Understanding your pension empowers you to feel secure about your long-term future – and that is also true of your clients. However, Money Marketing reports that 24% of over-55s feel unsure about the different options and rules around accessing their pension funds.
You needn’t look much further than the recent news headlines surrounding 3.6 million WASPI (Women Against State Pension Inequality) women to see how misunderstanding pension changes can derail people’s retirement plans.
It doesn’t help that, as different politicians and governments come into power, pension rules can change. Even if a client understood their pension a decade ago, they may not now.
With that in mind, read about some recent changes to pensions that could affect your clients and their financial plans.
The Lifetime Allowance has been abolished
At the 2023 Spring Budget, Jeremy Hunt announced plans to abolish the Lifetime Allowance (LTA). Now, in the 2024/25 tax year, this plan has become a reality.
Previously set at £1,073,100, the LTA represented an upper limit on the pension wealth a client could accrue during their lifetime without facing additional tax charges on withdrawal. It included all your client’s pension assets including personal and employer contributions, tax relief, and any investment returns.
Previously, if the value of your client’s pensions had exceeded this threshold, they would have faced an additional tax charge when they accessed it. The value of their pensions over the threshold would have been taxed at:
- 55% if they took their pension as a lump sum
- 25% if they took it as income.
Following the abolition, there’s now no longer an additional tax charge for withdrawing funds, enabling clients to build up a much larger pension fund without having to worry about a further tax bill.
However, clients should be aware of the new Lump Sum Allowance (LSA).
Set at £268,275, 25% of the former LTA, the LSA limits the size of the lump sum your clients can withdraw from their pensions tax-free – irrespective of the total size of the pension fund.
The State Pension has increased by 8.5%
The government has also increased the State Pension by 8.5%.
This means any clients who reached State Pension Age on or after April 2016 could now receive a full State Pension of £221.20 a week (up from £203.85). Those who reached State Pension Age before April 2016 could receive £169.50 (up from £156.20).
These recent changes may mean your clients want to act
In light of these recent pension changes, your clients may want to take some action to maximise their pension contributions, take advantage of tax relief and employer contributions, and mitigate their Inheritance Tax (IHT) liability.
1. Your clients may want to contribute more to their pension
Some of your clients might have stopped contributing to their pension to avoid breaching the LTA. Now that it’s abolished, they may consider starting again so they can benefit from further tax relief and employer contributions, and boost their retirement income.
2. Your clients may consider returning to work
One of the aims of abolishing the LTA was to encourage skilled workers who had decided to retire – partly as they faced potential tax charges for accruing more pension wealth – to return to the workforce.
So, if your clients have retired, they may consider returning to work. Not only would they benefit from tax relief, but they could also receive extra employer contributions if they returned to a salaried role.
Remember that, if your clients have already flexibly accessed their pension, they may be subject to the Money Purchase Annual Allowance. This limits their Annual Allowance to £10,000 (2024/25) rather than the full £60,000.
3. Your clients may be able to mitigate their Inheritance Tax liability
Normally a person’s pension falls outside of their estate for Inheritance Tax (IHT) purposes.
With that in mind, without the tax-free cap of the LTA, your clients may be able to reduce the value of their taxable estate by contributing more to their pension and living off income from other assets.
Additionally, by contributing more to their pension, they can benefit from tax relief and potentially pass more money on.
4. Your clients may want to top up their National Insurance contributions
As you previously read, your clients can now enjoy a higher State Pension. However, receiving the full State Pension is dependent on their historic National Insurance contributions (NICs).
To receive any State Pension your clients will need at least 10 years of NICs, and at least 35 years to qualify for the full State Pension.
If your clients don’t have enough years on their record, they might be able to top them up.
Clients can check their State Pension forecast on the government website to see what they’ll be entitled to. They have until 5 April 2025 to fill in gaps from their National Insurance record as far back as 2006. After this deadline, they’ll only be able to fill in gaps from the previous six years.
We can help your clients navigate these recent pension changes
At Santorini Financial Planning, we’re one of just 58 Accredited Financial Planning Firms in the UK. That means we exhibit excellence in everything we do and are recognised as one of the country’s most trusted planning firms.
If you think your clients could benefit from our expertise to adapt to the recent pension changes, or in any other financial matter, they can contact us by emailing info@santorini-fp.co.uk or calling 01509 278620.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
