The UK Chancellor makes his annual Autumn Statement every year. The purpose is to update progress from the main event, the Spring Budget. Initially, it was a relatively mundane affair where few important new policies were announced.
Over the years, the Autumn Statement has morphed into a mini-Budget as more new laws and government policy changes have been introduced. Uncertainties in the time of Covid 19 emphasised the importance of the Autumn Statement as the government needed to fund individuals and businesses to ensure they survived the financial shocks caused by lockdowns and the pandemic.
Every time there’s a Budget or Autumn Statement, the financial services industry keenly monitors what might change for their clients. International advisers must also do this as alterations to the UK tax code can sometimes have knock-on effects for expatriates and internationally mobile people.
Major changes usually occur only in the Spring Budget, and this year’s Autumn Statement hasn’t bucked the trend. It’s always worth looking back at previous forecasts, however, to be able to mark the Chancellor’s homework. This time, for example, economic growth expectation has been cut from 1.8% to 0.7% for the coming year. This downward trend continues for the following two years, after which some improvement is forecast. Let’s see what happens.
This is important because future tax and spending decisions will be based on expectation versus reality.
It was rumoured that sufficient ‘headroom’ was available to cut Inheritance Tax and, maybe, Income tax rates. In the end, neither happened, but businesses will have been pleased to see the permanent extension to the ‘full expensing’ measure introduced to help them during the pandemic.
The big Spring Budget giveaway in the pensions industry was the abolition of the Lifetime Allowance (LTA). The latest LTA limit was £1,073,100, which had the unintended consequence of making it financially unviable for many Doctors and Consultants to go to work. Consequently, many retired early or left the country altogether. Abolishing the LTA and raising the annual allowance to £60,000 halted the exodus; the NHS will benefit as a result.
Autumn Statement: Specific Details
As is often the case, the devil is in the detail. Despite the end of the LTA, Pension Commencement Lump Sums (PCLS) and Lump Sum death benefits rules have remained largely the same. This means that those who don’t have any form of protection are limited to 25% of the last LTA (£1,073,100). £268,275 will, therefore, remain the maximum PCLS that can be withdrawn tax-free (assuming the pension fund is at or over the LTA limit). Those with ‘protection’ can still withdraw up to 25% of their fund up to that limit. So, someone with ‘protection’ of £1,500,000 can still take £375,000 tax-free.
Pensions aren’t subject to Inheritance Tax; rules govern what tax is payable, depending on the age at which the policyholder dies. This is where we saw a subtle but important change introduced in the Spring Budget. Death Benefits paid before the policyholder reaches age 75 will now be subject to income tax on the beneficiaries. Whilst the tax-free element will stay the same, any lump sums above the limit will be taxed as income to the beneficiary. Previously, all distributions to beneficiaries were tax-free. Protection rules apply as above.
This makes it all the more important for the beneficiaries to understand the consequences at the time of death, preferably in advance.
As the abolition of the LTA was primarily introduced to help Doctors and Consultants, and the Labour Party have said they will reintroduce the LTA if they win the next election, anyone who has a pension pot over the current LTA should consider their options as a matter of priority. It may be wise to crystallise your pension well before the next election to avoid any unwelcome surprises.
The advice remains the same for those intending to retire to an EU/EEA country. Consider a QROPS transfer either just before you move or soon after. Transferring to a QROPS is a ‘Benefit Crystallisation Event’; therefore, your pension will be permanently outside the LTA.
If you want to take your PCLS, do it before you leave and are still a UK tax resident. The PCLS is tax-free in the UK; this doesn’t mean it is tax-free in the country you move to.
Keeping up to date with changes to tax and regulations is a full-time job. Your financial adviser has such a job and will be more than happy to help you understand the intricacies of the financial jungle.
If you would like to learn more about the Autumn Statement and how it affects you, please get in touch with us on the form below.