The future of wealth management
The value of pensions for wealthy investors could be further eroded as more of the Chancellor’s long-term plan becomes clear.
Government figures show that for 2014/15, tax relief on pension contributions and national insurance relief on employer contributions totalled £48bn.
With the world economy flatlining, growing funding demands from key areas like the NHS, and an election to prepare for, this is a lot of money going mainly to the well-off.
Although the Budget contained no dramatic pension or retirement planning announcements (except perhaps the Lifetime ISA, of which more later), changes outlined in the 2015 Autumn Statement are set to have a significant impact.
The key changes are the reduction in the lifetime pension saving allowance and the tapering of the annual allowance.
Chris Aitken, Head of Financial Planning at Investec Wealth & Investment, explained: “The maximum High Net Worth Individuals (HNWIs) can now have without a tax charge is £1m in their pension funds. That’s the first side of it.
"The second is that if they earn more than £150,000 then the annual allowance that they can contribute to their pensions is tapered down to £10,000 for those earning more than £210,000. That’s a massive change as only a few years ago people could contribute more than £200,000 a year into a pension.
“Those HNWIs who haven’t contributed to pensions, thinking they’ll make up for it a few years later, are not able to do that now.”
Craig Hendry, MD at Johnston Carmichael Wealth, however noted: “The reduction in annual allowance for high earners will require more complex planning considerations in constructing the most efficient and effective way to fund for their retirement.
"The use of other tax-efficient vehicles or other asset types, such as residential property, will have to be considered.”
The changes may also increase the level of risk HNWIs must take to preserve the tax efficiency of their investments.
However, Craig doubts pensions have had their day. He said: “Before the Budget most people involved in financial planning thought pensions were dead and buried, but they remain extremely attractive.”
As to what this means right now for HNWIs, MD of French Duncan Wealth Management Zane Hunter’s advice is that they should use the principles of diversification and hold assets in different tax ‘wrappers’, with pensions a part of this plan.
He commented: “The key word for modern wealth management in a changing environment should be ‘flexibility’.”
An ISA is for life
So far as saving for retirement is concerned, the key Budget changes relate to ISAs. Firstly, the introduction of the Lifetime ISA and, secondly, the increase in the ISA annual limit to £20,000 from April 2017.
Trent Lyons, Financial Analyst at Chiene + Tait, said: “The new Lifetime ISA allows a contribution of up to £4,000 per annum and will provide a 25% government bonus (up to £1,000) at the end of each year.
"It will only be available to those aged 18 to 40 and the government bonus will cease at age 50.”
While money can be withdrawn at any time, if this happens ahead of age 60 (except if used as the deposit on a first home purchase of up to £450,000) the government bonus plus any interest and growth will be lost and a 5% charge levied.
Morag Watson, Partner and Tax Specialist at Scott-Moncrieff, said: “For many younger clients, this type of ISA, if used for pensions, could provide a significant pot of tax-free capital in retirement.
“While the Lifetime ISA is limited to those under 40, the increase in the ISA limits to £20,000 from April 2016 also provides an incentive to older savers to put funds aside, which can again be drawn tax-free in retirement.”
According to Jim Wilson, MD of Henderson Loggie Financial Services: “More and more high-worth individuals will find themselves in a position where their ISAs make up the majority of their portfolios as they add new cash or sell funds and re-invest through ISAs to maximise their allowances.”
CGT rates and salary sacrifices
From 6 April the higher rate of CGT was reduced from 28% to 20% and the basic rate from 18% to 10%.
The exception is residential property gains, which will still be assessed at 28% or 18%. This means individuals now face five different CGT rates.
Billy Burrows, of William Burrows Retirement Intelligence, said: “The reduction in CGT should mean it will be beneficial for investors to keep more of their money they make outside of a tax-free wrapper, such as an ISA.”
Trent added: “By retaining the CGT rate at 18% or 28% for residential property there is a clear incentive for individuals to invest in companies rather than property.
“The changes are clearly advantageous to OEIC investors and along with reforms to dividend taxation allowing for £5,000 and the continuation of the £11,100 CGT exemption an opportunity has been created for individuals to build up a tax-efficient portfolio to run alongside pension and ISA savings.”
While it was widely reported that salary sacrifice for pension contributions would be removed, this didn’t happen.
Craig at Johnston Carmichael commented: “Thankfully as changes to funding pensions through salary sacrifice were not announced in the Budget a review of existing arrangements will not be required.”
In view of the pension changes and the increased emphasis on ISAs, what does the future HNW retirement planning landscape look like?
Trent explained: “Rather than using pension income as the primary source, as was traditionally the case, we are now considering drawing income from taxable portfolios and ISAs in the first instance and supplementing this with pension income.
"Over time, assets subject to IHT will be reduced and a larger pot should be available in a pension.”
So, post-Budget, are the wealthy better or worse off in retirement?
Morag commented: “The proposed increase in personal allowances for 2017/18 to £11,500 and the increase in the basic rate limit to £33,500 means that from 6 April 2017, an individual can have income of £45,000 before they are subject to tax at 40%.
"Given the flexibility of how people access their pensions now, it is possible for individuals to keep their income below £45,000 and benefit from paying tax at reduced rates.”
Martin Reynard, Financial Planning Manager at Blick Rothenberg, concluded: “The government will not see this as an attack on pensions, rather directing tax incentives more effectively.
"HNWIs will simply find other ways of saving if pension is limited or ineffective, so why waste tax relief on this group? Far better to spend the current tax relief costs on finding ways for those not saving enough.”
The full version of this article is in the May 2016 edition of CA magazine.