Article by Phil
In the future will more people need pension help to save tax?
Perhaps. The government has announced a consultation to look at the Lifetime Pension Tax Allowances (LTA) with a view to maybe abolishing it. The consultation was issued on 19th July and is considering changes that could come in from April 2024. On the face of it changing or abolishing the LTA would be a good thing in that it would save money for those at the higher end of pension incomes.
There are 15,000 people affected by the LTA, including many senior doctors and consultants. It is these people that the pension help consultation is trying to resolve.
However there appear to be other potential back door changes also being considered. One is the abolition of tax-free pension transfers on death.
Currently if someone dies under the age of 75 and their pension pot hasn’t been touched, it transfers to the beneficiary tax free. This has been the case since 2015. This is under threat from the consultation. It’s proposed that lump sums would remain tax free, but income drawn down would be taxed at current income tax rates. That seems strange and many in the pension industry feel that this should be out in the open and scrutinised as potential new pension tax policy, which is what it effectively is.
Savers already overpay tax on pension withdrawals. HMRC published figures showing refunds of £53 million in the last quarter for savers who withdrew money from their pensions for the first time. If the pension company doesn’t have a tax code, then they will apply a 25% charge. If that’s wrong, then the overpaid tax needs to be reclaimed. The £56 million refund was up by over £20 million on the same period last year. Over 16,000 people were affected and needed pension help before being paid a refund.
HMRC says that all over payments will automatically be refunded. But if you don’t claim it might take a while.
In fact, tax in general has been singled out for a review.
The Treasury Committee has ordered a review in the number of tax reliefs available (25/7/2023) and details of what this cost. There are over 1,180 tax relief schemes currently operating which makes the tax system almost impenetrable. When they last looked at a just 100 tax relief schemes, they found that they had cost the exchequer over £190 billion. Let’s see what the overall figure is.
Tax on pensions is set to be a big issue well into the future meaning more pension help will be required.
In the latest report on Intergenerational Wealth published by Time Investments (FT Adviser 21/7/23). They found that over £300 billion in assets are going to be transferred to 300,000 30- to 40-year-olds in the next 10 years. That’s a staggering amount. The report found that of those who will be inheriting the wealth:
- 37% said they already had a financial adviser
- But almost half still took their financial advice from their parents
- Of those using an adviser, two thirds used their adviser to help with investment decisions and one third with pension help
- Only half have a relationship with their financial adviser but still 50% said they would keep the same advisor
These numbers do demonstrate that those with wealth do tend to use the services of financial experts far more than the majority of ordinary savers.
It’s different story with younger people. The latest survey from Shepherds Friendly found that the top 10 sources of financial advice for 18- to 24-year-olds are:
- Tik Tok 25%
- Bank 24%
- Parents 23%
- Google 21%
- You Tube 21%
- Other online 16%
- Friends 15%
- Workers 15%
- TV Shows 14%
- News 14%
Some of these are worrying to us as financial advisors. Especially Tik Tok and You Tube.
In other pension news. The Bill to extend pension Auto enrolment from 21 down to 18, was passed by the House of Lords. Unfortunately, there isn’t enough time for this to be enacted until parliament come back in September. A delay which has disappointed may in the pensions industry. It’s estimated that 600,000 young workers will benefit from the change in terms of starting their pensions earlier.
Existing pensioners may also benefit from changes to the rules. Currently if you move to live abroad your UK pension is still paid but you don’t receive any increases. (Unless there is a special agreement between the country and the UK) But pressure is mounting to change the rules. If this changes, it’s estimated that it would cost the taxpayer an extra £800 million a year.
