Headley Spring Newsletter 2023
Our last newsletter hoped that 2023 would bring some calmer times for all but the jury is still out so far. It remains a difficult period with continued increasing costs, which has led to many of us reconsidering or delaying plans. The below looks at some topical areas of interest currently.
Spring Budget 2023
We hope you found our recent Budget newsletter informative. Here are some key points for the new tax year:
- No more Lifetime Allowance tax charge
- Existing pension Lifetime Allowance protections can be retained if contributions restart, but further tax-free cash may not accrue
- Annual Allowance increase from £40,000 to £60,000 for most people
- Income thresholds remain frozen until April 2028
- Starting rate for savings remains at £5,000 for the tax year 2023/24.
Capital Gains Tax
- The Capital Gains Tax (CGT) annual exemption has been cut from £12,300 to £6,000 from 6 April 2023, and will reduce further to £3,000 from 6 April 2024. The tax rates of CGT remain unchanged.
- Corporation tax rose from 19% to 25% from 6 April 2023. However, small companies with profits below £50,000 will continue to pay at the current rate of 19%. Companies with profits between £50,000 and £250,000 will pay between 19% and 25%.
- The triple lock for the State pension is maintained, which guarantees the 10.1% increase in April.
- The Government has recently extended the voluntary National Insurance deadline to 31 July 2023 to give taxpayers more time to fill gaps in their National Insurance record going back to 2006 (see article below).
If you have not yet read our Spring Budget newsletter yet, please click here to read it in full.
We know that the journey through divorce can be a tough one. As experienced chartered financial planners, we can make sure that the pensions’ question is one less thing for you to worry about. Outside of the family home, pensions are often the biggest asset to share when two people divorce. Despite this, however, pension assets are frequently ignored or simply overlooked, especially in the early part of divorce proceedings, resulting in rushed and potentially unsatisfactory outcomes.
Headley’s Phil Hasell has written two articles to answer some common questions around pensions and divorce to provide further insight. These are available on the links below and on our website:
Top 10 questions about sharing pensions on divorce
What the best divorce solicitors know about pension sharing
Just how much does retirement cost?
Now that we are in April, the New State Pension is rising to £203.85 per week, a 10.1% increase on the current level, thanks to the infamous ‘triple lock’. At the same time, the National Living Wage rises to £10.42 an hour, equivalent to £364.70 a week. As both could be regarded as Government determined minimum incomes, the gap between the two begs questions about why retirement ‘appears’ to be so much less expensive.
How much retirement income is needed to maintain your standard of living?
Since 2019, the Pensions and Lifetime Savings Association (PLSA) has published estimates of the net income needed to answer that question. In conjunction with Loughborough University, the PLSA produces a table of target retirement incomes for three distinct living standards:
- Minimum, a level of income which covers all needs, with ‘some left over for fun’
- Moderate, a higher level of income, providing more financial security and flexibility, and
- Comfortable, the top level of income, giving more financial freedom and ‘some luxuries’
There are six common categories underlying each standard – house, food, transport, holidays & leisure, clothing & personal and helping others. For example, under the holidays & leisure heading, the minimum standard for a couple is one week and a long weekend in the UK each year, while the comfortable standard envisages three weeks in Europe every year. The standards are reviewed annually as living patterns change. For instance, in the latest update, published in January 2023, supermarket delivery charges have been included for the first time.
The latest results
The latest tables are based on prices in April 2022, so are already behind the inflationary curve. Even so, they show a marked increase over April 2021.
At the minimum levels, the year-on-year increase for a couple living outside London is almost 20%. Part of that is due to their proportionately heavier expenditure on energy and food, both sectors that have seen above average inflation.
However, even the least affected, the ‘comfortable couple’, saw their costs rise faster than the 9% CPI inflation over the year to April.
The PLSA’s net annual income targets for 2022 and 2021 for those living outside London are shown in the graph below. Full London costs are still awaited, but the PLSA has already said for a moderate living standard couple the 2022 figure is £41,400 (up 14.4%).
Even though the New State Pension will hit five figures at £10,600 a year from April, it is still not enough to meet the minimum standard of living for a couple unless both have close to their full State Pension entitlements. At the comfortable end of the retirement spectrum, two State Pensions do not even reach 40% of the target income – and that is before you start considering tax.
If your goal is anything other than a minimum standard of living in retirement – and that one week UK holiday – the State Pension is going to be something on which to build your retirement planning, not the key element.
National Insurance contributions – Maximise your State Pension income
This article featured in our last quarterly newsletter but the 5th April deadline has recently been extended until 31st July 2023. As the above article shows the importance of using your state pension for a secure foundation for your retirement income, we thought we should repeat this article in case clients thought the opportunity to ‘backfill’ missed national insurance contributions had now passed.
If you are looking to maximise your income in retirement, a good place to start is with your State Pension. The amount of State Pension you receive is based on your record of National Insurance Contributions (NICs) and the amount of ‘qualifying years’ you have built up. The number of extra years you can purchase becomes restricted to the last six tax years from 31st July 2023, after the previous deadline of 5th April 2023 was extended, so checking now is key.
The quickest and easiest way to check your national insurance record is online through the government website below:
This will let you know what you have paid, up to the start of the current tax year, and if you can pay voluntary contributions to fill any gaps and how much this will cost.
Before paying any voluntary contributions, it is a good idea to request a State Pension forecast to get information on your State Pension entitlement. You can apply online through the government website https://www.gov.uk/check-state-pension. Alternatively, you can:
If you already have, or are forecast to receive, the full state pension then there is no need to pay additional voluntary contributions.
If you are considering purchasing additional contributions or would like to discuss your options further, please contact us and we will be more than happy to help and support you.
Pensions dashboard programme delayed
It has been announced in a Ministerial Statement that the deadline dates for the Pensions Dashboard Programme are to be extended.
Pensions dashboards are intended to allow individuals to view information about their pensions, including State Pension, in one place online. This will put savers in control and help reconnect them with their lost pension pots – for example, where a pension scheme has lost contact with a member – in the hope of transforming how consumers think and plan for their retirement.
The Pensions Dashboards Programme, under the supervision of the Money and Pensions Service, is responsible for delivering the digital architecture which underpins pensions dashboards. The project is a significant undertaking, requiring the development of new technology that will permit individuals to find their pensions by searching thousands of pension schemes which collectively hold millions of pensions records.
The first connection deadline is currently 31st August 2023. However, additional time is required to deliver the complex technical solution to enable the connection of pension providers and schemes, in accordance with the connection deadlines set out in the Pensions Dashboards Regulations 2022 and the Financial Conduct Authority’s corresponding pensions dashboard rules for pension providers.
Given these delays, the Government has initiated a reset of the Pensions Dashboards Programme in which DWP will play a full role. The new Chair of the Programme Board will develop a new plan for delivery. Any delay is disappointing but doing the job well is much more important than doing it quickly. It is to be hoped that the end result will make any delays worthwhile.
Using insurance or pensions to pay for long term care
The Association of British Insurers (ABI) has identified problems for people wanting to use insurance or a pension to pay for social care, as well as solutions to address them, using research from the Pensions Policy Institute.
The industry is committed to finding solutions to help more people afford the level of care and support they want, in a location of their choice. With the implementation of the Government’s social care reforms pushed back from October 2023 to at least 2025, the ABI is urging the Government to use the time to address the issues it has identified, so that insurance or long-term savings products could help more people pay for social care.
A pay-out from an insurance or a long-term savings product could help people ‘top up’ the funds provided by their local authority, allowing them to pay for additional care or support, in a location of their choice. However, in their current form, the reforms would see two thirds of the population receive less financial support for social care from their local authority if they had an insurance or long-term savings policy than without one. This is because the local authority would consider any payment from a policy as part of an individual’s income.
By excluding insurance pay-outs from local authorities’ financial assessments, the Government would enable providers to serve more people, and ultimately help more people access the care they want in a location of their choice.
In its report, ‘Prepare for Care’ the ABI also proposes changing pension tax rules so that it is more straightforward for people to pay for their care using a pension. The ABI press release has additional information.
We are delighted to announce that after a lot of hard work James Bryan has now passed all the relevant exams to gain his Diploma in Regulated Financial Planning. He is now looking to study for the Advanced Diploma level. Well done James.
We look forward to continuing to work with you and help you enjoy life enriched
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax relief depends upon individual circumstances and tax rules may change. This newsletter is provided strictly for general consideration only and is based on our understanding of current law and HM Revenue & Customs practice. No action must be taken, or refrained from, based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
The Financial Conduct Authority does not regulate taxation advice, estate planning, inheritance tax planning, wills or trusts.
Sources for some of this newsletter – Techlink, Threesixty