The Chancellor surprised many of us earlier this year when he announced an overhaul of the rules governing how much people can pay into their retirement pots.
The policy change included the removal of the lifetime allowance - the maximum amount of money people can put into their pension without paying tax on it. The surprise announcement was designed to solve the issue of much-needed NHS consultants and others from leaving the workforce as they risked breaching the £1,073,100 allowance.
As I see it, the government’s bid to make the rules around saving for retirement less complicated is not only welcome news, it has opened new opportunities for advisers.
As I’ve written about before, this is the era of the ‘Great Wealth Transfer’, with trillions set to be passed into new estates. And for advisers, the removal of the lifetime allowance should help to prompt conversations with clients of all ages around tax-efficient intergenerational wealth transfer, as well as planning for more sustainable retirements.
Highlight the opportunities to clients
While money in a pension doesn’t attract inheritance tax after death - unlike an ISA, which could be taxed at up to 40% - this was previously limited by the lifetime allowance.
Following the Chancellor’s surprise move at the Spring Budget, the tax break is now almost unlimited. This will no doubt have already prompted client conversations about the role of pensions in wealth transfer.
But, for advisers, the removal of the lifetime allowance is a good opportunity to highlight to clients how pension savings, when thought about in the most basic terms as a pot of money, can be a source of income for multiple generations’ lifetimes, and not just for one person’s retirement.
For groups of clients at different life stages, this important conversation will most likely take different angles. For those at or near retirement, wealth transfer will be a more immediate consideration. And tax optimisation, preservation of pension capital and intergenerational planning will be the priority.
For those clients further away from retirement, this is a chance for advisers to discuss the simple, but fundamentals of retirement income planning as well as what the pension of the future may well look like.
Looking to the future
Of course, governments change and policies change, so none of us can say for sure if the removal of the lifetime allowance is a finality. The government is currently considering plans to apply income tax to untouched pension pots that are passed on under certain circumstances. However, we can hope any future government will want to continue with the simplification of savings policy in the UK for the good of society.
Another key point for advisers to consider is that over the next few years, the £1,073,100 lifetime allowance may start to look outdated. While in the past, a £1m pension pot may have seemed unachievable, it’s now totally achievable for those at the start of their careers to save a seven-figure amount over 40 years.
Put simply, there will be a much larger number of ‘pension millionaires’ in this country in the future. It makes it even more important that advisers can optimise their clients’ tax planning, not just on pensions, but across the full range of tools at their disposal – whether that’s ISAs or premium bonds.
A versatile financial planning tool
A pension pot has always been a versatile financial planning tool.
But with the removal of the lifetime allowance, it should be seen as much more than just a retirement plan, post-work.
From one, important, pension policy change, there are lot of important client conversations to be had.
As advisers continue to help clients strive towards tax plans that are fully optimised, the Chancellor’s surprise Spring Budget announcement should also be prompting conversations with clients of all ages around making more sustainable retirement and wealth transfer plans – whether that’s for now, the immediate future, or a few decades’ time.
The value of investments can go down as well as up and your clients could get back less than they paid in.
The views expressed in this blog should not be regarded as financial advice.