Transcript

Martin Stanley  00:19

Good evening ladies and gentlemen, and thank you for joining this evening for our latest seminar, which is on the subject of the lifetime allowance. This is a subject you might have read about in the newspapers, and there has been a lot about the lifetime allowance in the newspapers at the moment, because it has been the subject of the recent chancellor’s budget. The title of today’s seminar is Navigating a Window of Opportunity for Lifetime Allowance. We will be talking a little bit about politics and talking about the impact of the next election. We do not like to talk about politics too much here, but in this case, political ramifications often have an impact on pensions. And in this case, we think there might be an opportunity that you should take advantage of. So the presenter today is going to be Scott Gallacher who will join me in a moment. My name is Martin Stanley, I am a chartered financial planner with Rowley Turton, and I am pleased to introduce our seminar today. Before we go on, there are a couple of things to say. Firstly, today is one of our more technical presentations. If you get a little bit lost in the slipstream along the way, do not worry, the slides will be available for everybody. And more than that, we encourage all of you to speak to us in person, and we can talk you through your own particular situation. A couple of housekeeping points. Can you please make sure your microphones are muted? Otherwise, we will get a babble of conversation. Also your camera is off, and at the bottom of your screen on Zoom, you should see a Q and A feature. If you have any questions, please type them in there, and we can answer your questions at the end. There will be a recording of this presentation available to everybody, and if you are experiencing technical difficulties, put a message in the chat box below, and we will do our best to help, although we are not technical experts here. Thank you for joining us today, and without further ado, I will hand over to my colleague, Scott.

 

Scott Gallacher  01:55

Thank you, Martin. My name is Scott Gallacher, and I am a chartered financial planner with Rowley Turton IFA limited. Thank you for joining us this evening. As you may be aware from Martin’s introduction and hopefully from the press, the UK’s lifetime allowance, which was a limit on the value of the pension benefits that you could accrue, or more accurately take, without paying a tax charge or an additional tax charge, has been scrapped in the recent spring budget. In this webinar, we will explore the implications of the lifetime allowance charge albeit is set to be gone. Also, the impact of future political shifts. Labour are not happy with the scrapping of the lifetime allowance, and effectively they described it as a tax break for millionaires. We will look at the strategies for maximizing pension savings within the current window, which will hopefully help explain the details of the scrapping and what it might mean to you. Additionally, we will look at the impact of a future Labour government, and what they may do. Also, why the scrapping of the lifetime allowance charge is not the 55% tax saving that the Conservatives would claim, or that Labour would object to. We are going to talk about some strategies for your pension savings within what we believe may be a window of opportunity, including looking at contributions and withdrawals, I think both are valuable options for people depending on their circumstances, and then why it is crucial not to overlook the inheritance tax impacts when it comes to planning your pensions. So the spring budget of 2023, it is quite a momentous budget in a sense, for us as financial advisors and for you as clients. One of the main purposes of this seminar is that the lifetime allowance charge was removed. Technically it is still in place for this tax year, however, effectively at a rate at zero. So the rules all exist, there is still some paperwork to complete if you are taking pension benefits this year. But effectively you are taxed at zero. And as it stands, the lifetime allowance charge will be removed completely in the following tax year, 2024/2025. Interestingly it is gone but not entirely gone, because those lifetime allowance levels will still limit the tax free cash that you can take from your pension. A couple of good things, from a pension perspective, in the spring budget was that the annual allowance increased to £60,000 a year. I will come on to explain it in more detail, but it is basically a limit on how much you can pay into your pension with tax benefits, tax relief. And if you go over that, then the taxman essentially claws some of that tax relief back. Also there is the money purchased annual allowance, which is a restriction on what you can pay into your pension if you have taken benefits flexibly. That previously was £4000 a year, that has gone up to £7000, so these are three positive things for people with pensions. There were some negatives in the spring budget, and certainly for many of our clients, the dividend allowance was reduced, and the capital gains tax allowance was reduced, so was negative. So it was a budget of two halves, some which was very good for our clients, some which was clearly negative for our clients. I will just give you a very brief history of the lifetime allowance, or the LTA. It was introduced in 2006 as part of supposed pension simplifications. Even at the time, we did not think that the pension simplifications made things particularly simple. At the time, I calculated all the number of pension schemes, and pensions simplification I believe removed only one. But it also added some additional complications. Like many things from the government, the name is not always indicative of what it actually is. So the lifetime allowance introduced what was an effective cap on the value of your pension fund, or the value of your pension fund that you could acquire, pension benefits more accurately, without incurring an additional tax charge. Previously on pensions, and there is two types of pensions I will cover briefly in a moment, defined contribution schemes and defined benefits schemes. Previously, on defined contribution schemes in particular, there was a limit on what you could pay into them, but there was not a limit on what you could take out of them. In a sense, you effectively had unlimited benefits from those. What they did in 2006 is they introduced a very generous allowance for what you could pay into pensions. That became a lot more generous, and I will cover that in a minute. But, I believe they did this as an element to protect the government’s tax take, they introduced a limit on the amount that you could take out of the pension, or the value of your pension funds. Originally, 1.5 million, which is quite generous, it would be a lot more today if it had stayed at that level, and if inflation was applied on it. In simple terms, if your benefits were above that lifetime allowance, you paid tax for those excess benefits, and you were taxed in one of two ways. If you took those excess benefits as a lump sum, there was a 55% tax charge. Alternatively, if you took them as income and they were subject to income tax, there was a 25% tax charge. You might think, of course I will take it as income and pay 25% tax rather than 55% tax. Unfortunately, it is not that simple. If you take it as income, you have to pay the income tax. And when you put the 25% lifetime allowance charge together with a assumed 40% income tax charge for a higher rate taxpayer, you effectively end up at a rate of 55%. If you are a basic rate taxpayers it is a little bit less, and if you are an additional taxpayer it is a bit more. So there was always an element of planning around how we took excess benefits. The lifetime allowance peaked at 1.8 million in 2010 and then subsequent governments and chancellors chipped away at it until the last tax year, where it was at £1,073,100. So it was originally £1.5 million, peaked at 1.8, it should be more when you add inflation, but actually it was at just over a million before it was removed. Now, as I mentioned earlier, there are two types of pension schemes, and I do not to go into this in too much detail, but it is important to understand how they work and how they worked in relationship to the lifetime allowance. So you have defined contribution schemes. This is generally stakeholder pensions, SIPPs, assets, personal pensions, things like that. Most auto-enrolment schemes when you have a pension pot, so you and your employer possibly pay, in you have a pension fund or funds, and you normally get a valuation savings. Often you go online and get valuation almost any time the week, really, and you will see your budget will go up and down in line with markets, charges, and obviously what you pay in is a big influence on how much value your pot has and therefore what pension you may get. For lifetime allowance purposes, and annual allowance actually, it is just the amount of the pot. I mentioned that the lifetime allowance was £1,073,100 so that is the value of a pot that you have before you have to worry about the lifetime allowance charge, and that includes any tax free cash you might take, and in the annual allowance, which again, was similar in how much you pay in, and it was just based on how you much you paid in that year, or how much you and your employer paid in. Now defined benefit pensions, generally final salary and career average type pension schemes. So if you are in the NHS, and you have been in the NHS for a while, you have probably had both of those schemes, or if you are a teacher, they do not provide you with a pension pot as such, albeit some people have the option of transferring out. They instead provide you with guaranteed income, possibly with tax free cash as well. The amount of income is generally based on your salary in service and for lifetime allowance purposes, these are not valued at the amount of pot, because it technically is not a pot, but it sets a calculation which is 20 times the pension that you take when you take your benefits. Therefore if you took a £50,000 per year pension, that would be 20 times £50,000 which would be a million pound pot, plus any tax free cash or pension commencement payable at the time for which that would just be simply the amount. So if, for the sake of argument, you had a £50,000 pension and a £250,000 tax free cash lump sum, 20 multiplied by 50 is a million, plus the tax free cash £250,000. That is £1.25 million, and that is the value. And obviously if that is in excess of the lifetime allowance, which it would be, then you would have a lifetime allowance charge to pay on that. The next question is, knowing that there is a lifetime allowance charge, when is it an issue and how do they know? There are 13 specific events that can happen to you or your pension that then trigger the assessment of your pension benefits, either the value of the defined contribution pot or the value of your pension and tax free cash from a defined benefit pension, and that is then assessed against the lifetime allowance. We will not bore you with all 13, but the key ones cover taking your benefits. So how much benefits have you taken and how does that compare to the lifetime allowance? Reaching age 75, there is kind of a cut off in a couple of scenarios, that even if you have not taken benefits, there is an age 75 test. Or if you have taken benefits under drawdown, you get another test at age 75 which essentially taxes you again on growth within your pension that you have not taken out. And I can explain that in a bit more detail later on, but it is an important thing to be aware of, especially if you are using drawdown or if you have not taken your pension benefits, and you are heading towards 75. Finally, dying before 75. So if you have a pension pot, you have not taken the benefits yet, so you have not had one of those crystallization events, but you die, and you die before 75, then the value of those pension benefits, historically was assessed against the lifetime allowance, to make sure that the government got any set tax on the pot that it felt was due at that time.

 

Scott Gallacher  11:50

Annual allowance. I mentioned earlier that at the same time that the lifetime allowance was introduced, we had the imposition, or amendment in a sense, of an annual allowance. Previously, there were different rules on what could be paid into pensions. The annual allowance came in, was very generous for defined contribution schemes in particular, originally was £215,000 per annum, which is very generous, rising at one point to £255,000 a year. There was also rules where you could manipulate the dates to some extent, you could make effectively two contributions in the same tax year. And there were certainly reports of City Investment bankers, paying in almost half a million pound a year at one point, you were not able to do that every year, but there was certainly the opportunity for some time to do that. As I mentioned, it is now £60,000. Last year it was £40,000 but it has gone back up, but nothing to the heights that it was when it was first introduced. It is important to note that for higher incomes, for very high earners, it is tapered. And if you are on a very high income, then you need to speak to either ourselves or your accountant just to see where you are affected. Because it might not be the £60,000 it could be a lower figure. Also, I mentioned earlier the money purchase annual allowance, so if you have accessed your pension benefits flexibly in the past, you are likely to have been sorted to the money purchase annual allowance, and then your allowance will be £10,000 and not £60,000. It is worth pointing out, there is a carry forward option of unused relief. As long as you have been a member of a pension scheme previously, if you have not used your full allowance for the set of the previous three tax years, you can carry that forward. Again, it is somewhat complicated, but we can give you advice on that. The money purchase annual allowance. Essentially this was another joyous thing the government introduced. In April 2015 they made pensions somewhat better for people in terms of tax treatment flexibility, which was all very good. I think the government got slightly concerned people would take advantage of those flexibilities too much, as they would see it. What they did not want people to do is take money out of their pension, primarily tax free cash and possibly income, and then be able to pay that back into the pension very quickly, and effectively have two lots of tax relief. They introduced this money purchase annual allowance. If you are not taking benefits flexibly you probably do not need to worry about this, but you need to be aware of it, because you could get caught out. You could then forget that you are subject to this, and then start paying in large chunks into your pension. Where it can catch people is in changes of circumstances. So you retire, you take any benefits, you have no intention of paying into a pension again, no intention of going back to work again, you then retire. Then you are a bit bored of work, work rings you up and wants you to come back, they have got some  projects on. You go back to work, or join a new employer, or you do some other project later on. And your new employer has a very generous pension scheme, and you become a member, of course, automatically, not really thinking about it possibly, and depending on your earnings, because the allowance is usually £4,000 up until this year, then people could easily breach that by mistake, and then that would give them tax consequences, which you do not want. So you need to speak to a financial advisor or your accountant if you are affected by that. Now, when the lifetime allowance came in, there would have been uproar if overnight they had capped your pension benefits at 1.5 million. Now 1.5 million is very generous in lots of regards, it certainly was in 2006, but there were still people who previously had pension benefits in excess of that, or were likely to exceed it, and they had been happily paying into the pension under the current rules, no attempt to breach the rules or take advantage, they were just utilising the rules at the time. And I think there would have been uproar if those people had been what would have been seen as retrospectively taxed i.e. paying tax on money that previously would have been not subject to extra tax, it is still subject to income tax in the normal way, but not any extra tax. So what happened when the new lifetime allowance came in, was there were a series of protections, and numerous protections added over a number of years, as they have changed the lifetime allowance to protect different people in different ways. If you have any form of lifetime allowance protection, you should hopefully know about it, and should have a detailed record of it. It is important to note that even though lifetime allowance is being scrapped or has been scrapped, it still plays a part for the purposes of tax free cash calculations, and therefore any existing lifetime allowance protection that you have may still play a part for that Calculation of Tax Free cash. So you need to keep hold of the details of your protection, and you also need to exercise care to ensure you do not inadvertently break that protection, because that may reduce the amount of tax free cash you can take from your pension. There is also some reports that, depending on how the legislation finally ends up, whether there is opportunities for people with some very clever planning to take advantage of those protections and actually increase the amounts of tax free cash they can take. That is not a subject for today, but it is a thing that we will be looking at closely as we move into this new world. So, the lifetime allowance is scrapped. Or is it? The lifetime allowance has been removed from this tax year, but it technically remains enforce but with no charge, effectively it is a nil charge. But this still means that if you are taking pension benefits, or if we as financial advisors are assisting you with that, there is a lot of paperwork and filling forms and confirming lifetime allowance figures, which is fairly pointless because there is no lifetime allowance charge, but it still a technical requirement to complete. It should be fully removed from the next tax year, although the lifetime allowance levels still remain effectively in place, but to limit the tax free cash. So when the announcement it was being scrapped went through, we thought this would be absolutely amazing. If you have a £2 million pension fund, you will be able to get half a million pound in tax free cash, not just over £250,000. That is not the case, it does still bear a place. Questionable reasons, but it is in place. However there is the question of what would a new government do? So we put up the Tardis there, and the argument is that Labour are looking to effectively go back in time and reverse this removal. There are some arguments about how they may do it, and I will briefly explain how they might do it. And it is a point to bear in mind that we could be going back in time very quickly. So what might a new labor government do? The polling station picture is there, we will have a general election no later than the 28th of January 2025, I cannot see how we have one much earlier than at considering the current polling. But we have had a lot of elections recently, and so watch this space, it could change. Now, Rachel Reeves the shadow chancellor described scrapping the lifetime allowance as a tax cut for the rich. It is not as big a tax cut as she perhaps is, or that Jeremy Hunt would have claimed, and I will come on to that in a moment, but it is still a tax cut, and Labour pledged to unpick any changes. But interestingly, they have said they are going to introduce a lifetime allowance solution for the NHS, because one of the big reasons behind the spring budget and the improvements, in terms of scrapping the lifetime allowance, and in terms of increasing the annual allowance from £40,000 to £60,000, was that the NHS probably had a recruitment although it is actually technically a retainment problem. A lot of public sector workers, but GPs and consultants in particular, were getting hit from two key tax issues. Their pension benefits were causing them both an annual allowance tax problem, and also in many regards a lifetime allowance tax problem, especially for GPs, because they are effectively self employed, and essentially were paying both the employer and employee element to those contributions. A lot of those people have been expressing concerns about these tax charges, and there were certainly lots of stories of people who were effectively retiring or retiring early, because they felt it was no longer worth remaining as a GP, because the tax costs of being in the scheme were eroding a lot of the benefits, and obviously it depends on individual circumstances, but I have come across people that have not done that. And that was obviously creating a real issue for the NHS. That is one of the reasons cited for scrapping the LTA, but it is also one of the reasons why Labour have said that they are going to introduce a specific lifetime allowance solution and presumably an annual allowance solution for the NHS staff. It will be interesting to see how that works in practice, because as much as it does clearly affect GPS and consultants, we also know of headmasters that have been affected, I am sure there are senior police officers and other civil servants affected. I imagine there will be some arguments about who should benefit, and the rights and wrongs of certain members of the public sector being excluded from that lifetime allowance, or will be getting a special scheme, and other members not. Of course, if we expanded it to all members of the public sector then there will be a public sector versus private sector argument. So how did the LTA work in practice? And you will a copy of the slides, so you do not need to worry about this, but essentially if you had a £1.5 million pot, we will assume that it is a defined contribution scheme to keep it simpler, and under the old rules, and it has no lifetime allowance protection, you can have a quarter of the lifetime allowance, so it is a quarter of £1,000,073 of which £268,275 was tax free cash. The other £804,825 so the remaining 75% of his lifetime allowance you could take as taxable income, with no lifetime allowance charged but income tax. Now the excess benefits, £426,900 of excess benefits. That was in excess of the lifetime allowance, so to some extent you could have left that for the time being and dealt with it later, which lots of people did. Lots of people said I will take my tax free cash and I will take some income and I will leave the lifetime allowance excess pot for another day, because until they get to 75 it is not tested unless you actually access it. And that is what a lot of people did do. But if he wanted to access it, or needed to access it, he had two options. He could take it as a lump sum, that is a 55% tax charge, or he could take it as income, he could buy an annuity or he could designate it for drawdown and pay a 25% lifetime allowance charge. But then his income was taken either by the way of annuity income or drawdown income, which will be subject to income tax, and as explained earlier, he was a higher rate tax payer, that effectively creates about a 55% tax, but if he was a basic rate taxpayer it would be less than 55% and if he was an additional taxpayer it would be more than 55% so again, there was some planning opportunities around that. And the lifetime allowance charge, if you take it as a lump sum, is £234,795.

 

Scott Gallacher  21:37

So now there is no lifetime allowance, then why do you not say 55%, Scott. I said at the start of the seminar that it is not the 55% tax saving that Jeremy Hunt might claim, or the 55% tax break that Rachel Reeves might be concerned about. It is actually about 15% depending on your tax position, that is because of those excess benefits, the rest stay the same. The 25% of the old LTA figure, you still take as tax free cash. It is strange, but that lifetime allowance figure still has a place. It is still remaining in the system as well, and is not completely forgotten about. The balance of 75%, you can take as income, and the excess, the £426,900 can also be taken as income, but of course that is then subject to income tax. Assuming that Bob is a higher rate taxpayer, and he takes over a number of years, so he does not push himself into the additional 45% tax band, he is still going to pay £170,760 in income taxation. So he is not getting it completely free. His choices in simple terms are £170,760 under the current income tax rules, versus the £234,795 he paid under the old lifetime allowance charges, or which he might pay if Labour reintroduced the lifetime allowance charges. So there is a £64,000 or 15% tax saving, that is great. Nobody is going to object to saving £64,000 in tax, certainly not Bob. But it is not the 55% tax saving that he was promised, or might have thought he was getting from the announcement, or that Rachel Reeves was concerned . It is a good tax saving, but it is not 55%, and that is important when you look at other impacts of taking your benefits. So do we need to be careful? Why do we not just say, we were going to pay a 55% tax on excess benefits, we could possibly take a 40% or 45% if we take it in one lump sum, depending on the size of the excess benefits, and surely, 40% or 45% is better than 55% if Labour win the next election and reintroduce the lifetime allowance charge. There are a number of reasons why you would want to be cautious. Firstly, as I mentioned, there is income tax on taking those income benefits, and we do not know who might win the next election, and if you do not draw access benefits and you die before 75, then generally it is tax free. So there is a reason for not doing it, and not triggering the income tax today, certainly not for rushing to do it without fully understanding and considering the impact of that. There are a couple of other tax traps that you can get into with income tax, number one being a 60% band if you are earning over £100,000 to £125,000 and change, you end up in a 60% tax band, which is worse than 55%, so be cautious there. Secondly, I mentioned earlier about triggering the money purchase annual allowance, they might not be concerned about that in one sense, you might say, “I am going to take my pension benefits, I have a £1.5 million pot, why am I bothered about paying money into a pension?” Because, if there is no lifetime allowance today, and it is not reintroduced in the future, it might be a very good idea to continue paying into your pension, even pay as much as you can, whereas taking money out would limit what you can pay. As I mentioned earlier, your circumstances could change, you can get a new job, or a new career, you always need to think about that. Perhaps more importantly, is lost tax-free growth. So the money in your pension, even if you had a lifetime allowance charge issue, and even if Labour reintroduce it, the money within a pension is still growing tax free. Yes, there is tax when you come to take the benefits, there is income tax, or possibly lifetime allowance charges if it is reintroduced, but it is growing tax-free in the pension. If you take that money out of the pension, the ISA allowance is only £20,000 so to use Bob’s example, where we are taking out over £400,000 even after the taxes we have around a quarter million pound lump sum. If he starts to put that into ISAs, even if he is married, it has taken him 12 years for it to become tax-free, so it is going to sit somewhere, in a bank account or investment account, and he is going to switch to income tax in the meantime, where it would not be in the pension, and it is going to switch to a capital gains tax if it is invested. And finally, and probably most importantly for our clients, there is an inheritance tax trap as well, which people do not always think about. Some of our clients are very thankful that they have spoken to us about this before taking their benefits. So what is this inheritance tax? Well, most assets that we hold are subject to inheritance tax in the UK. Houses, investments, savings cars, other properties, businesses, provided that it is trading business, are generally exempt. Buy-to-let properties are generally not exempt. But importantly, pensions are generally exempt from inheritance tax. So all the things on this side are subject to 40% inheritance tax, whereas your pension pot is not subject to inheritance tax. There are other tax issues, income tax, and possibly lifetime allowance tax if it gets reintroduced, but not inheritance tax. There are certain scenarios, if you transfer pensions and die very quickly you can, but generally that is not a factor. What we are saying is you need to exercise some care if you are taking money out of the pension pot, which is inheritance tax free, even if you take it as tax-free cash and are not paying any income tax on it, but if we are then putting it into the estate and you are going to pay 40% on inheritance tax when you die, we need to exercise some caution to say, are you gaining or losing in that scenario? Going back to Bob, with this £426,900 of excess benefits, he is worried about the lifetime allowance, he takes it over a couple of years, so hopefully misses Labour getting in and changing rules from that perspective, and he pays 40% inheritance tax. The increase in his estate having paid £170,000 in inheritance tax, is £256,000 and change, whether that goes into a house, into an investment portfolio, cash, whether he buys any real asset apart from perhaps the depreciating assets, he has a bigger estate. So if he already has an inheritance tax problem, or if this creates one, he is facing the possibility of paying 40% inheritance tax on that extra £102,000. Therefore his actual beneficiaries will only receive £153,000. Now if Bob is comfortably under 75 and dies under the current no LTA rules, his beneficiaries will get the whole of the £426,900, that is a bigger loss. And when you add up the income tax charge and the inheritance tax charge together, he effectively has a 64% tax charge. Put very simply, 64% is more than 55%, so again if we are taking action to save the 55% lifetime allowance charge, but end up paying the 40% income tax and then the 40% in inheritance tax, we are actually making ourselves or the family worse off. We need to be aware of that. How can you mitigate this IHT trap? The one thing I did not say which I should mention is, do not take the pension benefits. That is probably the simplest way of doing it. But if you assume that you have taken the benefits or are in the middle of that, firstly you can do regular gifts out of excess income. Bob can take that income out of the pension, whether it is drawdown or annuity, it does not really matter, he pays the income tax on it, but if he gives that money directly to his family on a regular basis, to his children for example, standing order, sets up an investment account for them, a trust fund, something like that, then essentially there is no inheritance tax. As long as he received excess money, as long as he has more money coming in then he actually needs for normal living expenses, then he can pass that and there is no inheritance tax, that is an instant relief. So he still pays the income tax charge but he does not pay the inheritance tax charge. Alternatively, if he does not want to do regular gifts or does not have the excess income, and he still wants still wants to give the money away to save on inheritance tax, he can give it away, either directly or indirectly, via trust arrangements, and it is on what is called the seven-year clock. Most people listening would have heard of the seven-year clock. Essentially, you give the money away, and as long as you survive for seven years, there is no inheritance tax to pay. If he is of a young age, and is fairly fit and healthy, he will probably be fine that way. Thirdly, you can invest in business relief assets, older clients especially like that. Essentially those are specific assets that benefit from a relief or business relief. And what that means is that those assets are not subject to inheritance tax provided that you have held them for two years. So there is a two-year clock in a sense. Also, importantly you do not have to give those assets away. The point is, you hold those assets, but provided that you have held them for two years, the value of those assets is exempt from inheritance tax, that means you only have a two-year inheritance tax problem on that money, not a lifetime issue. Fourth, spending. I am often keen to encourage my clients to spend their money if they are in a position where they have what we would call too much, and effectively, if you have an inheritance tax problem, you are receiving a 40% inheritance tax discount on that dream holiday. So Bob and his wife had done the worldwide cruise. I can only remember the QE2 and Concord from my young days, when people used to win at pools and do that, and I am not sure what the replacement is, but if you spend that £250,000 net on that cruise, obviously at the end of the cruise, he has had a fabulous time, but there is no money left so he cannot pay any inheritance tax on it, so we are essentially getting £102,000 off the cost of that fabulous world cruise. Finally, you can insure against the inheritance tax. So he said, “I have taken money out of my pension Scott, I know that is an issue. I know that my family will have to pay this £102,000 in inheritance tax. I have an insurance policy that gives the family the money to pay it”. There is a cost to that, you have the premium and stuff, so it is not a completely free lunch, but it does solve the problem in a sense. As I mentioned, do we have a window of opportunity? Well, we are talking about a general election by January 25th, I cannot see the government wanting to do one early, given the current polling, but equally, I cannot see them wanting to leave it last minute, so it is probably before then. I think most commentators figure it will be in autumn 2024 so we have a year and a bit maybe, maybe a bit longer. If Labour win, which they are currently likely to in the polls, we expect to say, and if they reintroduce the LTA or do something new, which they said they are going to do when the rules come in, they could technically do it from the moment they come in. That seems unlikely. It seems more likely that they would come in, they will do a budget, and more likely they would come in from the 2025/2026 tax year. But of course, we cannot be certain. So we maybe have nearly two years to act, but maybe there could be an early election, and the current laws could change. It is worth pointing out on that if there is an election sooner, and Labour win, and certainly they win before the next tax year, because the LTA is still on the books legislatively as it were, and it is just at 0% it would presumably be fairly easy for them to effectively scrap the scrappage and then reintroduce the LTA by just continuing it in effect, and just get rid of the zero charge to 55% charge. That would be more of a concern, and that would make a much smaller window for people to act. We debated this a lot in the office when this came in, what can we do? Because we see the rule changes as you do, and it is confusing, and we have to pause and look at it and work out, what do we do? And how do we know what to do? The way we looked it is, there are probably five scenarios. Scenario one is that you do nothing and the LTA is not reintroduced. And that is a scenario, you can work out what the tax issues are when you might take the benefits with no LTA effectively. And that is scenario one. You can take actions. Next one, you can draw your pension benefits or pay more money in, and the LTA might not be reintroduced. Is that a good idea? And we work out the tax consequences of that. We can take action. You would take money out of your pension, or pay more money in depending on your situation and the lifetime allowance may be reintroduced, we work out that, and we can guesstimate what the tax position might be in that scenario at various points, and we have done that for a few clients recently. Or you could do nothing, and the lifetime allowance is reintroduced. That is the fourth scenario. We can plan out, but there could be completely new rules, and that is a little bit harder to plan for, admittedly, because we do not know what those new rules might be. But first of all, we can essentially work out what your tax position would be, income tax, lifetime allowance charge if applicable, and inheritance tax for our clients, and we have done that for a few clients actually, even before the scrapping of the lifetime allowance. We will still have an element of looking at the income tax, inheritance tax and the lifetime allowance charge for clients. And we can then work out what the likely tax cost to you is of any of those four options. Then you or us can make an educated guess on what the likely outcome is of the general election, the change of government, etc, and what the impact is from a tax angle, and then you can make an informed decision. You need to know what is going to happen. One thing to say on the whole new rules point is, if they did introduce entirely new rules, it is not impossible to concede that they might introduce it, and they might, in a sense, introduce a new form of lifetime allowance protection, same as what was introduced in 2006 when the lifetime allowance rules first came in and therefore you may have a window. Rather than taking money out of your pension, you might have an opportunity to pay more money in. That would also be the opposite of that inheritance tax trap. I said that you might be able to take money out of your estate, pay into your pension, so reduce your inheritance tax bill, inflate your pension, and if Labour come in and say that your pension benefits up till this point are now exempt from the lifetime allowance charge, this would be a perfect window of opportunity to pay money in. It is a conflicting situation, whether we should pay money in or be taking it out.  As I say, what can you do? I want you to do nothing. It is a perfectly valid option, and certainly I would not rush to make a decision. But again, you can do nothing. We can work out tax consequences, and at least you know what the likely scenarios are, or the tax implications of doing something or not doing something, and that is fine. Doing nothing is rarely the worst option, but it can be. You can pay more money in. As I mentioned before, if they are going to reintroduce the lifetime allowance, and they happen to give you yet another protection, that your pension funds that the LTAs reintroduced are protected, that could be an ideal scenario if you have been taking advantage of this tax year, previous tax years by carried forward relief, and possibly next tax year as well, to boost your pension, get an even higher protected amount. Again, we do not know that is what they will do, but it is an option, and as long as you understand that nobody knows the future, that is fine. If you take benefits, if you take them out of the Defined Contribution Scheme or your defined benefit scheme in order to take now, avoid the lifetime allowance charge, as I mentioned, you will be able to but there will be some income tax issues, that might be particularly beneficial for people with a defined benefit scheme, where it is much less likely that the lifetime allowance charge would be imposed on retrograde. It is not impossible, but less likely. Or if you are buying an annuity, a guaranteed income for life, annuity rates are higher today, more people are considering annuities than they have done in the last 10 years or so, and there is an opportunity to take it, not have a 55% tax charge or a 25% tax charge on income, that could be a very good window of opportunity. Finally, the fourth option, which is kind of undertake benefits, but not fully, is you can designate pension funds to drawdown, so you can essentially inform the pension provider that you are taking your pension benefits via drawdown, but not actually draw them. Now there are some pros and also some cons of that. The first thing to say is that would be a benefit crystallization event, which typically would be tested against lifetime allowance, but there is lifetime allowance charge now. That would be a tick in the box in one sense, saying “I have already taken my benefits”, even if you are not drawing any income out of it, so that if the Labour government came in and introduced it, you might find there are benefits that you have already looked to take, and therefore they might not be subject to any reintroduction of the lifetime allowance. However they could be, but you do not actually have to take any income out of that pot until you decide to. So you have made an action which may protect you against the lifetime allowance, but you do not actually draw the income, you do not have the income tax problems, which is good. There is a possibility that Labour could change the death benefit rules on pensions. They have been very generous for the last few years. And if they did that, then it is more likely to affect pensions that have been designated for drawdown than pensions that have not been touched at all. There is always a danger that when you are trying to solve one tax problem, you may create another one. And the other thing is that you still could be caught by another benefit crystallization event BCE5A. There are three key tests, when you take the benefits, when you get to 75 either on benefits you have not taken or on drawdown benefits, and when you die before 75. In this case, basically BCE5A essentially looks to tax you on growth within the pension or drawdown pension that you have not taken. In Bob’s case, he put £426,900 into drawdown, he did not take it, it is growing very healthily. Several years later, it is worth £600,000 and he made around £170,000 in profit, he is now 75, but because that is what the government would see as excess growth, under the old rules that would be subject to a lifetime allowance charge, not the £426,000 he started with but the extra £170,000 of growth. And again, that would be quite an easy one for a Labour government to just reintroduce the old rules and catch you, they did not catch Bob when he took his benefits or designated it, but he has left the money in and he has not taken out the growth, and he can get caught for this 55% tax at the moment. There is an easy way to not incur that, and we do that with clients anyway, or historically did, which is you take the growth, but then you have an income tax charge on it. You sit down every year or so, you look at how you drawdown the pot, and if it is in a nice pot, you strip out that profit and pay the income tax, but you do not pay the lifetime allowance charge, because it effectively does not grow, because you are taking the growth out of it.

 

Scott Gallacher  37:10

So that is a fairly whistle-stop tour of the lifetime allowance scrappage and possibly reintroduction. I have tried to keep it as simple as possible, but it is a very complicated subject, and we are quite keen on trying to keep it simple, I am not sure how well we achieved that or not. And we mentioned in the invite to this seminar that we have a copy of the Enough book, which I actually have in front of me. This is a book which is not specifically about the lifetime allowance at all, but it is about financial planning generally. And as much as we have talked about the lifetime allowance and pensions a lot, for us all financial planning and financial advice really should be tied to a financial planning perspective, because you really need to look at people’s overall financial picture before making decisions. Because, there is a lot of stuff to consider, not just the tax. But if anyone would like a copy of this book and we will send it out to you for free of course, you can email my colleague, martin@rowleyturton.com just with your name and address, and we can get one into the post as soon as possible. Thank you very much. Questions and Answers now.

 

Martin Stanley  38:18

Thank you very much for that, Scott. And thank you for those of you who are still with us after what was a more detailed, packed session than normal. We know it can be quite complex, but that after all is why we are here and what we do. The key message I took from what Scott told us was that anybody with a fairly large pension should really be taking thought to review things. Our message at Rowley Turton, is usually to think long term, but that does not mean ignore things along the way and walk blindfolds, and this might be one of those occasions where you really need to take stock and look at this. Scott’s message was, do not rush into any of this and certainly take advice from ourselves or your accountant or your own financial advisor, but certainly take the time to look at this opportunity, because you might kick yourself in three years time when you realise that there was an opportunity to save an awful lot of tax. You probably will not want to go through that on your own, you will want to speak to your financial advisor. Hopefully you will come to us, Scott or myself will be delighted to speak to you. Come into the office, sit at the boardroom where I am standing at the moment, have a cup of coffee and a biscuit, and we can go through things. We are always welcome for people to have a chat. So while we were talking there have been a couple of questions asked of Scott, which I have been asked to send to your way. One of our participants today said, “I am lucky enough not to need all of my pensions and have several personal pensions that I have just left alone and sat there, because I was told that if I took them, I would pay the lifetime allowance charge. Should I still do that?”

 

Scott Gallacher  39:49

Should you still leave them? It is difficult because of the other tax consequences. But this is certainly an example whereby not having acted has worked in your favour, I mentioned in the presentation that Bob could have just left the excess benefits in place and not worried about the tax, and that is what many people did. Those people are certainly going to be delighted about the scrapping of the LTA. So had Bob taken his benefits last year and taken all of them and taken the excess benefits, then yes, he would have paid the 55% lifetime allowance charge, which now he might only pay a 40% income tax charge with the planning, maybe even less. Again, because of the other impacts, inheritance tax and other factors, it is not that simple. That is a complication really, and that is what we deal with on a daily basis. There are so many different tax aspects with this, you really need to sit down. I certainly think that if you have a relatively small excess benefit, and you do not have an inheritance tax problem, and you do not really have an income tax problem, then that certainly would nudge you more down the line of, perhaps it is a good window to take those benefits. If you do have an income tax problem and you are a higher rate taxpayer or additional rate tax payout, then the advantage of this window might be less. The difficulty is always that you do not know what’s coming in. The new tax rules, when Labour come in, could be completely different.

 

Martin Stanley  41:08

So what you are saying Scott, is that the person who asked this question is a prime example of someone who really should look into it more carefully. For the person who wrote that question, please come in and sit down with us. Another question for Scott here, somebody says, “I know that if I leave my pensions, ultimately, they can go to my family.” And this person says that is why they did not choose an annuity. So their pensions are sitting there. Can I give those pensions to my family earlier, and spread it around? Can I give some of my pension to my sons while I am still alive?

 

Scott Gallacher  41:40

In essence, no. There used to be some ways with SASS and stuff where that was very technical and complicated. But with pensions, effectively, no you cannot gift them. You can get divorced if you are married, you can get a divorce and then share your pension on divorce, but that is a bit extreme and a bit expensive for most clients. What you can do is you can take the pension benefit yourself, pay the tax, and then you can make pension contributions for your kids, and certainly if your children are higher rate taxpayers, there is an argument, certainly with no lifetime allowance, that you can take money out of your pension, you can pay 40% tax relief. You could give it to them or pay it into their pension, and subject to allowances and stuff, they could get the 40% tax relief back if all the numbers work perfectly, and then effectively you have transferred your pensions to them, but it is not quite as simple as here is my standard life pension, there you go.

 

Martin Stanley  42:30

Thank you Scott, that is great. Last question here today, somebody says that they work for a local company, have a final salary scheme, and they think they were quite close to the lifetime allowance because they worked for a final salary scheme for many years, they have not had their state pension yet, which is another £10,000, is that going to take them over the top?

 

Scott Gallacher  42:50

The state pension has no impact on the lifetime allowance. Essentially, what you are talking about is private or workplace pension schemes, in essence UK schemes, so the state pension is not included in that calculation. Where it would be an impact, obviously is in terms of income tax, but if you were over the lifetime allowance, or close to the lifetime allowance, with a defined benefit pension scheme, we have clients at the moment who are comfortably over, it is a huge win for him, because he was looking to have a lot less net pension income with the LTA being in place. So he has had a win of several thousand pounds a year when you work it out. He is delighted about the removal.

 

Martin Stanley  43:27

The message for him is very good news, it hopefully is for many others, but we need to be careful about this possible reintroduction and take planning accordingly.

 

Scott Gallacher  43:34

Yes, definitely take advice, I believe is the key takeaway message.

 

Martin Stanley  43:38

Well, that is all the questions we have for the moment. I hope that if anybody has any other questions, they will send them in to Scott and myself, we will be glad to speak to you. In the meantime, remember that we will be sending you a copy of this presentation so you can look it again at your leisure, and look at the slides, so you will certainly be able to look at our ugly mugs. It only remains for me to say thank you very much for joining today. We hope to do another one of these seminars on financial planning topics in a couple of months time, which we hope you will tune in then as well. Thank you very much.

 

Scott Gallacher  44:07

Thank you very much Martin, good evening.