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The new Chancellor Rishi Sunak made his debut Budget on the 11th March 2020, and many people have been quick to assert that it contains few implications for pensions and retirement planning. Yet is that really the case?
Here at Cedar House, we outline four ways the Budget could affect a retirement plan in 2020. We hope you find this content informative, and if you’d like to discuss your own financial plan with a financial planner here at Cedar House, then please arrange a free consultation via:
020 8366 4400 or firstname.lastname@example.org
#1 The Annual Allowance
One notable absence from this Budget is any change to pensions tax relief. Many speculated that Higher Rate taxpayers might lose their 40% relief on contributions after the announcement, instead receiving a flat rate of 20% (in line with Basic Rate taxpayers). The fact that this has not transpired has come as a relief to many higher earners.
Yet the Budget does a key change to the rules about pension annual allowances. In 2019-20, each person has been allowed to commit up to £40,000 per year into their pension (or up to 100% of their salary; whichever is lower). However, this allowance was tapered down by £1 for every £2 earned above £150,000, to a maximum reduction of £10,000. Under the new rules in 2020-21, however, this taper will not kick in until your adjusted earnings are over £210,000.
#2 The State Pension
Whilst the Budget did not explicitly mention any change to the state pension, it did not stand in the way of a planned change for the 6th April 2020 (i.e. the start of the next tax year). At this point, the state pension is set to rise by 3.9% to £175.20 per week, up from £168.80. This rise is intended to follow the rising cost of living, and could result in an annual income of £9,110.40 for those receiving the full new state pension. This, of course, is welcome news for those in and approaching retirement, and is good extra motivation to maximise your state pension planning ahead of time.
#3 IHT Developments
Once again, the Budget makes no overt mention of the inheritance tax (IHT) regime, or of any imminent plans for radical reform. However, it does show that the government is committed to continuing the yearly trend to increase the IHT-free threshold on the family home. Since 2015, the government has enabled each person to leverage a residence nil rate band (RNRB) on top of their standard £325,000 IHT-free entitlement.
In 2020-21, this additional threshold is set to rise by a further £25,000 to a total of £175,000. In effect, this will allow each individual to pass on up to £500,000 upon death free from IHT, on the condition that the family home goes to direct descendants. For married couples and civil partners, you will still be able to combine your allowances and, therefore, potentially pass up to £1m to your children and/or grandchildren.
Another important aspect of IHT planning to mention in light of the Budget is business property relief. Under the current system, business property relief (BPR) helps enable people to invest in small companies on the Alternative Investment Market (AIM). If shares in these businesses are held by an investor until death and for at least two years, then they are typically not counted as part of your estate for inheritance tax purposes.
There had been predictions in the press that the March Budget might include an abolition of AIM qualification for IHT relief. Thankfully, however, this has not transpired. If you are considering leveraging the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) or other AIM mechanism to grow your investments and help mitigate a future IHT bill, then the opportunity still stands and we recommend you consult an experienced financial adviser to discuss the best strategy for your financial goals and situation.
Finally, one crucial aspect of individual wealth which tends to impact retirement planning is our family home. For homeowners, the 2020 Budget does contain a new policy to introduce a 2% stamp duty surcharge on non-UK residents. Whilst this appears to be targeted at non-British buyers of UK property living abroad, it does also appear to capture British expatriates who are deemed non-resident. As a result, if you live abroad or plan on retiring in another country, it might be worth consulting a financial adviser about how this new surcharge might affect you and your future beneficiaries.
If you would like to discuss your financial plan or retirement strategy with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or email@example.com.