Rachel Reeves says ‘we will turn our attention to pensions’
Despite Chancellor Rachel Reeves will be making significant tax changes in the Budget today, it is not too late to protect your wealth, according to personal finance experts.
Simple steps, such as topping up pension contributions and depositing savings into tax free savings accounts, such as ISAs, could help avoid a feared tax rise.
While giving money away to loved ones now might protect you from changes to Inheritance Tax rules designed to raise billions of pounds.
The Chancellor has admitted some of the changes will be “painful” while speculation about the proposals has triggered anxiety over just what they will mean, particularly for people trying to save for a comfortable retirement.
Top up your pension
READ MORE WASPI woman makes final plea to Rachel Reeves to ‘save our pension’
It is not too late to protect your wealth, according to personal finance experts (Image: Getty)
The rules currently allow people can pay the lower of £60,000 or their full salary into their retirement pot every year while still benefiting from pension tax relief. This is set at 20 percent for basic rate taxpayers and either 40 percent or 45 percent for higher earners.
There has been speculation that these tax reliefs could be changed to a flat rate figure of 30 percent. This could hurt those on high incomes while boosting the pension pots of the majority of workers.
A number of those on high incomes have been piling cash into workplace pensions and Self Invested Personal Pensions (SIPPs) in recent weeks to take advantage of the higher rates of tax relief.
One benefit of diverting more cash into a workplace pension is that many employers often match these contributions, which can significantly boost the value of this vital nest egg.
Under the current rules, money held in pension pots can be passed on free of Inheritance Tax (IHT) if the person dies before the age of 75. This exemption to IHT could be removed in the Budget.
Make use of carry forward pension relief
While there is a £60,000 cap on the amount being paid into a pension in each year, workers can claim tax relief on contributions from the previous three tax years using carry forward rules.
This lets you make use of any unused allowance and to get tax relief on pension contributions.
The allowance for the 2021-22 and 2022-23 was £40,000 per year, but it went up to £60,000 for 2023-24 and is the same this year. This means you could potentially pay up to £200,000 into a pension before April 6, 2025.
This carry forward relief could be removed or reduced in the Budget, according to Chris Boulet of adviser Blick Rothenberg.
He told the Telegraph: “To save the Government money, the carry forward relief could be reduced to one year carry forward or removed entirely, similar to ISA allowances. Anyone who has not maximised their contributions should consider doing so if they are eligible.
“Getting tax relief now could take the sting away from other painful pension changes Ms Reeves may be planning.”
Maximise your ISA allowance
There are a few good reasons to make sure you’ve used this year’s ISA allowance. Firstly, unlike savings or investment accounts, savings interest and returns remain tax-free as long as the money is held in ISA “wrapper”.
This will prove beneficial by protect the money and investments from any changes to taxes on the interest paid on savings, capital gains tax and dividend tax.
Currently, people can pay in £20,000 a year into an ISA, however there has been some speculation that this figure could be reduced.
The Chancellor has been critical of ISAs in the past and that some have managed to use them to amass tax exempt savings worth more than £1 million. Writing in the Independent eight years ago she said the system “needs overhauling” and a lifetime cap of £500,000 should be introduced.
Fears over changes to ISAs and taxes around savings and investments has seen thousands of people piling cash into the accounts in recent weeks.
Almost £4 billion was pumped into a cash ISA last month taking the value of all adult Isas in the UK to £726bn.
Laith Khalaf, of AJ Bell, said: “Savers are dead right to make the most of their available tax shelters seeing as we’re in the middle of a dramatic rise in taxation.
“Conventional financial planning wisdom suggests individuals should have three to six months of expenditure held in cash, just in case.”
For parents who have already maximised their own £20,000 allowance, experts say contributing to a junior Isa on behalf of your child could be a shrewd move. Children have their own £9,000 Isa allowance each year, so more of your money could be funnelled into this tax-free wrapper.
However, you should only do this if you can afford to part with the cash as you will not have access to the funds in the future. Junior Isas can only be accessed by your child once they turn 18.
The Chancellor has admitted some of the changes will be “painful” (Image: Getty)
Cut your inheritance tax bill by giving gifts
Rachel Reeves is thought to be considering a change to the headline rate of inheritance tax or tax-free exemptions.
Parents are therefore rushing to give away wealth to their children over fears of a raid. As it stands, everyone gets a £3,000 annual allowance to gift money to their loved ones.
Not many realise this can be carried forward for one tax year – so you could give away £6,000 if your allowance was unused in the previous year.
Large gifts in excess of £3,000 can be made without incurring inheritance tax, but only currently if you survive the gift by seven years. If you die within three years, the gift will be liable to 40pc tax.
The Government may choose to change the seven-year-rule to 10 years, consequently it will make sense to give away money sooner rather than later, before your health deteriorates.
Rob Morgan, of wealth manager Charles Stanley, said: “If you haven’t already, now could be an opportune time to consider the rules as they stand, who you want to benefit from your assets and whether you and your family might be affected.”
Plot your pension withdrawal tactics
Reports suggest that the Chancellor is considering plans to slash the tax-free pension lump sum limit from £268,275 to £100,000. As a result, some savers have scrambled to take their tax-free lump sum while they can.
Bestinvest said that the number of pension withdrawal requests had doubled in September this year compared to the same month in 2023.
Alice Haine, of Bestinvest, said: “One client turned 55 earlier this month and immediately requested his pension lump sum to ensure he could access the full amount he wanted before the Budget.”
However, taking a lump sum out of a pension earlier that necessary could be a huge mistake as it means it will no longer be able to grow in order to deliver a better return and pension. Consequently, it is vital to take financial advice before taking this drastic step.
