Our recent webinar covered the Autumn Budget in October 2024 and explained the implications of key announcements which could affect your retirement planning. The introduction of multiple taxation changes affecting both pre- and post-retirement stages certainly attracted a lot of attention. In light of the fact that tax revenues are at their highest since 1948, these are the key changes from the Budget you need to be aware of:
- Income Tax: From 2028, personal income tax thresholds will rise with inflation, leading to a potential ‘tax drag’ of 30% due to increasing inflation since 2022.
- Employer National Insurance: Increases from 13.8% to 15%, raising employer tax burdens but potentially creates planning opportunities.
- Inheritance Tax (IHT): Frozen until 2030, but pensions will be included in estates for IHT from 2027/28.
- IHT Nil Rate Band: £325,000 for individuals and £175,000 for main residences, totalling £1,000,000 for married couples. Tapered for estates above £2 million.
- State Pension: The triple lock remains, offsetting the loss of the winter fuel allowance.
- Capital Gains Tax: The basic rate rises from 10% to 18%, and the higher rate from 20% to 24%, reducing benefits on investment accounts.
What Does All This Mean?
As ever, you need to think about whether your savings will last throughout retirement. This is all the more important if you’re considering early retirement.
If you have both a house and a pension pot, inheritance tax will be a significant consideration, especially with pensions moving into the inheritance tax net in from 6th April 2027. Many of you will now need to think carefully about how to mitigate the increased tax burden.
These considerations are good ‘whys’ for seeking advice from an independent financial adviser. Effective planning is proactive, brings future concerns into the present, and adjusts your financial plan accordingly.
Let’s look at two examples:
- Dave and Sarah – their ‘why’? To know if their savings will meet their retirement goals.
Dave and Sarah are planning to retire at 60, aiming for a monthly spend of £4,000 and holidays costing £18,000 annually. They own a mortgage-free home worth £700,000 and have various pensions. A cashflow stress test shows their money could run out by age 78, but with proper planning, they could extend it to age 100.
How?
They could optimise their pensions by using salary sacrifice, which would provide 40% income tax relief, 2% National Insurance savings and an employer contribution, which would result in a 49.5% uplift in contributions.
This would help them get the most from their savings and build a strategy to meet their retirement goals.
- Jennifer – her ‘why’? To mitigate against inheritance tax
Jennifer, a tech professional, plans to retire at 60 and is facing growing inheritance tax liabilities as her pension will be included in her inheritance tax calculation from 6th April 2027. Careful planning shows how she might be able to reduce the IHT bill her son would have to pay after she dies.
How?
Having used most of her tax allowances already, she could consider life assurance investment bonds. An offshore bond in a loan trust structure is another option. It would allow her to settle a loan with trustees who invest in an offshore bond.
This gives Jennifer control over when the investment bond is cashed in, deferring Capital Gains Tax while providing flexibility to distribute funds to her son, Sam. However, since she retains control over the loan, the funds remain inside her estate for Inheritance Tax purposes, so careful planning is needed.
Retirement Drawdown and Income Options
During the webinar, we also talked about the ‘retirement mountain’ – the peak of wealth you build during your working years, followed by the downward slope of expenditure during your retirement years.
We looked at how investments with different risk profiles can generate different returns.
Then we showed how using different sources of income in different sequences can help ensure money lasts.
Managing ‘sequence risk’ is essential. There are three main income options:
- Drawdown: Flexible but carries investment risk.
- Annuities: Guaranteed income for life, more attractive with rising yields.
- Hybrid Approach: A combination of both to provide underlying security with a degree of flexibility.
For Jennifer, phasing her income by taking tax-free cash and structuring income to align with personal allowances could work. She could also use a cash buffer or gilt laddering (investing in UK government bonds) for stability in the early retirement years, while balancing risk.
For Dave and Sarah, using Dave’s defined benefit scheme for secure income or combining it with an annuity could provide them with underlying security coupled with a degree of flexibility, while managing tax efficiently in the early years of retirement.
Legacy Planning
Legacy planning is also a key aspect of financial planning, especially with increased inheritance tax concerns. But clients often struggle with balancing reducing inheritance tax and maintaining control over their assets. Options like downsizing, gifting, charitable donations and insurance can all help reduce the impact of inheritance tax. And for more complex needs, trusts like discounted gift trusts or loan trusts may be beneficial.
For Jennifer, she could use a combination of strategies like loan trusts, tax-free cash and larger gifts at certain ages to minimise inheritance tax while keeping control of her estate.
Conclusion
No matter what your ‘why’ for seeking advice from an independent financial adviser, effective retirement and legacy planning require proactive strategies to manage taxes and risk, especially as pensions will become part of your estate from 6th April 2027. Therefore, it’s essential to make decisions now to maximise your income and secure your legacy.
A Retirement Strategy Session with one of our advisers can:
- Review your retirement goals and whether your current savings are on track;
- Identify key strategies to close any gaps in your plan; and
- Explore how recent budget changes will impact your future finances.
Book your free, no-obligation Retirement Strategy Session today!
