As we head into 2022, and tax year end approaches, you’d be forgiven for being distracted. The cost of living crisis, the threat of new Covid variants on the stock market and a raft of financial announcements over the last 12 months might make staying on track to your long-term goals trickier than ever.
Rising inflation, potential changes to the State Pension Age – not to mention the already suspended triple lock – and the allowance and threshold freezes announced during 2021 all need to be taken into account. But that doesn’t mean they need to worry you or throw your plans off track.
Here are just a few simple ways to stay in control of your pensions, investment, and estate planning during 2022 and beyond.
1. Keep track of your Lifetime Allowance (LTA)
When you take pension benefits in certain ways, your fund might be tested against the LTA. This is a limit on the amount you can take from your pension pots before an LTA charge becomes payable.
Understanding the LTA, and checking the percentage used up each time you take benefits, will help you avoid – or at least plan for the effects of – a charge.
Any funds over the allowance that you take as tax-free cash will be taxed at 55%. You’ll pay a 25% charge on any excess you take as income.
While the LTA had been rising in line with inflation, in his 2021 Spring Budget the chancellor froze the allowance at its current rate of £1,073,100 until at least 2026.
This “stealth tax” is expected to raise nearly £1 billion for the Treasury. Be sure to speak to us if you think you might get near to the limit to ensure you don’t get caught out.
2. Consider the impact of pension withdrawals on your Income Tax band
The Personal Allowance is another threshold that was frozen last year, also until at least 2026. It currently stands at £12,570. For higher-rate taxpayers, the threshold is £50,270, while for additional-rate taxpayers it is £150,000.
Another “stealth tax” designed to recoup the government’s coronavirus overspend, the freeze is calculated by the Office for Budget Responsibility to push 1 million taxpayers into the higher-rate tax bracket by 2026.
Pension withdrawals (outside of your tax-free cash entitlement) are taxed as income, so managing your pension payments tax-efficiently is key to avoiding unnecessary Income Tax.
While Pension Freedoms legislation allows you to take all of your pot in one lump sum, or in some cases, a series of lump sums, it’s important to plan ahead. Taking too much in one go, or too many within a tax year could push you into a higher tax bracket, lowering the net amount you receive and potentially endangering your dream retirement.
3. IHT threshold freezes could affect your estate planning
Your long-term financial plans will be based on living your dream life in retirement, whatever that looks like. You’ll have considered what a dream retirement looks like to you, how much it will cost, and how long your pension may need to last. At some point, you will likely have started to think about the money you intend to leave behind.
Estate planning is a complicated juggling act of present expenditure, potential later-life costs, and the complicated rules of Inheritance Tax (IHT).
The final headline-grabbing allowance freeze of the 2021 budget was to IHT thresholds, which could affect the way you manage your finances in the run-up to tax year end, as well as over the next four years.
IHT is payable at 40% on the value of your estate that exceeds the nil-rate band. This currently stands at £325,000 and will remain so until 2026. You also have a residence nil-rate band. This can apply when you pass on a house you own to your direct descendants. It currently stands at £175,000, giving homeowners a total allowance of £500,000. The residence nil-rate band is also frozen until 2026.
As house prices and the value of your savings and investments rises over the next few years, the likelihood of your estate tipping over the frozen allowances increases. In fact, the government anticipates the freeze raising an extra £985 million for the Treasury.
There are ways to lower the value of your estate, thereby decreasing a potential IHT liability. Back in September, we looked at how IHT could affect you and your family and listed several of these, including:
- Gifting using HMRC exemptions: You can gift £3,000 during the 2021/22 tax year without tax to pay, under the annual exemption. You can also carry forward unused allowance for up to a year.
- Gifting from income: You can make regular gifts, as long as you can prove to HMRC that the gift is made from regular income, is part of your normal expenditure, and doesn’t detrimentally affect your standard of living.
- Using your pension: The value of unused pension pots remains outside of your estate for IHT purposes, under some circumstances. Contact your provider and request an Expression of Wish form to ensure you have a beneficiary in place.
Get in touch
If you’d like help managing your finances in the run-up to tax year end and beyond, get in touch. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
