The Big Freeze: What the Budget means for your retirement plans

The effects of the coronavirus pandemic on the UK economy have been well documented. The last 12 months have seen record borrowing, hits to GDP, and rising unemployment.

Back in March, the chancellor Rishi Sunak delivered his spring Budget.

The government’s coronavirus spending has left a hole in the public purse and yet Covid – and its effect on the economy and livelihoods – is still a huge part of our lives.

How did the chancellor’s announcements balance the need to support those affected by the pandemic, while recovering government losses? And what does the freezing of tax thresholds and allowances mean for your retirement plans, now and in the future?

Budget freezes could affect your retirement plans

The Lifetime Allowance – frozen at £1,073,100

The Lifetime Allowance (LTA) is a limit on the amount you can withdraw from the pension schemes you hold without becoming subject to an LTA charge. The charge is 55% on any excess pension funds – those over the limit – that you take as a lump sum. Excess funds taken as income are taxed at 25%.

The freeze, due to stay in place until at least 2026, is expected to raise around £990 million for the Treasury. The funds will come from the charge itself, but also through saved pension tax relief where savers approaching the limit cease contributions.

The LTA was introduced back in 2006. It began at £1,500,000 before rising to £1,800,000 and dropping down to £1,000,000 in 2016/17. Since 2018/19 it had been rising in line with inflation.

While £1,073,100 might seem like a large amount, it would provide an annual pension of just £36,000, according to Hargreaves Lansdown’s pension calculator. This is based on a 65-year-old male, retiring next year.

Figures from Canada Life suggest that a current retirement pot of £469,000, with no further contributions, could breach the LTA in 20 years. This assumes the LTA is frozen until April 2026 and then increases by 2% on average each year.

Andrew Tully, technical director at Canada Life said of the freeze, “this measure simply sends the wrong signal to savers trying to do the right thing. It also penalises good investment performance.”

The Inheritance Tax nil-rate band – frozen at £325,000

Thinking about the assets you intend to pass on to the next generation is an important part of your retirement planning.

Regardless of the size of your estate – and any potential IHT liability – you expect to leave behind, the freezing of both the nil-band rate (£325,000) and “residence nil-rate band” (£175,000) could affect you in the future.

As house prices and the value of your assets increases over the next five years you could find yourself liable for tax. HDA can help you think about the value of your estate and the most tax-efficient way to pass your wealth onto the next generation so get in touch if you have any questions.

Capital Gains Tax (CGT) annual exemption – frozen at £12,300

Also frozen for five years, you could find yourself liable for CGT on the disposal of assets whose value has risen during that five years.

HDA can help you decide how and when to dispose of assets tax-efficiently so be sure to speak to us before you sell any assets you hold.

For some thresholds, the Big Freeze kicks in next year

The Personal Allowance

The Personal Allowance is the amount you can earn before you have to pay tax.

The allowance rose from £12,500 to £12,570 for the 2021/22 tax year but will then be frozen until 2026. The higher-rate threshold also rose – from £50,000 to £50,270 in 2021/22. This too will then be frozen until 2026.

Whether you are still working or receiving taxable pension income, the freeze will impact the real-terms value of income you receive over the next five years.

The Treasury expects the move to raise around £6 billion, pushing 1.6 million people into the higher tax bracket by 2024.

Get in touch

While not all the Budget announcements will affect your retirement planning directly, the freezes – essentially stealth taxes – are designed to increase the government’s revenue in the wake of its pandemic overspend.

You’ll need to be aware of the amount you contribute to your pension and acknowledge that your real-terms income could decrease over the next five years. Wage increases and inflation will see the value of your assets grow while allowances and thresholds remain frozen, thus increasing your tax liability and impacting your take-home pay.

At HDA we can help you factor these changes into your retirement and estate planning, putting robust strategies in place aligned to your long-term goals.

If you’d like to discuss how the Budget affects you, or you want to revisit your retirement or estate planning, please get in touch. Email or call 01242 514563.

Please note

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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