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As we wait for the elections this week, many clients are wondering what they should be doing with their pensions.
It appears the spectre of the lifetime allowance has now finally gone away, albeit after a brief swansong a couple of weeks ago. The latest change to the regime, announced back in 2022, means Rachel Reeves has stated ‘it’s too complicated’ to resurrect the lifetime allowance charge.
One thing is for sure, pensions simplification promised in 2006 has been anything but and constant tinkering makes the possibility of getting it wrong much higher. This is proved by the latest introduction of the ‘Lump Sum Allowance’. For most people this is relatively straight forward (in the context of pensions!) but for some it’s fiendishly complicated.
There is always much talk about tax free cash being removed. To a degree this is already happening. The first cut came in the 2012/13. Until this point the lifetime allowance had been increasing steadily each year from £1.5m to £1.8m. In 2012, the vast majority of people could access 25% of their pension fund tax free. For example, a person with a £1.6m pension fund in 2012 would be able to take £400,000 of their pension tax free. Now a person with a £1.6m pension fund (and no protection) can only take £268,275 as this is the maximum available under the new rules. 25% now becomes 16.8%. With the Lump Sum Allowance effectively frozen, this fiscal drag will continue.
In terms of what happens next and what action to take, the earliest point the budget can be called would be September. As pension administrators need time to implement changes, it is likely that not much will happen before the 25/26 tax year. In my view, there is going to be a wholesale review of the pension landscape where all sorts of measures will be on the table, adding death benefit tax back in, minimum income withdrawals, flat rates of income tax relief on contributions are all possibilities.
What should you do now? Make sure you understand your current position. The key factors vary significantly from one person to the next. Some clients should be acting now, for example applying for transitional arrangements, some should be exploring options for tax free cash, some should be ensuring that the structure of their pension assets allow them to move quickly in the event of a small window before any proposed changes come in. Taking proper advice is key in this area and we are here to help.
Anne McClean, Head of Wealth
amcclean@ipscap.com
This document is issued by IPS Capital LLP of 4 Eastcheap, London EC3M 1AE; a limited Liability Partnership registered in England OC328405 and authorised and regulated by the Financial Conduct Authority.
This document is issued in the UK only. This publication does not constitute advice and you should not make any investment decision based on it. The information contained herein is correct to the best of our knowledge and we may not be held liable for any errors or omissions. This information is based on current information in respect of UK Pensions. IPS Capital LLP does not offer tax advice and you should seek professional tax advice for your own circumstances.
