Unsurprisingly the pension changes are the biggest to impact IFAs, their clients and potential clients You can read more about the multitude of pension changes (link back to article) in my previous post, but here’s a summary of ways these changes can mean opportunity for advisers.
As you are aware the 55% tax charge applied on death for lump sums from vested pension funds or funds from someone over 75 at the time of death is changing. This will have a significant impact on the beneficiaries and how they might be taxed and choose to take this money.
The improved tax position of the funds taken at death means those clients who would have taken an annuity at retirement might not now do so This is particularly valid today as annuity returns remain at historical lows. If a client then wants to add on escalation/widows/guarantee periods or any other benefit it can drastically reduce the regular amount paid. There is a significant need for advice now for clients and potential clientscoming up to retirement age.
In addition, the improved flexibility in accessing a pension pot, now means that clients who were previously put off from contributing to a pension may now reconsider. This will create opportunities for IFA’s and clients alike.
These pension changes spell good news for those who are 55 and want to retire early, before their occupational funds start to pay out, or they receive any state pension as they can now benefit from a more flexible drawdown. Effectively they can create a ‘bridging pot’ which can be used tax efficiently to provide income from their early retirement date to when they start to receive any occupational and/or state pensions.
This tax year the first £10,000 of your income is tax free. Meaning you can invest into your pension pot and get up to 45% tax relief and potentially then take an income where 0% or 20% tax is paid when you take it out at retirement. This leads to much greater scope for financial advice to be given.
Just because this flexibility is available it doesn’t mean it’s right for each client. The advice still needs to be tailored to the individual, which is where I feel that individual advice is becoming more complex, because of the increased options at retirement. For example, the reduction in tax payable on any lump sum payable on death may be of little consequence to someone in particularly bad health who has no one to pass the income onto. In this scenario an impaired life annuity with the advantage of the guaranteed income is likely to be much more suitable.
There are already adverts encouraging people to take their money out of their pension pot to pay off debt. Flexibility with your finances is important, but with it comes a greater need for advice to make sure clients are making the right decision for them.
Higher Rate Tax Relief
As a side note, while these pension changes might make saving into a pension more appealing for some I also speculate that Higher Rate Tax (HRT) relief won’t survive for long after the next election. And if you take away Higher Rate Tax Relief, then higher rate tax payers will be less keen to invest in their pension pots.
Alternative tax efficient savings
For those wealthy enough, even if they do take full advantage of the tax efficiency of pensions, the cap on how much can be paid into a pension has it’s limits. The use of EIS or VCT are alternative vehicles of investment choice for tax efficiency. This is a growing area of advice that IFAs can take advantage of. If Higher Rate Tax Relief is removed from pensions then these investment vehicles will become even more relevant for the right clients.
Basic Rate Tax Payers incentivised to save more
As it’s more likely that basic rate tax payers will need some form of state support in retirement, it makes sense to lessen that load as much as possible through incentivising them to save while working. If HRT relief is abolished and instead a flat tax relief rate of, say, 30% was introduced, this could indeed incentivise Basic Rate Tax payers to pay into their pension pot, giving them more funds at retirement.
Understanding the changing landscape in the financial sector, how this impacts on an IFAs business and positioning ourselves to be robust enough to take opportunities in the market place while providing the necessary back office support is where Bradbury Hamilton excels. Get in touch to discover more.