Your Autumn Budget update – the key news from the chancellor’s statement
Almost four months after Labour won the general election, chancellor Rachel Reeves has delivered her 2024 Autumn Budget, outlining the government’s plans for this tax year and beyond.
Arguing that the July general election had given Labour a “mandate to restore stability and start a decade of renewal”, Reeves described it as “a Budget to fix the foundations and deliver change”.
Against a backdrop of a manifesto pledge not to increase Income Tax, employee National Insurance, or VAT, Reeves also announced that her Budget would raise taxes by £40 billion, stating that any other chancellor would “face the same reality”.
Read on for a summary of some of the key measures and announcements from this year’s Autumn Budget –and what they might mean for you.
Confirmation of the 4.1% increase to the State Pension under the triple lock
The basic and new State Pension will increase by 4.1% in 2025/26, in line with earnings growth, meaning over 12 million pensioners will receive up to £470 a year more.
Changes to some Inheritance Tax reliefs
As expected, the chancellor made key announcements that could affect estate planning.
Nil-rate bands
The freeze on IHT thresholds will be extended by an additional two years, to 2030. The nil-rate band will remain at £325,000, with residence nil-rate band at £175,000.
Pensions
Reeves announced she was closing the “loophole” that gives pensions preferable IHT treatment. She will bring unused pension funds and death benefits payable from a pension into a person’s estate for IHT purposes from 6 April 2027.
The government estimates this measure will affect around 8% of estates each year.
Agricultural Property Relief
Currently, individuals can claim up to 100% relief on agricultural property (land or pasture that is used to grow crops or rear animals).
From 6 April 2026, the first £1 million of combined business and agricultural assets will continue to attract no IHT at all. However, for assets above this threshold, IHT will apply with 50% relief.
Business Property Relief
From 6 April 2026, the government will also reduce the rate of Business Property Relief from 100% to 50% in all circumstances for shares designated as “not listed” on the markets of a recognised stock exchange, such as the AIM (Alternative Investment Market).
Capital Gains Tax reforms
The chancellor announced several changes to the Capital Gains Tax (CGT) regime.
As of 30 October, Capital Gains Tax (CGT) rates have increased immediately, with the basic rate rising from 10% to 18% and the higher rate from 20% to 24%.
The lifetime limit for Business Asset Disposal Relief (BADR), previously known as Entrepreneurs' Relief, remains at £1 million, while the Investors' Relief (IR) lifetime limit has been cut from £10 million to £1 million. The CGT rate for BADR and IR will stay at 10% for now but is scheduled to increase to 14% on 6 April 2025 and 18% on 6 April 2026. These changes are projected to raise £2.5 billion annually by the end of the forecast period.
Furthermore, CGT on carried interest – paid by private equity managers – will rise from 18% (basic rate) and 28% (higher rate) to 32% from 6 April 2025. There will be further reforms from April 2026 to bring carried interest within the Income Tax framework, under bespoke rules.
ISA subscription limits frozen until 2030
The Budget confirmed that annual subscription limits will remain at £20,000 for ISAs, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs and Child Trust Funds until 5 April 2030.
Additionally, in the 2025/26 tax year, individuals with employment or pension income below £17,570 can earn up to £5,000 in savings interest tax-free, thanks to the retained starting rate for savings.
An end to the freeze on Income Tax thresholds from 2028
Back in 2021, the then-chancellor, Rishi Sunak, raised the Personal Allowance to £12,570 and the higher-rate Income Tax threshold to £50,270, with increases of £70 and £270, respectively.
Importantly, he also fixed these thresholds until 2026. Then, in the 2022 Autumn Statement, Jeremy Hunt extended this freeze until 2028.
Unexpectedly, Reeves decided against extending the freeze beyond 2028. From 2028/29, personal tax thresholds will be uprated in line with inflation once again.
A rise in employer National Insurance contributions
Reeves increased employer National Insurance (NI) rates by 1.2% from 13.8% to 15%, effective 6 April 2025. Currently, employers pay NI only above a threshold of £9,100 a year. The chancellor reduced this threshold to £5,000 a year, effective 6 April 2025.
From 2025, the Employment Allowance will rise from £5,000 to £10,500 and the £100,000 eligibility threshold will be removed so that all eligible employers now benefit.
A change to business rates relief
The chancellor announced that, from 2026/27, permanently lower tax rates will be introduced for retail, hospitality and leisure properties, and some will receive 40% relief on their bills, up to a cash cap of £110,000 per business.
Corporation Tax capped at 25%
The government plans to support businesses to invest by publishing a Corporate Tax Roadmap. This confirms that the government will cap Corporation Tax at 25% for the duration of the parliament.
A rise in the national living wage
Reeves announced a 6.7% rise in the national living wage for workers aged 21 and over, from £11.44 to £12.21 an hour, effective April 2025, and from £8.60 to £10 an hour for workers aged 18 to 20. Apprentices will receive the biggest pay increase, with hourly pay rising from £6.40 to £7.55 an hour.
A freeze in fuel duty
Fuel duty has been frozen since 2011, and the 5p cut brought in by the Conservatives in 2022 has been extended at every subsequent Budget. Reeves confirmed the freeze for another year and extended the 5p cut, saving the average motorist £59 in 2025/26.
Second home Stamp Duty surcharge increasing
With effect from 31 October 2024, the Stamp Duty surcharge on the purchases of second homes, buy-to-let residential properties, and companies purchasing residential property in England and Northern Ireland will increase from 3% to 5%. This surcharge is also paid by non-UK residents purchasing additional property.
VAT on private school fees from January 2025
From 1 January 2025, VAT will apply to all education, training, and boarding services provided by private schools. Additionally, the chancellor announced that she was removing business rates relief from private schools from April 2025.
In closing, we understand that the recent budget changes may raise concerns, and we urge you to remain calm and thoughtful in your decisions. If you have any questions or need guidance, please don't hesitate to reach out to your financial planner. We're here to support you through these changes.
Please note
All information is from the Autumn Budget documents on this page.
The content of this Autumn Budget summary is intended for general information purposes only. The content should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
While we believe this interpretation to be correct, it cannot be guaranteed and we cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained within this summary. Please obtain professional advice before entering into or altering any new arrangement.
The World In A Week - Markets shrug off cold winds from the East
Written by Chris Ayton
Last week was a positive one for global equities with the MSCI All Country World Index retracing most of its losses suffered earlier in the month, and ending the week up +3.3% in Sterling terms. Large cap US growth stocks bounced back sharply with the NASDAQ 100 index up +6.2% over the week, boosted by Nvidia’s CEO citing at a Goldman Sachs technology conference that there continues to be a frenzy of demand for its products from its large and “emotional” AI focused customers with “everyone wanting to be first and everyone wants to be most”.
In the UK, July’s GDP growth number unexpectedly came in flat for the second month in a row. The economy grew by +0.7% in the first three months of the year and +0.6% in the second quarter but the flat numbers for June and July raised fears that the economy is stalling. This data also slightly raised expectations that the Bank of England could cut interest rates again when they meet on 19th September, although the odds are still in favour of the base rate being left unchanged at 5%.
The FTSE All Share Index ended the week up +1.3%. Takeover activity continued to be prominent in the UK market with the latest bid being by Rupert Murdoch owned REA’s £5.6bn bid for online property portal, Rightmove. The company swiftly rejected the bid, which was at a price 26% above where it started the month, saying it fundamentally undervalued the company’s future prospects.
In the US, away from the headlines from the Presidential debate, the latest inflation data showed inflation falling to 2.5% in August, although core inflation, which excludes food and energy, held steady at 3.2%. This tempered expectations of a 0.5% interest rate cut at the upcoming Federal Reserve meeting, although the markets are still pricing that as the most likely outcome.
Emerging Market equities were the laggards over the week, rising +1%, once again dragged down by Chinese equities which fell back -0.2% as China’s producer prices declined 1.8% year-on-year and raised more concerns that deflationary forces are entrenched in the economy. Data was also released showing that the value of new home sales by the top 100 developers fell 26.8% year-on-year. Although this lacklustre backdrop is far from ideal for equities, it continues to be positive for our funds’ exposure to China government bonds, with the Bloomberg China Aggregate Bond Index up +0.4% for the week and +8.2% for the year-to-date, both in GBP hedged terms.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th September 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Sahm Rules are meant to be broken
Written by Cormac Nevin
Last week was a challenging one for global equity markets. The MSCI All Country World Index fell -4.0% in GBP terms, and while all equity markets found themselves in negative territory for the week the worst affected was the U.S market, illustrated by the -4.5% (GBP) fall in the S&P 500 Index.
The source of the volatility we have witnessed over the last two months has been centred around economic data releases in the U.S, primarily around the health of the labour market. As we covered in prior notes, the U.S Non-Farm Payrolls employment report released on the 2nd of August undershot expectations by implying an increase in the unemployment rate and triggered a bout of market panic the following Monday. This was followed up with last week’s report whereby even though the unemployment rate fell back to 4.2% from 4.3%, the report again disappointed expectations.
Market participants are acutely focused on a concept known as the “Sahm Rule”. This metric was devised by the economist Claudia Sahm as an indicator for when the economy enters a recession. It is “triggered” once the 3-month moving average of the unemployment rate rises by half a percentage point or more relative to the minimum of the three-month averages from the previous 12 months. The dynamic which it seeks to capture is that when the labour market weakens, it does so at an accelerating rate as the growing body of jobseekers reduce demand in the economy spurring further job losses. This metric was initially triggered in the August payroll report and was further pushed into recessionary territory by last Friday’s report. Interestingly, Claudia Sahm herself has recently argued that her rule may not apply this time given large numbers of new entrants to the labour market from immigration, however markets appear to be becoming increasingly concerned about the U.S economy from a number of angles.
While the equity market’s reaction to these developments has been negative, the reaction from fixed income markets have been much more amenable, particularly in the highest-quality segments. The Bloomberg Global Aggregate Index of high-quality global bonds rallied +1.0% last week and is now up +3.9% for the quarter-to-date. The long duration U.S Treasury exposure we hold in the MAB Funds has rallied +3.4% last week and has now returned +9.5% for the quarter to date. All returns quoted were in GBP Hedged terms. Fixed income is once again playing its traditional role in providing meaningful diversification to equities, illustrating the value of a globally diverse multi-asset approach.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 9th September 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Rate cuts: a step closer
Written by Shane Balkham
In July, the Fed’s preferred measure of inflation, known as the core personal consumption expenditures (PCE) price index, which excludes volatile food and energy items, rose by 0.2% month-over-month. This mild increase has reinforced the Federal Reserve’s plan to start cutting interest rates at the next meeting in September.
Furthermore, consumer spending, which makes up more than two-thirds of US economic activity, saw a notable increase of 0.5% in July. While this may suggest that the economy remains strong and might temper expectations for a significant Fed rate cut, income growth was modest at 0.3%, and the savings rate declined to 2.9% from 3.1% in June. Some arguments suggest consumers are likely tapping into their savings to maintain spending, therefore, future spending may not be sustainable and may reflect ongoing financial stress in a high interest rate environment. However, others argue that the income figures might be understated, as they may not fully account for earnings by individuals working without legal documentation.
Nonetheless, the labour market is another key factor in the Fed’s decision-making process. With some signs of weakness emerging, Fed officials are paying close attention to how employment trends could impact consumer spending, which is the main driver of the economy. The August jobs report, due this week, will be crucial in shaping their decisions at the upcoming September meeting.
Across the Atlantic, the Eurozone is also seeing a slowdown in inflation. In August, year-over-year prices increased by 2.2%, down from 2.6% in July. This marks the lowest inflation rate in three years, and investors are already anticipating that the European Central Bank (ECB) will further reduce interest rates before the year ends. However, some policymakers remain cautious, noting that the battle against inflation isn’t over, particularly in the services sector where prices continue to rise, increasing 4.2% in August from 4.0% in July. Nevertheless, this news has been supportive for European equities, with the MSCI Europe ex-UK returning +0.8% over the last week and extending gains to +1.8% for the month, both in GBP terms.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 2nd September 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - A cut above the rest?
Written by Millan Chauhan
Last week, Jay Powell delivered his speech at the Federal Reserve’s (the Fed) annual economic symposium in Jackson Hole, Wyoming. Chairman Powell acknowledged that the “upside risks to inflation have diminished and the downside risks to employment have increased” and stated that the “time has come for policy to adjust”, indicating that policymakers would look to cut interest rates at their next meeting in September.
According to the CME FedWatch Tool, the probability of an interest rate cut is now 100% but the magnitude of the rate cut still remains in contention. The probability of a 25 basis points cut currently stands at 70% and the probability of a 50 basis points cut is at 30%. One of the major risks that remain is the speed at which future interest rate cuts are implemented. Whilst a 25 basis points is almost certain, the probability of a 50 basis points rate cut has risen substantially following Chairman Powell’s statement. The Fed’s preferred inflation metric which is the personal consumption expenditures index is expected to be released this Friday, with expectations of the core measure at 2.7%, on a year-over-year basis.
We also saw the release of the Fed’s meeting minutes which stated that the vast majority of participants expecting a September rate cut and that some officials preferred a July rate cut following weaker jobs data releases.
Following Chairman Powell’s comments at Jackson Hole on Friday, the likelihood of an interest rate cut increased which was a tailwind for smaller-capitalised stocks with the Russell 2000 index ending the week +1.3%, outperforming the S&P 500 index (larger-capitalised stocks), which returned -0.8% last week, both of which are in GBP terms.
In Europe, we saw business activity rise in August with the first estimate of the HCOB Eurozone Composite PMI Output Index coming in at 51.2, up from 50.2. The Paris Olympics was a major driver for the services sector however manufacturing production fell for the 17th month running. The governors of the Bank of Finland and the Bank of Italy commented that the case for the European Central Bank (ECB) to cut interest rates further in September has strengthened. Expectations now point towards two further rate cuts this calendar year. In July, the ECB voted to keep interest rates unchanged, but they were concerned about restricting future economic growth prospects.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 27th August 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Have we gone full circle?
Written by Shane Balkham
Last week seemed to be very much the calm after a short-lived storm. Not wanting to tempt fate, the dust seems to have settled again with financial markets back to almost where they started at the beginning of the month. The S&P 500 index is only a few percentage points below its all-time high, while Japanese equities, arguably at the epicentre with the Bank of Japan’s surprise rate hike, have also recovered significantly since the sharp drop.
A timely reminder that trying to time the markets is a fool’s errand and keeping a cool head and maintaining your investment strategy has been a robust process to follow. If your investment time horizon is measured in years and decades, then short-term movements over days and weeks should not be a cause of worry.
What helped quell the recent volatility was that a series of data publications were slightly better than general expectations. In the UK we had a jobs report for the second quarter, which showed a drop in the level of unemployment and slowing wage growth. Inflation was slightly lower than expected at 2.2% year-over-year to the end of July. Although slightly up from June’s and May’s reading, UK CPI is more or less still at the Bank of England’s target rate. For the US, CPI data continued to trend downwards, reaffirming market expectations that the Federal Open Market Committee (FOMC) will cut rates in its September meeting.
The FOMC minutes from the end of July meeting are published this week. Of particular interest will be any commentary around the level of confidence in the decline in inflation and weakening of the US economy. It must be remembered that any details gleaned from these minutes are three weeks old and there has been and will continue to be, a lot of data issued before the next FOMC meeting in four weeks’ time, highlighting the problem of relying on data that is inherently lagged.
The process of bringing down US inflation without causing a recession is a difficult balancing act. The resilience of the US consumer continues to defy gravity, as retail sales data showed a continued willingness to spend. However, with savings that grew during the pandemic largely gone and wage growth cooling, the US consumer is increasingly resorting to credit, raising questions about the longevity of consumer spending, especially as data is showing delinquency on payments are increasing.
While the recent market scares have abated and the US Federal Reserve’s goal of a soft landing looks feasible once again, we have the uncomfortable period of four weeks until the central bank meets to decide whether or not to cut rates. Whatever happens over the remainder of the summer, this demonstrates the importance of holding a diversified investment when the stock market is looking significantly narrow, particularly when we have the annual economic symposium at Jackson Hole this week, which has been the stage for drama in previous years.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 19th August 2024.
© 2024 YOU Asset Management. All rights reserved.
Why you need a financial plan for your whole family
Financial planning is essential for your portfolio, but it should incorporate a view on how it will affect your whole family and the implications of inheritance tax (IHT) on those plans.
Planning your financial future is an important and responsible step to take in order to meet your wider goals in life.
But thinking around how to make this plan shouldn’t just centre on yourself and your partner (if you have one). It should also consider how to plan intergenerationally, with your whole family in mind.
This works in both directions too and isn’t just about helping kids – it might be the case that you have elderly parents who need help with decision-making about their futures and how this figures in your overall plan.
This is complicated even further by the phenomenon of ‘blended’ families. This is increasingly common where people come into new relationships with children already, possibly on both sides of the relationship.
All that to be said, what is clear is that families are not simple and straightforward. Planning intergenerationally, taking into account the needs and goals of each family member is critical to ensure a clear plan.
This in turn will help to mitigate major potential issues such as tax liabilities, growth potential and the structure of a family financial plan.
Set clear goals
Goal setting is frequently discussed in financial planning as this ultimately sets out how you go about implementing a subsequent plan.
But taking into account your own goals, your goals for children, and their potential goals, is important because it will dictate some fundamentally long-term decisions.
In terms of the financial needs of children, aside from day-to-day costs, families will have in mind whether they want to help pay for higher education, or perhaps to gift a deposit for a house, or other smaller milestones such as a first car.
Starting to set aside money for this is key as the more time you have to prepare the better. How you structure that pot is important too as there are potential tax implications to think about.
A junior ISA (JISA) for a child can be a tax-efficient way to pass on savings at an early stage to mitigate inheritance tax liability, but this might not necessarily be the best way to proceed.
JISAs are a useful additional tax-free allowance but parents must accept that the child will have full control of that money from their 18th birthday. This might not be a problem but it is certainly something to consider.
An even more long-term approach could be setting up a pension for a child. This would mean the child would not access the money for decades into the future – but would guarantee potential financial security for your child as they approach retirement. Such a long-term approach would also be hugely beneficial for the potential growth of a portfolio.
Not just kids
Intergenerational financial planning isn’t just about kids though. Many people are in a situation – particularly those approaching retirement – where they have young adult children, and older parents to consider as part of their plans.
Older generations, grandparents, will often have their own plans in place but this is by no means certain. While talking to a parent about their long-term plans for their own estates is a difficult subject to bring up, but it is important to be clear on what their plans are, and the resources they have to achieve those aims.
This must be raised in as sensitive way as possible, and it is advisable to include relevant family members as a part of the process, particularly for someone with siblings.
Understanding their plans can help you to inform your own, particularly if there is a significant potential for changing the structure of your portfolio if and when you come to inherit.
IHT liabilities are paid for by inheritors so this should be on your mind too.
Mitigating liabilities
With these variable goals in mind a financial adviser can work with you to look at how best to structure yours and your family’s portfolio and wider financial plan.
This is really important because the way in which you structure your financial plans will dictate important aspects such as tax liabilities.
For those who are younger, perhaps with young children, this is about putting income and other earnings into the right products, be they ISA, pension, or something else, in order to maximise growth and minimise liabilities from the outset.
For older families who may have grown up children, with elderly grandparents in the mix too, preparing for the issues of IHT is key.
IHT is complicated, with a series of different allowances, both lifetime and annual, to consider.
This includes annual gifting exemptions, the seven-year rule, the nil rate tax band and the residence nil rate band.
In short, done wrong these rules can cause enormous damage to a financial plan. Working with an adviser to ensure that plan is robust as possible, has clear ways to meet goals and is resilient in the face of change or uncertainty is critical to the long-term success of an intergenerational wealth plan.
The World In A Week - Economic data in the driving seat
Written by Millan Chauhan
Last week, we saw some extended moves across global equities and the return of volatility to markets. Global equities, as measured by the MSCI All-Country World Index ended the week +0.4% in GBP terms. However, beneath the surface we saw several economic data releases which markets reacted to in very different ways.
Earlier in August, we saw US unemployment data come in higher than expected which raised a question as to the state of the US economy and whether interest rates have been too high for too long. Last week, markets reacted positively to the weekly jobless claims figure in the US, as they fell to 233,000, which was marginally below expectations. Following this announcement, US equities rallied on Thursday and the S&P 500 closed with its strongest daily gain since November 2022, finishing the week +0.3% higher in GBP terms.
Following the volatility resulting from the Bank of Japan’s decision to hike interest rates to 0.25% in July, the MSCI Japan index fell -12.5% last Monday in local currency terms. The Deputy Governor, Shinichi Uchida, calmed investors by confirming that the bank would not likely hike further while in periods of market instability. Markets reacted positively to this and the MSCI Japan index recovered +9.6% the following day in local currency terms. The MSCI Japan ended down -1.8% for the week in GBP terms.
This week, markets will turn their attention to UK and US inflation data that are set to be released on Wednesday. The UK inflation rate is expected to be at 2.3% for July’s year-over-year reading. The US inflation rate will also be released on Wednesday with expectations that the CPI rate will slow to 3.0% year-over-year. Over the last week, expectations of Federal Reserve interest rate cuts have also increased with the market now pricing in 1.0% of interest rate cuts before the end of the year.
In periods of market volatility and changing economic backdrops, it is important to have diversification in your portfolio across asset class, region and investment style.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 12th August 2024.
© 2024 YOU Asset Management. All rights reserved.
Everything you need to know about the new pensions Lump Sum Allowance
The Lump Sum Allowance (LSA) has replaced the old pensions Lifetime Allowance (LTA) as an important tax consideration when it comes to accessing your retirement savings.
The old LTA was an upper limit on the amount of money you could save into a pension without incurring taxable drawbacks. The limit was set at £1,073,100 – a figure which is still relevant which we will come to shortly.
The LTA differs from the pensions annual contribution allowance which is £60,000 – this is how much you can put into a pension tax-free each year. The LTA was the maximum you could ever put into pension savings in total.
As of this tax year it has now been entirely abolished, although it has in practice been redundant since April 2023 when the principal charge was removed. In its place has been implemented a new Lump Sum Allowance (LSA).
What is the Lump Sum Allowance?
The LSA has replaced the LTA as the main lifetime taxable consideration for pensions savings.
When drawing down your pension you are entitled to a tax-free lump sum. When this tax-free lump sum was initially created it was set at 25% of your overall pot.
With the old LTA set at £1,073,100, this in effect created a maximum tax-free lump sum of £268,275 although this was implicit rather than explicit.
What the Government has done now however is make the lump sum allowance explicit – set at the same amount of £268,275. So now you can take a 25% tax-free lump sum from your pension, but £268,275 is the maximum.
On top of that it has created another allowance, called the lump sum and death benefit allowance (LSDBA) set at £1,073,100. The LSDBA differs in that it is the limit on the tax-free cash available on the death of the pension holder, or if a serious ill-health lump sum is taken under the age of 75.
There is also now an overseas transfer allowance also set at £1,073,100. The overseas transfer allowance is relevant if you intend to transfer your pension abroad.
This can only be done to a qualifying recognised overseas pension scheme (QROPS) and can be refused if your provider does not recognise the receiving entity. If it isn’t a QROPS then you’ll face a 40% tax charge, or the provider may refuse to transfer.
What are the tax implications?
The LSA can be triggered when you drawdown your pension and is potentially very valuable to future retirement planning. However, there are some tax implications to consider.
Anything drawn down from a pension above this lump sum will be classed as income and charged at your marginal rate of income tax. However, small lump sum payments of under £10,000 do not count toward the overall limit.
The LSA has also made a subtle but important change in the way in which pension income will be taxed in the future. This is because by creating an official £268,275 maximum for the LSA, the Government in effect created a new kind of potential fiscal drag boundary.
Fiscal drag is a stealth tax used by the Government in recent times to increase its tax take without raiding marginal rates. In effect – if the Government doesn’t increase the LSA in line with inflation in future years, it means that as pension pots increase in value then the Government will increase its overall tax take on the income from those pots, while the value of the allowance diminishes versus inflation.
You must also keep in mind the money purchase annual allowance (MPAA). This is triggered once you draw down pensions funds and will slash your annual contribution limit from £60,000 to just £10,000. This is however an unchanged aspect of pensions and was relevant before the LTA abolition but is still important to be aware of in the context of lump sums.
What is most important therefore is to plan for the rules in front of you. Pensions are not easy products to navigate even at the best of times, so it is essential to consider using the help of a qualified financial adviser to ensure you make the best choices possible for your retirement.
The World In A Week - The time has come
Written by Ilaria Massei
Last week, the Federal Reserve (Fed) implemented a 0.5 percentage point rate cut, effectively settling the debate over whether a 0.25 or 0.5 percentage point reduction was more appropriate. The decision, supported by 11 of the 12 voting members, boosted US and Global equities last week, with the S&P 500 rising by +0.4% and the MSCI All Country World Index rising by +0.3%, both in GBP terms. Concerns that the magnitude of the cut could fuel future inflation have put pressure on fixed income markets, leading the Bloomberg Global Aggregate Index to fall by -0.2% in GBP hedged terms. However, a closer look at consumer data reveals that nearly all excess savings accumulated during the pandemic have been spent. This raises concerns about US consumers' ability to sustain economic growth.
Meanwhile, on this side of the Atlantic, the Bank of England (BoE) decided to keep interest rates steady at its Monetary Policy Committee meeting. This decision comes as the core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose to 3.6%. This increase was largely driven by a rise in services inflation, particularly in airfares, which increased to 5.6%, contributing to the BoE’s decision to leave rates unchanged. On the consumer front, sentiment in the UK took a hit in September, with the GfK Consumer Confidence Index, which measures expectations on the general economic outlook and households’ finances, dropping by 7 points to -20, back to January’s level. The move comes after warnings from the UK’s fiscal watchdog about the urgent need to address rising debt and the upcoming Autumn budget, which tempered optimism around the economic recovery.
Far in the East, China’s August data highlighted a continuing slowdown in economic momentum, with the country seemingly caught in a deflationary spiral similar to Japan’s experience in the late 1980s and 1990s. Nonetheless, Chinese equities were the best performing asset class last week, with the MSCI China index up +3.6% in GBP terms, supported by looser monetary conditions in the US. However, despite the benefits of US rate cuts, there is growing pressure on Beijing to take further action, as both households and businesses remain in need of additional support.
The Bank of Japan left its key short-term interest rate unchanged at 0.25%, as widely anticipated, maintaining a significant rate differential with other developed central banks. The MSCI Japan posted a strong +2.9% in local terms last week, however, the index gave back all of the gains due to currency weakness, resulting in a -0.8% return in GBP terms.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 23rd September 2024.
© 2024 YOU Asset Management. All rights reserved.