Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “The dust has started to settle on a truly momentous Budget and now it’s time to think about what it means for our retirements. The major impact has been the decision to bring pensions into the scope of inheritance tax – a move that is expected to land many more families with a hefty bill and people will need to plan carefully. However, one of the other big impacts was around what wasn’t announced. In the weeks running up to the Budget, the rumour mill ran red hot with speculation that tax free cash was going to be cut back. This is always brought up around Budget time, but on this occasion the rumours were even more persistent, and the industry saw a wave of people rushing to take tax free cash. The change did not come to pass, but this has left people holding cash they don’t need and looking at what they can do with it. Making the wrong decision could leave them with a nasty tax charge so they will need to be careful.
These issues can have long-term impacts on your financial resilience in retirement and so it is important to seek help if you think you need it. A financial adviser can help you navigate these issues and check in throughout your retirement to make sure your plans remain on track.”
I took my tax-free cash – what now?
If you took the money because you were nervous about the rumours and now regret it, speak to your provider about whether you can reverse your instruction. Some providers will offer a cooling off period, but it all depends on when and how you took your tax-free cash, so you will need to check with them. If you think you can get around the issue by reinvesting it into a pension such as a SIPP, then you need to be careful not to fall foul of recycling rules that could land you with a nasty tax charge.
Allowances and tax relief unchanged
Despite the change to the inheritance tax treatment, pensions remain top of most people’s retirement savings shopping list. With no change to allowances and tax relief for now, making best use of pensions is among the best and most tax efficient ways to save.
Make use of your gifting allowances
The decision to make pensions subject to inheritance tax will see more people opting to make more gifts to loved ones during their lives rather than after they’ve died. There are a series of allowances available to you, such as the ability to give £3,000 to someone every year and it will drop out of your estate for inheritance tax straight away. Other allowances include the ability to give gifts up to a certain level when family members get married. Another less well-known rule is around gifting out of surplus income. This is where you can give regular gifts of any value away and they leave your estate for IHT purposes straightaway. However, to do this you need to prove that you are making gifts from money you don’t need, and you will need to keep careful notes as to how much was gifted and when. You will also need to evidence that money was gifted on a regular basis.
The gifting out of surplus income rules exist to make sure you don’t give away too much money and leave yourself struggling in later life. It’s hugely important to consider issues such as long-term care before you make large gifts to loved ones. It’s also worth saying gifting money and then asking for it to be returned because your circumstances have changed can have an enormous impact on family relationships.
Contributing to a loved one’s pension.
Pension recycling rules don’t apply if you contribute to the pension of another person, so it could make sense to top up your partner’s pension or a child’s Junior SIPP to boost their own retirement planning. You can contribute up to £2,880 per year into their pensions and receive tax relief, topping it up to £3,600, so it’s extremely tax efficient. It may also be a handy way of keeping your own estate below inheritance tax thresholds. You have an annual gift allowance of £3,000 which leaves your estate for inheritance tax purposes immediately. Larger gifts will drop out of your estate after seven years.
A Junior ISA – or LISA - may be nicer.
You can save up to £9,000 per year into a Junior ISA. Over time, this can play a major part in helping your children onto the property ladder or through university. It can prove a valuable early lesson to your loved one in the power of investment, which can help them feel more comfortable getting more involved themselves. This can also ease any concerns you have that they might fritter it away when they take charge of it at 18. Another option is to help them either get on to the property or retirement ladder, by giving them money to contribute to a Lifetime ISA. You can make contributions of up to £4,000 per year and receive a 25% government bonus. The only downside is that if they need to access the money for a reason other than house purchase or retirement, they will be hit with a 25% early access charge.
Consider a life insurance policy in trust.
If you are concerned about how your family will pay any inheritance tax bill, then you can take out a life insurance policy placed in trust to cover the amount. You will need to pay a monthly premium which depends on how old you are when you took out the policy and your health, but it could be a great way to give you and your family peace of mind
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