What the Budget means for your retirement plans

Published on April 28, 2021 by Andrew

Last month, Rishi Sunak delivered his spring Budget. He announced a three-part plan aimed at clawing back the government’s coronavirus spending, providing continued support to those struggling due to the pandemic, and looking ahead to Britain’s post-Brexit economy.

Although the chancellor didn’t announce any large tax rises, the freezing of several allowances and thresholds could have an impact on your retirement plans.

Here we take a look at the impact of the Budget on your income, savings, and your pension.

The Lifetime Allowance (LTA) freeze could lead to an unexpected tax charge

What was announced?

The LTA is a limit on the amount you can withdraw from your pension without triggering an additional charge.

In the lead-up to the Budget, the LTA amount had been expected to rise. Since 2015 it has increased in line with the consumer price index, and this would have seen a 0.5% rise to £1,078,900. Instead, the chancellor froze the limit at £1,073,100.

The chancellor also announced that the limit would remain frozen until 2026.

The current limit of over £1,000,000 might seem like a lot but as your pension pot grows over the next five years you might find yourself getting close to or exceeding the limit.

FTAdviser suggests the LTA could have risen to around £1.2m by the 2025/26 tax year assuming a CPI rise to 2.5%.

What does it mean for you?

You could be liable for an LTA charge on any pension withdrawals exceeding the LTA limit. The size of the charge will depend on how you access your pension.

If you choose to receive an income from the excess amount you will be taxed at 25%. Taking a lump sum will leave you liable for a tax charge of 55%.

How can the Pension Planner help?

When measuring your pensions against the LTA, the combined value of all your defined contribution (DC) and defined benefit (DB) pensions is included, but your State Pension is not.

If you think you might be close to triggering the LTA, either now or by the time you come to retire, get in touch. We can help you calculate your pension values and put a plan in place to mitigate the impact of a charge.

Income Tax thresholds have risen this year but will then freeze until 2026

What was announced?

The Income Tax Personal Allowance has been raised for the 2021/22 tax year, as has the higher rate threshold.

The amount you can earn without paying Income Tax has increased from £12,500 to £12,570 for basic-rate taxpayers. If you pay higher-rate tax, the allowance has increased to £50,270. Both amounts are now frozen until 2026.

What does it mean for you?

Not only do the threshold rises fall below anticipated wage growth for this year, as your wages increase over the next five years you could pay more tax. You might even be pushed into a higher tax bracket.

The freeze is part of the government’s attempt to claw back its coronavirus spending, with official forecasts suggesting it could raise an extra £8.2 billion by 2025/26.

The increased tax could affect the size of the pension contributions you can make but paying your future self first remains as important as ever.

How can the Pension Planner help?

We can help you put a long-term retirement plan in place. We’ll then review it regularly to ensure it remains on track.

While regulatory changes and stock market movements can impact your pension fund in the short term, it is important to remember that your plan is a long-term one. If your later-life goals haven’t changed, it is unlikely your retirement plan will need to either.

If you are worried about the impact of any Budget changes on your retirement plans get in touch.

Pensions remain a tax-efficient way to pass on wealth as Inheritance Tax (IHT) rates are frozen

What was announced?

The IHT threshold has been frozen at £325,000 and the “residence nil-rate band” remains at £175,000.

The threshold has been at its current amount since 2009. Had it risen in line with inflation it would have been closer to £450,000 today.

What does it mean for you?

As with other allowance freezes, the effects will be felt as inflation rises over the next few years.

The government expects the IHT freeze to raise £985 million extra in 2025/26. A freeze on Capital Gains Tax (CGT) could make an extra £65 million by the end of this parliament. The move helps to offset the cost to the Treasury of the Stamp Duty holiday, estimated at £1.6 billion over the next four years.

How can the Pension Planner help?

There are many ways to manage your estate and make tax-efficient plans to pass on your wealth.

One way is through your pension. Unused pension funds fall outside of your estate for IHT calculation purposes, so speak to us if you are worried about the impact of the IHT freeze on your estate planning.

Get in touch

Our team of finance professionals can help you mitigate the impact of the Budget changes, putting a long-term plan in place that aligns with your retirement goals. Please get in touch to find out what we can do for you. Email at info@thepensionplanner.co.uk or call 0800 0787 182.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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