lumin news Issue 10 / Winter 2024

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Page 4 lumin news 10 / winter 2024 How to avoid the sting in the tail of the new pension tax-free cash rules Savers with large pension pots could see the real value of their 25% cash lump sum undercut if they leave it intact. The lifetime allowance of £1,073,100 – the cap on the maximum amount you could save into pensions without extra tax charges – has been scrapped (as of April 2023). While this is good news for savers with large pensions, there is a sting in the tail. The standard lump sum entitlement – which allows savers to take 25% of their pot as tax-free cash – has been frozen at £268,275, with no plans currently in place to revise this. This has created a dilemma for savers with a large pension; should they leave their 25% entitlement intact – and see its value undercut over time – or put it to work elsewhere? Watch out for the erosion of your tax-free cash entitlement Assumptions: Net investment return of 5% per annum; 2% annual inflation. Year Fund value Max tax-free cash Tax-free cash percentage Frozen threshold If your pension were to grow over time, but the tax-free lump sum stayed fixed at £268,275, the percentage of available tax-free cash would shrink significantly in comparison to the total value of your pension. This is without factoring in inflation, which will eat into the purchasing Value of cash lump sum after inflation 2024 £500,000 £125,000 25% £125,000 2034 £814,447 £203,612 25% £167,033 2044 £1,326,649 £268,275 20% £180,541 2054 £2,160,971 £268,275 12% £148,107 power of your frozen tax-free cash amount over the long term – see example table. Possible solutions One option is to take the taxfree lump sum and reallocate it into different tax wrappers (although bear in mind the inheritance tax implications). UK adults have a £20,000 annual ISA allowance, while £9,000 can be put into a junior ISA. Offshore bonds and onshore bonds could also be a tax-efficient investment option for some savers, although it is important to weigh up the associated risks alongside the possible benefits. Want to find out more about how to maximise the value of your pension pot? Call a Lumin consultant on 03300 564 446. Pursue your personal investment strategy by bringing pensions together in one ‘mothership’ After a job move, it can be easy to forget about pension arrangements with a former employer. But it’s important to make sure the money is invested in the right asset mix and to monitor costs and performance. Having a ‘mothership’ pension – outside of a workplace pension with a current employer – can make that process much easier. Setting your own investment strategy Workplace pensions typically have a limited choice of investments. You are in an investment vehicle of the pension scheme’s choosing, which is designed for the ‘average’ employee. A preferrable option is to pursue an investment strategy based on your own goals, time horizon, and attitude to risk. Consolidating multiple plans into one self-invested personal pension allows you to tailor the asset mix/selection. Are your pensions on auto pilot? Investors in ‘target date’ or ‘lifestyle’ funds should be mindful of a changing asset mix. Such funds automatically reallocate from stocks towards ‘safer’ assets in the years leading up to a predetermined retirement date. However, that might not reflect your intended use of those assets or circumstances at the time. Less admin, lower fees Combining old workplace plans makes your pensions easier to manage and can lead to reduced costs, as some plans may have higher management charges. Some old plans may not offer flexi-access drawdown, which allows retirees to dip into their pension funds flexibly. Combining multiple pots into one single flexible plan can give you greater options when planning for both the short and long term. But it’s important to watch out for potential charges or any loss of benefits that would result from exiting a plan. Find out more by calling 03300 564 446.
lumin news 10 / winter 2024 Page 5 How to generate retirement income with a minimal tax burden With the right planning, and careful use of allowances, a couple can significantly lighten their tax load in retirement. JOE FISHER Financial Planning Manager joe.fisher@luminwealth.co.uk Phone 02039 887 788 Most retirees are able to substantially reduce their income tax burden once they stop working. With careful management and disciplined use of allowances, a couple could be able to shield up to £44,000 from tax in the 2024/25 tax year (see chart). A changing taxation picture in retirement During retirement the taxation picture undergoes a major shift for most people. Your income will drop significantly, so your tax bill will also fall. You can utilise several helpful allowances to stay within the basic rate tax band for income tax (20%), minimising your tax bill still further. In some cases, with careful planning, a retired couple could negate income tax entirely. It’s important to keep track of all forms of income. Pension withdrawals, rental income, State Pension payments and dividend income are all taxable. Making the most of tax allowances Pension withdrawals are subject to income tax at your A couple can have up to £44,000 income per year tax-free Max. tax-free income £45,000 £40,000 £35,000 £30,000 £25,000 £20,000 £15,000 £10,000 £5,000 £0 One person Personal allowance CGT allowance Starting rate for savings income marginal rate. But if a couple each apply their personal allowances of £12,570, over £25,000 can be taken taxfree each year. The capital gains tax annual allowance can be used to ‘harvest’ investment gains – or other taxable gains – in each tax year. This allowance is currently £6,000, but will be £3,000 per person for the 2024/25 tax year. Individuals with less than £17,570 of non-savings income may be able to benefit from up to £5,000 of tax-free savings income. This allowance is known as the starting rate for savings. Every £1 of non-savings income above your personal allowance of £12,570 reduces your starting rate for savings by £1. Basic rate taxpayers who have income above £17,570 can benefit from £1,000 taxfree savings interest per person each year, via the personal savings allowance. A couple Personal savings allowance Dividend allowance Cutting your dividends tax bill Investors who are earning income from dividends (on investments held outside of tax wrappers) can also take steps to reduce their tax bill. The dividend allowance of £1,000 will be cut to £500 from 6 April, but a couple can still enjoy tax-free dividend income of £1,000 annually. Staying within the basic rate tax band also sees you pay tax on dividend income (above the dividend allowance) at a rate of just 8.75%, rather than 33.75% and 39.35% for higher and additional rate taxpayers. ISAs and pensions ISAs and pensions form the bedrock of retirement income, but how and when should you draw on them? Many retirees make tax-free withdrawals from flexible ISAs first and save pensions for later in retirement (leaving them invested and with the opportunity for future growth), as pensions are typically exempt from forming part of the estate for inheritance tax purposes. Using ISA assets first enables you to continue Dividend making allowance pension contributions Personal of up savings allow to £60,000 in each Starting tax year. rate for savin This may be helpful if you CGT allowance are continuing to work parttime, as once you start Personal draw-allowancing from pensions you are limited to a maximum contribution of £10,000 in each tax year. You can take up to 25% of your total pension pot as a tax-free cash lump sum when you start accessing pension benefits. Strategically spreading pension withdrawals (beyond the 25% tax-free lump sum) over a number of tax years can help ensure overall income stays within the basic rate tax band, rather than making a large one-off withdrawal in a given tax year, which would likely tip you into a higher tax bracket. A retired couple who are making full use of their annual allowances and exemptions can save thousands on tax each year. Learn more by calling one of the Lumin financial consultants on 03300 564 446. FACTSHEET Tax-saving tips for pensions Request this free factsheet via enclosed response card, info@luminwealth.co.uk or call 03300 564 446
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lumin news Issue 10 / Winter 2024

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