Pension Awareness Week: Review your pension plans ahead of ‘painful’ October Budget
The Labour government has made it clear it must fill a £22bn gap in the public finances by increasing taxes, targeting those “with the broadest shoulders”. In light of this message ahead of a “painful” Budget, effective financial planning that targets tax efficiencies has never been more important.
In the past few weeks, the prime minister’s and the chancellor’s message about what to expect from the upcoming Budget has been clear and unambiguous: measures being announced will require individuals to endure short-term pain for the benefit of long-term gains.
Keir Starmer has also been explicit about targeting individuals with incomes in the higher tax brackets, claiming that the burden might fall heavily on their shoulders.
In fact, speaking in Downing Street, Starmer spoke of a “painful” Budget to come, where individuals with “the broadest shoulders should bear the heavier burden”.
Managing any potential changes ahead of the October Budget is essential so you can minimise the impact of measures that could affect you on the downside.
The only way to do this is to review your financial plan and ensure you’re leveraging tax allowances as best you can.
Bracing for change
A recent report from the Fabian Society, which is a political think tank, indicated that more than half of tax relief went to upper and top rate taxpayers in the tax year 2022/23, even though taxpayers in these brackets only make 19% of the taxpaying universe.1
According to the same report, the government could look to raise at least £10bn per year of income for the exchequer by applying income tax relief on pension contributions, increasing taxes on pensions in retirement, applying levies on national insurance and pension contributions, and further supporting under-pensioned groups.
Current chancellor Rachel Reeves has also said she plans to increase taxes. This increase is likely to come in the form of inheritance tax (IHT) and capital gains tax (CGT) raises, given that the government has previously said it wouldn’t raise the rates of income tax, national insurance, or VAT.
IHT and CGT raises could largely affect individuals in the higher tax rate bands.
In other words, the government is likely to increase pressure on wealthier households to fill the £22bn gap left by the previous government.
The calm before the storm
The tighter the belt, the more important it is to make sure you’re maximising your financial position. Given an individual’s pension is an important element of their financial position, in the run-up to the Budget on 30 October it could be beneficial to assess whether you’re making the most of it.
Here’s a brief pension checklist to help you ensure you’re most prepared to navigate any potential changes, and as always it’s important to take financial advice to ensure this is the right course of action for you:
- No pension is an island
Always consider your pension as one of the tools that will help you achieve the retirement you want. An important part of checking you’re leveraging your pension is to understand how well it complements the other elements of your wealth plan.
A pension should never be considered in isolation, and it’s important to leverage all the different tools that provide tax benefits and relief, such as ISAs, JISAs, venture capital trusts (VCTs), or enterprise investment schemes (EISs).
Please note that VCTs and EISs are higher-risk investments and it is essential that you consult a financial adviser as they will not be suitable for everyone.
There is no one-size-fits-all financial plan, so your plan should be tailored to your specific circumstances and goals.
- Use your current allowance
You can contribute a certain amount towards your pension without paying tax on it every year. Your pension annual allowance is £60,000 for tax year 2024/25, and it gradually reduces for higher earners with a threshold income above £200,000 or an adjusted income above £260,000.
The tapering of an individual’s annual allowance stops at £360,000, meaning that the total annual allowance could suffer a reduction to the value of £10,000 per tax year.
- Have you used your previous allowances?
An individual’s allowance renews each year, and they are able to use any unused allowance from the previous three years.
So it’s worth checking what the maximum available allowance is each year, including unused allowances from the previous three years so that you make the most of them before they expire.
- Review your tax-free cash strategy
You can usually take up to 25% of the amount in your pension as a tax-free lump sum, up to a maximum of £268,275.
Individuals over 55 are entitled to draw down from their pension, which means they benefit from further flexibility and different scope for pension strategies.
If you're 55 or over, it's worth getting in touch with your financial adviser to discuss what the most efficiency cash strategy from your pension looks like.
- Is your pension working as hard as it should?
Individuals with a defined contribution or workplace pension can choose how their pension is invested.
A pension could be invested across different funds and asset classes, and it’s worth spending some time checking whether you’re happy about how your money is being invested.
Some asset classes are riskier than others, and you could choose the level of risk you’re comfortable with for your investments by choosing the type of instruments you place your money in.
It’s important to understand that there is no magic formula when it comes to investing. Regardless of the picture past returns for any asset class can paint, you might get back less than what you initially invested.
- Consider consolidating your pension pots
Bringing different pension pots together should provide you with some administrative relief; it’s far easier to track and manage your pension savings in one place, rather than several different ones.
In addition, it might make sense to move your different pension pots into one where you might pay lower fees.
At the same time, before making any decisions around transferring your pension, it’s worth checking the type of pension you’re transferring. You might lose some benefits by transferring out a pension, such as guaranteed annuity rates or guaranteed growth rates, if your pensions offer any of these.
Get in touch
This checklist is by no means comprehensive, but it’s meant to highlight some of the aspects to consider for those looking to make the most of their pension allowances before the Budget announcements in October this year.
If you have any questions about your pension or any aspect of your finances, or simply if you’d like to understand whether you’d benefit from making any changes to your financial plan, speak to a 7IM adviser; we would be delighted to have a chat with you.
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