Are You About to Lose Your Pension Freedoms?
5 Potential Changes to Your Pension Freedoms
As the UK Labour government prepares to unveil its October 2024 Budget, speculation is mounting that there will be significant changes to ‘Pension Freedoms’ as part of the Chancellor’s ‘pension review’.
Introduced in 2015, ‘Pension Freedoms’ have given individuals unprecedented flexibility in managing their retirement funds over the past nine years, but Labour’s focus on generating new revenues could see these freedoms reduced, or even rolled back.
UK ‘Pension Freedoms’ marked a revolution in how Britons could access and manage their retirement savings, providing the opportunity to ‘drawdown’ flexible sums from your pension pot and the option to transfer your funds into a Self-Invested Personal Pension [SIPP]. Creating a single ‘portable’ SIPP in this way also gave international executive expats (and those considering retiring abroad) the opportunity to consolidate their retirement funds into a ‘pot for life’ that could be managed on a cross-border basis and accessed wherever they were in the world.
However, sweeping changes to these current Pension Freedoms could be introduced in the Budget later this month.
1. A Cap on Lump Sum Withdrawals
Currently, as a UK pension holder you have the option to withdraw 25 per cent of your pension pot tax free and withdraw the remainder subject to income tax, but it is anticipated that Labour could announce a cap on lump sum withdrawals in the Budget.
Although the government’s intention would be to prevent individuals from draining their pensions too quickly and leaving themselves financially vulnerable in later years, this cap could severely compromise those planning for a flexible retirement and represent an unnecessary hindrance for High-Net-Worth (HNW) Individuals looking to access significant amounts of their pension early on, safe in the knowledge that they have other assets and income streams to draw on in the future.
2. Increasing the Minimum Age to Access Your UK Pension to 60
Another change that has been widely discussed within the industry is the potential for the Chancellor to increase the age at which you can access your UK pension savings. Currently, the minimum age to access a private or company pension is 55 [rising to 57 on 6 April 2028] and speculation is increasing that this minimum age could be increased to 60 in the Budget.
“One option would be to increase the minimum age
at which you can access your savings – pushing it up to 60”
Tom McPhail – The Lang Cat Consultancy
3. Reduction of the Initial Tax Free Withdrawal
The Fabian Society, a leading left-wing think tank, has proposed that the initial amount that can be withdrawn from your UK pension pot(s) as a tax free lump sum (the ‘Lump Sum Allowance’ [previously known as the ‘Pension Commencement Lump Sum’]), should be reduced from the current maximum of £268,275 to just £100,000 (or 25 per cent of the total pot, whichever is lower). This would effectively make sums drawn in excess of that amount subject to income tax.
Reducing the initial tax free allowance to £100,000 would mean
that an individual with a £1m pension who withdraws 25% as a
lump sum would have to pay an extra £45,000 in income tax.
Other changes that have been previously considered in Whitehall and could potentially be part of Rachel Reeves’ October Budget announcement, relate to pension tax reliefs on contributions and inheritance tax treatment.
4. Introduction of a 33% Flat Rate of Pension Tax Relief
Money contributed to a pension benefits from tax relief. Basic rate tax relief is added automatically (meaning an £80 contribution becomes £100 inside a pension) while extra relief is available for higher and additional rate taxpayers which can be claimed back through your tax return.
Rachel Reeves is on record as previously having argued in favour of imposing a flat rate of 33% relief for all - effectively targeting higher and additional rate taxpayers.
If a 33% flat rate of pension tax relief is introduced, as an additional rate
taxpayer, paying £100,000 into your pension would result in your net
contribution being £12,000 less than under the current system.
5. Removing Inheritance Tax Relief from Pensions
As a UK domiciled individual, money you hold in your pension currently falls outside of your estate for UK Inheritance Tax (IHT) purposes and can be passed to your beneficiaries without IHT being applied. IHT is chargeable at 40% on the value of your assets above the IHT [‘nil rate band’] threshold of £325,000.
Labour has denied that a pension death tax is ‘party policy’, but industry commentators have warned that the Chancellor could easily extend the scope of IHT to cover pension pots in the Budget, with some even calling this a ‘soft target’, and indeed the policy was advocated only a fortnight ago by the Institute for Fiscal Studies (IFS), which recommended that,
“Ending this inequitable treatment could raise
several hundred million pounds a year in the
short term, rising quickly thereafter… as more
and more people will be dying with pension wealth.”
Institute for Fiscal Studies [IFS] - ‘Raising revenue from reforms to pensions taxation’ - 11 September 2024
What could this mean for you?
As a high net worth individual, having access to your UK pension funds restricted, or the tax burden you carry on contributions and withdrawals significantly increased, could impact the age at which you are able to step back from work, and compromise the quality of your lifestyle when you do so.
Now more than ever, it’s essential to seek expert advice and ensure your financial planning is both agile and robust, as next month’s budget is likely to have have wide-ranging implications, not just for your pension but for your overall wealth.
Speak with us to explore your options
As the Budget draws closer, now is the time to explore your options.
As international financial planners and wealth managers we can provide you with expert advice on protecting your wealth and securing your financial future, so if you are thinking about your business exit or re-locating away from the UK and would like to schedule an initial consultation contact us today or email us at [email protected].
This communication is for information purposes only and does not constitute financial, legal, or tax advice. Please schedule a meeting to receive advice on international financial planning and wealth management.
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