Daniel Partridge

Good morning, everybody. Welcome to today’s WKM webinar, hosting today myself, Dan partridge and Neil Wattam. Today, we’re going to be talking about the recent changes made in the budgets affecting pension schemes and what they mean to you. So before we start, just the usual compliance disclaimer, I’ll leave that up for a moment. Essentially, everything we discuss today is just for information. It’s not specific advice. But of course, if you do require specific advice, please come and speak to us. So this is just guidance and for your information. So today’s webinar split into four sections, just a couple of slides about WKM, where we are at the present time, then we’re gonna go into the actual webinar itself. We split this up into a few sections. Firstly, just looking at what the position was pre budget in respect of the changes that have been announced. Look at the changes regarding the annual allowance so that’s the contribution allowances, look at the changes regarding the lifetime allowance. Look at some client scenarios, case studies. And then at the end, we’re going to have a question and answer session with the next steps.

Neil Wattam

So just for those who perhaps are less familiar with us, so we’re a team of eight at the moment, due to be nine in the summer. And we’ve been going just over three years. So the team is a mixture of the four founders and the team that have joined us since and that was us at our recent investment events, which we will hopefully replicate at some point in the near future. So we are wholly independent advisors, investment managers, that’s you know, we can look at the whole market we do. Four of us founded it back in 2020. And like I’ve just mentioned, delighted that Dan has joined us as a director now as well, and the rest of the team who have joined us to help provide the service we want to do for our clients. We’ve got almost too many years between us and not enough hair. So there’s a lot of experience in a team despite the relatively few years as a business

Daniel Partridge

I thought you were going to say the follicle challenges.

Neil Wattam

No, that’s been there for a while, it’s not particularly new. But you know, we focused on financial planning, the investment management side led by Ben. And we’ve got a lot of experience in topics such as pensions, which is what we’re going to kind of focus on predominantly today. We did this, we launched it because we want to enjoy what we do, who we work with, and have a more selective approach to clients rather than having masses. So in terms of I’m going to kick off with the first slide, which is just a recap, I guess, on the pre budget position. Now, this is really focused this presentation today on pensions. So it’s not everything clearly. But lifetime allowance is probably one of the main headlines from the budget hence starting with that previously was had been frozen, or is has been frozen, excuse me, at just over £1,000,073. But it has moved around over more recent or years ago, when it’s been as high as 1.8, then it’s come down to come down being frozen was meant to be frozen. There were protections or are protections in place, which Dan will talk about in a few minutes. But essentially, the £1,000,073 was there, which is not a cap on how much you can put into a pension, but it’s the level at which you basically retain the tax advantages. Without any further taxes. The annual allowance, which is as it suggests, it’s an allowance on how much you can contribute and receives a tax relief. Again, you could technically put more in. But you pretty much wouldn’t otherwise you don’t get any tax relief on those extra amounts. There were some other allowance matters, I suppose, being the tapered annual allowance. So for higher earners, typically over £200,000 plus, there are a few tests in there. But basically, if you were at £312,000 or above you are fully what’s called tapered, which meant that you could only put in up to £4000 and still keep the tax relief and money purchase annual allowances where someone has taken income from a DC defined contribution pension. And again, this is to stop effectively you re topping up and getting tax relief on the stock but reduce. And then finally but by no means least, the tax free cash or the pension commencement lump sum. That was a maximum of 25% of the LTA again protections existed, but those were the primary pre budget positions that have notably changed. So Dan, onto protections.

Daniel Partridge

Yeah, thanks, Neil. I guess it’s it’s worthwhile, just to remind ourselves when the lifetime allowance is tested. So essentially three tests against a lifetime allowance when you draw down your pension benefits. At age 75. And then if a member of pension scheme was to pass away effectively on death, the lifetime allowance is tested. Lifetime allowance itself, as Neil mentioned, started out at £1.5 million, and they’ve increased for a number of years, up to £1.8 million pounds. And back in 2006, so the lifetime allowance has been around now for what 17-18 years or so. So it’s been in place for quite quite a while. But back in 2006, when it was introduced, there was two forms of protection that you could elect enhance protection and primary protection. Essentially enhanced protection allowed your fund to grow any level and you’d never be tested against the lifetime allowance. But in doing so, you’ll no longer be able to make any further pension contributions. Primary protection effectively protected your fund at the level it was in 2006 but did allow for contributions to be continued to be made in the future. I guess austerity took hold in the UK. Taxes rose, the lifetime allowance was impacted and effectively reduced over the next few years. So fixed protection was introduced which potentially lifetime allowance originally £1.8 million pounds and then 2014 at £1.5 million pounds. And in 2016, at £1.25 million pounds as the lifetime allowance fell in value to its current level, which is £1,073,000. There were also a couple of other forms of protection, individual protection, less commonly used, but effectively work similar to to the original primary protection. So the point being is, as a lifetime allowance is reduced over that time period, you’ve been able to protect your fund value against it, but you’ve always had effectively a limit to that to that level of protection, and potentially age 75 or on death, there would be a charge a tax charge that was levied on your pension fund.

Neil Wattam

So that’s kind of covered the primary pension related pre budget positions. So in terms of moving on to some of the changes, so in no particular order, but annual allowance. So as I mentioned before, this is the amount that you and an employer can contribute into a pension and receive tax relief. So the value is the gross value that’s into the pension. That has increased by 50% to £60,000 per tax year, which is a notable increase, and perhaps one that was less well signposted ahead of the budget. This means of massive change for higher earners, particularly not noting that the tapered annual allowance, which I’ll come to in a minute is still there. But perhaps if you know, £100,00 – £150,000, or even £200,000 earners, who potentially have more disposable income, and or they have employees who are perhaps more generous, or business owners, which we’ll also talk about, this is a really notable increase, and gives people the chance to really build on their pension savings, particularly if they’re playing a bit of catch up, perhaps, which nicely leads me on to the point of carry forward, which remains no changes to it as such. Having said that, this is just a reminder, you can effectively go back and use the prior three tax years to the current one, and essentially utilize any unused allowances. There are rules, primarily they have to be a member of a pension scheme for those years. And you have to have sufficient earnings. I won’t go into too much detail on that. But the big thing is it’s about this tax years earnings that really drive these annual allowances. If you had earnings that are perhaps spiky, maybe a big bonus in one particular year, that’s okay to be mindful of, but it’s about the current tax year that the taxman really cares about. So the carry forward, I guess, on top of the annual or the larger annual allowance means that someone could put a sizable amount into pensions. And that’s a potentially great benefit. The tapered annual allowance issue, if you recall, was £4000, that’s now £10,000. So again, if you are a particularly higher earner, it does give you and or your employer a little bit more headroom to contribute without tax consequences. I would argue that it still is not huge and if you are earning, say £300,000, then I dare say if your employer is making contributions, you’re probably over that anyway. So has it made much of a difference? Not sure it has. But nonetheless, it’s a useful step in the direction for those people affected by it. And the same applies, the same value for the money purchase annual allowance. So again, people perhaps who have dipped into their fund contribution pensions and taken an income. It could be useful if you are I mean, I think the reason they wanted to do it was the over 50s particularly push to get people back into work. Is this going to pull them back in? I don’t know. But it does give people that bit more wiggle room. So useful increases. But I think the top one, the main headline of the annual allowance increases is the big change for a lot of our clients and potential clients as well.

Daniel Partridge

Yeah, so probably the headline change for pensions in the budget was the changes to the lifetime allowance, so the lifetime allowance still remains at £1,073,100, but in this tax year, if your fund is in excess of the lifetime allowance and you have a lifetime allowance test, you’re on drawdown of pension benefits on death of a member at age 75, there will be an effective tax rate of 0% applied to that. So previously, that was either 55%, if the balance of other lifetime allowances was drawn as a lump sum, or if it was drawn as an income from the pension fund, it was 25% from the pension from itself, and then your marginal rate of income taxes you withdraw those funds from the pension scheme. So in the current tax year, it will be 0%. The reason for that is that from 24/25 tax year, the LTA is set to be removed. But as yet, because the legislation is not in place, it hasn’t been removed. So effectively, the tax that you would pay on an LTA test or lifetime allowance test has been reduced to zero. And then it’s proposed from the following tax year, the actual LTA itself will be removed.

Neil Wattam

So it’s what we’re saying is on that. So the expectation, our understanding is that that calculation will happen. It’s just zero tax. So from a process perspective, it’s still going to be effectively checked, it’s just no tax.

Daniel Partridge

Exactly so the process is exactly the same and then one of the considerations is that the legislation is in the bill stage at the present time. It’s not actually a Finance Act. So that’s expected to be around July of this year that it effectively receives or moves into an act and becomes official policy, if you like or law, I should say. So as this time it’s not effectively an act of law, hence why the charge is at zero. I think the other point to note as well, is that tax free cash is still going to be 25% of the previous lifetime allowance or the actual lifetime allowance with £1,073,100. Not quite sure why they have that £100 on there. Or whatever your fixed protection or enhanced protection lifetime allowance was effectively. If you have fixed protection in place, then it’ll be 25% of that fixed protected lifetime allowance as your maximum tax free lump sum, rather than anything above the actual lifetime allowance.

Neil Wattam

It’s worth just pointing out by the way, if you do have any questions, there will be a question and answer session towards the end. But if you have any questions, you can pop them in the chat. And we’ll take a look at them in a bit. So as we mentioned earlier that we’ve got a few case studies, just trying to bring things to life because we talked a lot of technical matters and there’s quite a few numbers around. And as Dan sort of mentioned earlier, everyone’s circumstances are individual, specific. Everyone’s different. So what we’re talking about here is, I guess, some ideas, some examples. So if you do need, if you’re affected by these sort of things, then feel free to have a chat with us. But everything is specific to you and your situation. So as we mentioned before, the annual allowance is now £60,000, depending on your actual income. So you can only put up to £60,000, personally if your earnings are above that. Taxable earnings and earnings, I guess without going into too much detail. Again, it excludes a rental income or any pension income. So it’s really earned income. And this subject and tapering point definitely apply. So for higher earners. Again, there’s things called adjusted income and threshold, which are points at which you have to be aware of and again, it gets particularly complicated. There’s factors you have to take into account including employer contributions, your contributions, all sorts. So if you are a notably higher earner, I would really suggest seeking advice on it. It’s not straightforward, but assuming that you’re not tapered, you can and/or your employer could put in up to £60,000. I think we’ll talk about business owners again, in a bit but the point of higher corporation tax rates which are now as of this tax year up to 25%. You might be familiar if you’re a company director and shareholder about the steps up from £50,000 of profit up to £250,000, where the 25% properly kicks in in full. There are HMRC rules as ever, and there’s the HMRC holding exclusively sort of test. But effectively if you’re an employed director and I guess you’re older potentially. You do have flexibility and the company now could make up to £60,000 into your pension and the company would or should hopefully receive tax relief at 25%.

Daniel Partridge

Per member. So for sort of group occupational schemes like a SSAS, that would be per member.

Neil Wattam

Which is, you know, business owners. Whilst the corporation tax rate is perhaps unhelpful. You can you have a slightly larger opportunity to reduce that tax burden. And you know, we’re business owners, and we want to help where we can inform and educate business owners to the relatively limited opportunities there might be to save some tax, but this is a great one, your pension gets a boost company saves on corporation tax, happy days. The next point about the increase in tax burden? Yeah, I mean, the general I think the tax burden is as high as it’s been for a long time, the Second World War or thereafter. So the opportunity to make pension contributions is perhaps one of the bigger opportunities to save some tax. If you are earning between £100,000 – £125,140, the personal allowance gets taken away for every two pounds you earn at one pound, per two pounds. So effectively, you are being taxed at an effective rate of 60% in that band, which is painful. And if you’ve had pay rises recently, you could find yourself creeping into that band, unknowingly. And it really hurts from a tax perspective. So making pension contributions effectively reduces that tax burden. Child Benefit is another one where, you know, people earning 50 to 60 plus, and it’s the one person in the household who’s affected not joint, then again, you effectively have a child benefit tax charge applicable. So pensions can help or pension contributions can help reduce that. So pension contributions, one, you have a larger scope, both as a company contribution and or personally. But as noted here, you can’t just make a contribution, because you think you can, you know, earnings have to be there or sufficient profits. We don’t know what’s going to happen in future of legislation. We didn’t expect this. I mean, it’s still not legislated, as Dan said. I have a motto, it’s not really a motto, but if there are opportunities in front of you, and it makes sense and it’s affordable, then, you know, try and take advantage of these things. But these things can change as they change now.

Daniel Partridge

Yeah which probably leads us onto the last couple of points on the slide. So you know, labour have said that they will reverse the changes that have been announced in the budget, whether that’s practical or possible, will remain to be seen. But as we’ve seen over the last 10-15 or more years, the rules do constantly change. So it could be a limited window of opportunity. But whatever the decision you make, it’s got to be the context of your so overall position with advice. Because there are knock on effects.
Okay, so probably one of the key considerations with the changes is around breaking the lifetime allowance position that may be in place. What happens if you make contributions in excess of the lifetime allowance? What happens if you have the benefit of fixed protection previously in place? Well, essentially, if you fund is in excess of the lifetime allowance in the current tax year, the lifetime allowance rate is 0%. So there is no additional tax to pay on that. There’ll be no tax free cash available for funds in excess of the lifetime allowance, or your protected lifetime allowance. But there is no additional tax. So effectively, you’ll be charged at income tax levels on any funds that you withdraw from the pension fund on that basis. Likewise, if you make contributions into your pension fund and you have fixed protection in place or enhanced protection in place from a number of years ago, then again, you will not lose that protection, and you will still retain that protection. But importantly again, it will not provide you any further tax free cash contributions in excess of the lifetime allowance or in excess of your fixed protected amounts. There are a few technicalities with this. So for those that have enhanced protection in place, for instance, your tax free cash at the moment is 25% of £1.5 million. If you make further contributions under the new legislation, your tax free cash will not exceed that capped amount of tax free cash, so 25% of £1.5 million. It will go into a separate pot essentially. So again, advice is required when you look at these positions because there’s a number of considerations to take into account on that basis. But certainly, as Neil was saying, with the annual announce, now it’s £60,000, plus the ability to use carry forward from the previous three tax years. And indeed, if you’ve had fixed protection in place or enhanced protection in place, you will have not used those annual allowances that carry forward allowance from previous tax years. So you potentially have the opportunity to make quite large contributions in an environment where corporation tax has risen to probably its highest level for a number of years, so a great opportunity. However, you just need to consider this in the context of your wider planning, what is the advantage of making a pension contribution. I mean, the advantage of making the contribution is obviously the corporation tax relief, the longer the contribution stays within the pension arrangement, the more tax efficient it becomes. As I said, contributions in excess of the lifetime allowance will not provide any tax free cash. So that limits the the tax efficiency to some extent, but depending on the individual circumstances, there could well be opportunities. And as we’ll come on to the other opportunity relates to death benefits. So in terms of the death benefit position, you’ve got three scenarios now, which are the same as before, but the tax rates differ. So if a member dies before age 75, then their fund below the lifetime allowance is tax free to their beneficiaries. If the member dies before age 75, and their fund is above the lifetime allowance, it is subject to income tax on the beneficiary, which could be it could be at nil, it could be basic rates, it could be at higher rates, whatever their income tax rate is. The key factor here is that there isn’t an additional lifetime allowance surcharge applied to it, which would have been either 55%, if taken as a lump sum, or 25%, if taken as an income, so quite a significant change. Likewise, on death over the age of 75, any fund in excess of the lifetime allowance would not be subject to the lifetime allowance charge. Also worth pointing out there wouldn’t be a lifetime allowance test at age 75. So again, it will be subject to income tax as it is at the current time on the beneficiaries that withdraw that from the funds, so quite a significant change in terms of the death benefit position. And also noting that there is no inheritance tax applied to pension schemes, as well. So if you take those previous points in combination, and the ability to make large contributions, particularly for those that have not contributed for the past few years, the fact that the lifetime allowance charge has been removed. And the added advantage this has with death benefits from a pension scheme, it certainly makes it even more tax efficient, perhaps than it was before. However, as we’ve said, advice is required.

Neil Wattam

Yeah and I was just thinking, Dan, as we’ve been talking through the slides, we’ve been talking in that the rules are the rules for pension schemes, broadly, but a lot of the focus of the discussion has almost been focused on defined contribution pensions. But a lot of the legislation and changes have been factored in because of say NHS, doctors, consultants and other sort of Civil Service DB pensions where people, you know, accrue, so rather than you contributing, say up to £60,000, you’re effectively accruing an extra contribution effectively, but you’re not paying it in it to £60,000. So there are DB questions out there. We almost focused a bit more on the DC points, here with death benefits as well, I mean there are technical death benefits with DB schemes as well. But you know, a lot of this conversation is focused on DC pensions, however, the rules, by large applies both ways.

Daniel Partridge

Yeah, we should also say that DC pension is things like your SIPP or your SSAS, personal pensions, rather than a DB scheme in a final salary pension scheme.

Neil Wattam

Yeah. You might have both potentially, which could work out in harmony potentially, but if you know, seek advice and DB schemes get very complicated, but most of this conversation has been kind of tempered towards DC schemes. This is the final slide in terms of content, I suppose, and we will send the slides out after the webinar. So this is almost a bit more for your reference than anything else. But there were some other changes announced. A lot of them were leaked ahead effectively. But I guess just for reference, and as we said earlier, the general world of increasing taxation, whether it’s actual rates, and maybe not other than corporation tax, but the freezing of allowances and bans effectively means you’re paying more tax as you earn more, because the allowance remains as it was. So ISA’s, I’m a big advocate of ISA’s. The amounts remain the same. And so that’s again use or lose it there, but the numbers are there for you. Capital Gains Tax and dividend income are, I guess one of the bigger items that were non pension that changed, significant changes into the reductions of the capital gains tax allowance, tax free allowance, and dividend income. I mean, they’re still tax free allowances. So if you can make use of them great. But they are notably reducing, and particularly ahead to next tax year, again, where they halve again, so you need to think of the wider planning. As Dan’s mentioned, the income tax thresholds remain frozen again. However, the additional rate kicks in at now above the £125,140. So that will pull a large number of people into that tax rate. So again, we talked about pension contributions can be potentially very helpful for the high earners. Inheritance tax, no changes, in terms of the nil rate bands and the resident nil rate band, which is fine. Some planning, you need to think ahead, and pensions can be DC pensions can be a really attractive place to help shelter family assets ultimately. And as I mentioned earlier, corporation tax is or has gone up. But depending on the level of corporate profits, so could be anywhere between 19% and 25%. So these will be sent out I’m not gonna dwell on it, because we’re effectively over time.

Daniel Partridge

So in summary, these are dramatic changes because lifetime allowance has been in place for many years now and has reduced over that time and now all of a sudden there has been a change where effectively there’s no tax charge. However, the basis of this change was perhaps more of a pragmatic approach to the NHS pension scheme and the issues that has had over recent years. So although we have had a change perhaps the focus of that change wasn’t so much changing the pension rules for the purpose of changing the rules, it was to facilitate an easing of the issues within the NHS pension scheme. I think the point there is, to then change it back again in the future, it could actually be quite difficult or complicated. We may see these rules remain in place for a good while in the future rather than being changed back again. I think in terms of the planning options that have been provided for pensions and holistically when you look at estate planning, this is probably the best opportunity since 2006 when the legislation fundamentally changed previously, or at least to my mind. As we have said throughout, advice is required, you need to be cautious before making any decisions, have to bear in mind that the legislation is in bill format at the moment rather than a finance act, so it is not actually law, all be it things such as the lifetime allowance is 0% rated from a tax charge point of view as this point. As we have also said, it could change at the end legislation, the government can change if it wishes, but of course we only plan based on the rules we have in place.

Neil Wattam

Yes, no panic decisions, no knee jerks, equally we don’t have a crystal ball, so it’s trying to make use of what’s in front of us now ahead of what may or may not change.

Q1) How much is the carry forward allowance?
As I mentioned earlier, you can go back three tax years prior to the current one and the annual allowance in the prior three tax years was £40,000, so I’m talking maximums here, and then you have £60,000 this year. So the order you have to go in, the current tax year, use that in full, then you go back to the oldest tax year of 2020/2021 and then you work forward. This is where some planning, thinking, some advice can be really useful to think, if you have got those 4 years, do you use them all? Do you not? How do I use it? There’s up to £180,000 potentially, subject to various rules and regulations as ever, but that’s a sizeable amount that you could make use of.
Q2) Will I lose my fixed protection if I make a contribution?

Daniel Partridge

No, so as long as that fixed protection was in place before 15th March 2023, if you make a contribution in the current tax year, you will still retain that fixed protection, but obviously caveated that if you are above the lifetime allowance or the fixed protcted amount of lifetime allowance you have, there will be no further tax free cash on that contribution.

Neil Wattam

Q3) What are the advantages of making a contribution if you’re over the lifetime allowance?

Daniel Partridge

That’s probably multifaceted, and very much depends on individual circumstances but the advantage would obviously be, if its made from a business, from a business owner, the corporation tax relief, it’s outside of your estate, it’s in a tax free environment. I think the point there is, the advantage of the pension fund or the tax free environment of the pension fund enhances over time, so the longer it is in that environment, the more tax efficient it becomes. If you draw that down immediately, then the tax efficiency diminishes somewhat within the pension fund but certainly on the basis the death benefit rules have changed and perhaps become more tax efficient, and inheritance tax doesn’t apply to pension funds, there a quite a few significant advantages there.

Neil Wattam

Indeed, and I guess coming back to the planning, juts because say ‘you’, or one partner is over the lifetime allowance, you might both be involved in the business so why not consider the wider opportunities, so there are some noticeable advantages, but equally there might be others that are potentially more beneficial as a family unit or family planning rather than just the one person.

Q4) Did the budget have any impact on the effect of 60% tax rate?
This is guess is referring to the point I made earlier about earner between £100,000 and £125,140, so this is where the personal allowance gets taken away or reduced, so you are effectively paying 60% tax on that band. There were no changes announced, it’s a further quirk in the tax system alongside the child benefit one, where people are penalized especially in that zone, so you can effectively pay 40% tax up to £100,000, then effectively 60% between that band and then 45% above that. So there’s a strange hump, but there were no changes to that. I guess having said that, the annual allowance going up gives a bit more opportunity potentially, but nonetheless £60,000 if you are earning £110,000 is huge.

Thank you for your questions, I hope that been a useful session. The next webinar is in August. We will make a recording of todays webinar available on our website, which is newly launched by the way, so take a look. That went live a few weeks ago, I think it was. Our details are there, again you can contact us through the website or email or phone. Happy to hear from you, if you have any thoughts on future webinar topics, we love to hear them as we are doing this to inform and educate as best we can, so happy to take those in due course.

Daniel Partridge

Thank you for your time this morning, I hope you have all found it informative and if you do have any queries, please get in contact.