Navigating Pension Planning: Stay Calm and Secure Your Future

This blog was written by our sister firm Aquila Financial Services, a leading provider of financial planning and wealth management solutions. Aquila helps clients achieve their financial goals and secure their future with personalised advice and tailored strategies. Whether you're seeking advice on investments, pension planning, or wealth management, Aquila has the expertise and experience to guide you.

Rachel Reeves delivered the first Budget from a Labour Government in over 14 years on the 30th of October.

Speculation was rife in the days, weeks and months beforehand regarding how the Chancellor  intended to address the black hole in the Public Finances and a  considerable amount of attention has been focussed on the rules regarding Personal Pensions.

Were the Rumours True?

Some of the theories doing the rounds were that Labour would do some or all of the following;

-            Limiting tax relief on contributions by introducing a flat rate of relief

-            Removing inheritance tax benefits of pension funds

-            Reintroducing the Lifetime Allowance

-            Restricting the Pension Commencement Lump Sum (Tax-Free Cash)

As it transpired, only the second of these measures has been introduced, although this still represents a significant change in the rules regarding pension death benefits.

What is changing?

The key date is 6th April 2027; prior to this, in the vast majority of cases, death benefits from Pensions will be not included in someone’s estate for Inheritance Tax purposes.

After this date, the Personal Representatives of the deceased person will need to obtain details of any pensions that were not in payment at the time of death, and these will be included in the estate; with any Inheritance Tax Liability being split proportionally between the non-pension and pension assets.    The Inheritance Tax bill on the pension funds will, as the provisional rules are set out, be paid by the scheme administrators. 

This is clearly a pivotal change from the position we have been in for the last nine and a half years, since the 55% tax charge lump-sum payments was abolished.

As well as the direct impact on pension funds themselves, the value of the pension is also now included in the overall estate which could push them over the £2m threshold meaning the potential loss of the Residential Nil Rate Band.

It is important to remember that pension benefits passing to spouses are not liable for Inheritance Tax, in the same way that other assets are exempt.

Benefits of Current Pension Rules

Even allowing for the changes to the IHT treatment, pensions remain an extremely attractive and tax-efficient way of saving for your future. It seems sensible to take advantage of the current rules, especially in case future changes impact them; definitely a case of making hay whilst the sun is shining!

Research by the Pensions and Lifetime Savings Association, published earlier this year, suggests a single person needed an income of £43,100 a year for a comfortable retirement and a couple £59,000 a year.

Home - PLSA - Retirement Living Standards

Here are some of the ways pension funding can benefit you:

-            Tax-Free Growth

Pension funds grow in a tax-free environment, allowing your investments to accumulate without being reduced by taxes.

-            Personal Allowance and Child Benefit

Personal contributions to your pension can restore your personal allowance and/or child benefit, providing additional financial advantages.

-            Business Owners

For business owners, pensions can be a fantastic way of extracting profits from your business into your own name. Additionally, it is possible to own commercial property (including farmland) within some types of pension schemes, which can be very tax efficient. For example, owning your business premises personally can help build up additional funds in your name.

-            Auto-Enrolment Schemes

For auto-enrolment schemes, using salary exchange allows the company to pay the personal contributions, resulting in significant National Insurance savings for both the employee and employer.

Given the potential for future changes in pension regulations, now is the time to optimise your pension strategy and secure your financial future.

If you would like to discuss any of these aspects in more detail or have any questions, don't hesitate to contact us. Let's secure your financial future together.