The contents of this article, accurate at the time of publishing, is for general information purposes only, and does not constitute investment, legal, tax, pensions or any other advice. Before making any investment or financial decision, you may wish to seek advice from your financial, legal, tax, pensions and/or accounting advisers.
As the 2023-24 tax year gets underway on 6 April, a number of changes have been introduced which could potentially impact your finances. Some of these apply to pensions regulation, with the recent Spring Budget outlining plans affecting members of defined contribution (DC) pension schemes, including workplace or occupational pensions, personal or private pensions, Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSAS).
Our article What Could the Budget Mean for Investors? looks at some of the key changes to DC pension schemes taking effect in the 2023-24 tax year. These changes included an increase in the pension annual allowance (PAA) and money purchase annual allowance (MPAA), and the complete removal of the Lifetime Allowance (LTA), which would have previously constrained the amount saved into private pensions. The naming of such schemes can be confusing and it’s worth remembering that ‘money purchase’ is synonymous with ‘defined contribution’. This relates to members making contributions from their own salary or income, which is ‘defined’ by the pension member and which is a type of ‘money purchase’ contribution to the scheme.
One implication of the abolishment of the lifetime allowance (LTA), withstanding those who have already begun to draw down pensions approaching the previous limit of £1,073,100, is that DC pension schemes may now offer a tax-efficient means to pass on wealth to nominated beneficiaries. Pensions aren’t usually tested against inheritance tax (IHT) thresholds and can be passed on completely tax free, should the member pass away before the age of 75*. After 75, the pension funds inherited by the nominated beneficiaries will only be taxed as and when they draw down on the pension, with the withdrawals treated as the beneficiary’s additional income. No IHT liability is due on the capital sum of the pension.
The interplay between pension planning and succession planning has therefore been augmented in light of the changes to LTA. The IHT allowance per spouse – known as the nil rate band – is £325,000 each, although you can pass on £500,000 each if you’re also leaving the principal private residence (the family home) to direct descendants. This is due to the £175,000 residence nil rate band, applicable to each spouse. Pensions and inheritance tax planning are complex subjects and we would always recommend seeking professional, impartial advice when making such financial decisions.
Turning to the state pension, this is provisioned for by the contributions that workers make to National Insurance. To qualify for the full ‘new’ state pension, employees are required to have a total of 35 qualifying years of National Insurance contributions. Should you not have the full 35-year record, perhaps after working abroad, a career break or home-making, you can make voluntary contributions to National Insurance. Note that the deadline for such ‘top-ups’ is 31 July 2023.
The state pension payment is index linked and references three measures known as the triple lock: average wage growth, Consumer Price Inflation (CPI) or 2.5%. Whichever growth measure is the highest is the indexing factor used by the Treasury to incrementally increase state pension benefits paid to members. The tax year 2022-23 saw this index rule briefly suspended as the UK economy emerged from the Covid-19 pandemic. Wage growth was running high as the economy sparked back into action, and the then Secretary of State for Work and Pensions, Thérèse Coffey, therefore decided to remove the anomalous number from that year’s calculation. The triple lock has been reinstated for the 2023-24 tax year, which will see benefits increase by 10.1% - the annual inflation number registered in September 2022.
It was announced last week that a proposed rise in the state pension age to 68 will not be brought forward, following a review by the Department for Work and Pensions, although the planned rise of the state pension age to 67 is expected to take place between 2026-2028. The decision to move towards the target age of 68 has been scheduled for review within two years of the next parliament, with a General Election due to take place no later than January 2025.
Also taking effect this tax year is the reduction in the Capital Gains Tax (CGT) allowance which, like the triple lock, was previously uprated in line with price inflation. The CGT annual exemption allowance (AEA) has been reduced from £12,300 for private individuals to £6,000 in the tax year 2023-24, with a further drop to £3,000 during the tax year 2024-25.
It has been a rather tumultuous month for equity markets, with fears of contagion spilling over from the collapse of Silicon Valley Bank and, concurrently, the rescue and takeover of Credit Suisse by UBS. This uncertainty has encouraged investment flows into gold, which is traditionally seen by many as a ‘safe haven’ asset in a challenging market, and has pushed the sterling and dollar gold prices to all-time highs.
We offer a dedicated account management service for anyone wishing to discuss their investment holdings at The Royal Mint, as part of their annual tax planning. You may also want to find out more about our Gold for Pensions offering, through which you can add gold to your well-diversified pension portfolio. Call our Customer Services team on 0800 032 2152 and ask for one of our account management team to phone back at a time to suit you, or book an appointment.
* To be tax free, the lump sum needs to be paid within two years of the scheme administrator becoming aware of the death.