It’s Pensions Awareness Week, where the aim is to share straightforward and impartial advice with people about their pensions. Pensions matter more than just offering retirement savings; they can be your legacy for the next generation. After removing the lifetime allowance, we explore the importance of tax-efficient wealth management when it comes to pensions.
Lifetime allowance scrapped
In 2023, the then Chancellor Jeremy Hunt scrapped the lifetime pension allowance. The aim was to resolve an issue regarding medical consultants who were leaving the NHS when their pension pots approached the £1,073,100 threshold. Any amount above this threshold was previously taxed.
With the removal of this tax threshold, savers are free to increase their pension pots. At the time of writing, there is speculation that the new government could change pension tax relief and annual tax-free pension allowances in the October budget.
Even if such changes are announced, pensions are a sensible strategy when you are looking to build and transfer your wealth. They offer an opportunity to create a substantial legacy, which can be passed on to the next generation.
Should the new government continue to maintain the current more straightforward pension policy, many people could fall within the bracket of “pension millionaires”. As a result, intergenerational wealth transfers will require meaningful conversations on tax-efficient estate planning.
How to build a legacy using your pension
Building a legacy using pensions has become a viable way to fund retirement and pass on wealth. When combined with ISAs and other forms of savings and investments, there are likely to be tax considerations for the next generation.
Although pensions are currently exempt from inheritance tax, the previous lifetime allowance set a limit on pension wealth. However, as adult children and grandchildren benefit from unlimited pension wealth transfers, this will affect inheritance tax.
The current threshold for inheritance tax is £325,000 (£500,000 if you leave a property to a child or grandchild). Inheritance tax would be liable at 40% above this amount. The only exceptions are if you leave everything above the threshold to a “spouse, civil partner, a charity or a community amateur sports club” (Gov.uk).
If you want to build your legacy using your pensions, check the benefits of your scheme. Pension types and products vary, depending on the providers’ investment strategy. Always seek professional advice before you consider changing or transferring a pension.
Whether the transfer of wealth in the form of a pension will be taxed in the future remains to be seen. The most important strategy is to make sure you have a robust approach to both your pension and estate planning. Having essential conversations regarding your estate today will help to prepare the next generation on how to manage their wealth tomorrow.
Pension Advice, Nottingham and Lincoln
When it comes to your pension and inheritance tax planning, it’s essential to have a set of clear objectives. Consider how much you want to use in your retirement and pass on to the next generation. If you’re reaching the pension freedom age (currently 55, rising to 57 in 2028), you might want to access a pension while you’re still working. Pensions matter because they play a vital part in managing your wealth and building your future legacy.
Our financial planners offer pension advice, retirement and legacy planning. We will carry out a review, discussing your aims and aspirations. We will then explain your options and how you might be affected by any tax implications. Together we will create a sensible financial plan that will ensure a comfortable or luxurious retirement and protect your legacy.
Do you need to review your pensions? Get in touch to speak to our financial planning team.
Sources:
https://www.abrdn.com/en-gb/adviser/insights/why-pension-savings-are-about-more-than-retirement-planning
https://www.gov.uk/browse/tax/inheritance-tax
