funds they receive

In addition to tax factors that the State Pension triple lock could bring up, your retired clients might wish to use this increase to their advantage.

Indeed, your wealthier clients may have no need for the additional funds they are set to receive, which could be worth more than £900 a year. So, now may be the time to discuss how they could use it to benefit either their future selves or their loved ones.

Some options your clients could consider are:

  • Placing the money in a rainy day fund
  • Investing it either into their personal pension pot or investment portfolio
  • Routing the funds into a child pension or Junior ISA (JISA) for their children or grandchildren
  • Offering the money as a financial gift to mitigate Inheritance Tax (IHT) later on. To remain IHT-efficient, it may help your clients to limit the total amount they give to the annual gifting exemption, which stands at £3,000 as of 2023/24.
  • Making a tax-efficient charitable donation
  • Putting the funds aside for later-life care.

Deciding how to use this financial opportunity as soon as possible might enable your clients to begin saving or investing the funds immediately after the new tax year begins.

Clients approaching retirement could boost their State Pension eligibility through voluntary National Insurance contributions

If you have clients who are not yet receiving the State Pension, it may still be worth discussing it with them.

Seeing as the triple lock is set to increase the value of the State Pension, your clients may wish to ensure they are eligible for the full new State Pension before they reach retirement. They will normally need 35 “qualifying years” on their National Insurance (NI) record to receive the full entitlement. Some individuals with longer NI records could need only 30 qualifying years.

Fortunately, they can fill in any gaps in their NI record between 2006 and 2017 by paying voluntary National Insurance contributions (NICs) before April 2025, and have six years to fill any later gaps too.

While there is an initial cost to “buying” NICs they did not pay in previous years, your clients could earn this initial cost back several times throughout their retirement if they receive the State Pension for a number of years.

As such, even those who are not yet retired could benefit from a conversation about the upcoming triple lock.

Get in touch to become part of a network that supports IFAs throughout their career

From building a new firm to making exit plans, the Corbel Partners’ network exists to nurture IFAs throughout their careers.

To learn more about how we could help you, email hello@corbelpartners.co.uk or call 01925 637891.

Please note

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 value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate tax and estate planning.

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