A pensions dilemma for investors and a challenge...

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IN PRESENTING her party’s first Budget in 14 years, the new Labour Chancellor was faced with a challenging task. Following her announcement of a “black hole” in the public finances, Rachel Reeves would need to strike a balance between the need to renew the Treasury’s coffers while also maintaining Labour’s manifesto promises.

A tall order indeed.

With the full details of the Budget now revealed, many have looked unfavourably on some of the Chancellor’s decisions, criticising it for a lack of growth-generating measures given the Chancellor’s rhetoric on the need to revive economic growth in the UK.

Away from the initial market reaction to the Budget, the largest fall-out for investors has clearly surrounded the fact that pensions will now form part of an individual’s estate, therefore anyone who has an estate valued above their individual allowances will now be hit by a tax on second death and pensions potentially locked into probate before they are released.

The reason why this impacts everyone is that today a pension sits outside of the estate, and as such, most individuals would not be taxed as a couple’s joint estate without pensions is below the £1 million joint threshold. From 2027 (detail to be provided) your pension -  irrespective of what protection you have in place today (allegedly) - will form part of your estate and, being potentially assessed as part of your estate, will therefore be locked in probate.

This will cause three problems.

Far more individuals’ estates are likely to be charged Inheritance Tax and charged at 40% on second death. Pension funds will likely not be immediately available and from 2027 locked into the probate process. There is an interaction between total estate and main residence nil rate band that is worth £175,000 per person for estates below £2 million in that if your estate goes above £2 million then you start to lose it.

If, therefore, your total estate goes above £2.35 million including pension then your allowance against which you pay no Inheritance tax reduces to £650,000.

In addition to the key headline, the other big news stories we saw were:

The main rate of class 1 employer National Insurance Contributions will be increased from 13.8% to 15.0% with effect from April 6 2025 and the secondary threshold at which NICs are payable will be reduced from £9,100 to £5,000. The main rates of capital gains tax will increase with immediate effect to 18% for non and basic rate taxpayers and 24% for higher and additional rate taxpayers. The rate for business asset disposal relief will rise to 14% for 2025/26 and 18% from 2026/27. Inheritance tax business and agricultural 100% reliefs will be capped at a combined total of £1 million from April 2026. Above that, the rate of tax relief will be 50%. However, the cap will not apply to AIM shares which will just qualify for 50% relief. The additional Stamp Duty Land Tax rate for second homes and buy-to-let properties increased from 3% to 5% from October 31 this year. The temporary increases in the 0% SDLT band for first-time and other property buyers will end on March 31, 2025. VAT at 20% will be applied to private school education and boarding services from January 1, 2025. From April 1, 2025, charitable relief for business rates will be withdrawn. Subscription limits for Individual Savings Accounts, Junior ISAs and Lifetime ISAs will be frozen until April 2030.

 As ever, the Budget publication contains a wide range of detailed proposals and there is much still to digest, with a consultation period on the key pension changes still to be completed so let us hope they think in the round on that one.

Please also remember government and taxes rise and fall so what has changed today could very much reverse tomorrow.

To discuss the budget and how it potentially impacts you, your family or your business, please do not hesitate to contact OCM Wealth Management.

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