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The UK Budget 2024 brought both relief and new challenges for pension savers, scheme trustees, and administrators.
While some feared changes to National Insurance on pension contributions and tax-free lump sums, these concerns were unfounded.
However, significant changes to inheritance tax (IHT) on pension-related death benefits are set to take effect from April 2027, prompting a closer look at the implications.
In yesterday’s Budget, there were a couple of reassuring announcements for pension savers:
However, while these aspects remain unchanged, new IHT rules will bring added complexity for scheme trustees and administrators in the coming years.
Starting immediately, the Budget extends the tax on transfers to overseas (QROPS) pension schemes, impacting those moving pensions outside the UK.
The Chancellor has introduced new measures to include more pension-related death benefits within IHT.
Previously, only unused defined contribution (DC) funds were anticipated to be affected, but now many other death benefit lump sums, including those from defined benefit (DB) schemes, will also be subject to IHT.
This aligns with the government’s aim to prioritize retirement income for the member and their spouse or civil partner, rather than for descendants.
To implement these changes, HMRC has launched a technical consultation on the practical application of IHT to pension death benefits, with draft legislation expected in 2025.
The government has also confirmed its commitment to incentivize pension saving, maintaining tax relief on contributions and investment growth.
The new IHT rules will come into force on 6 April 2027, applying the standard IHT rate of 40%.
From April 2027, the following death benefits from registered pension schemes will be included in a member’s estate for IHT purposes, unless they are left to a spouse, civil partner, or charity:
Currently, where trustees have discretion over lump sum death benefits, these funds typically fall outside IHT.
However, HMRC intends to end the different treatment of discretionary versus non-discretionary death benefits.
Starting from 6 April 202, pension scheme administrators will be responsible for reporting and paying IHT on unused pension funds and death benefits.
This shift means that:
The collaboration between PRs and pension administrators will involve
When a spouse or civil partner is the beneficiary, the exemption from IHT applies. However, if trustees need time to assess beneficiaries, meeting the two-month reporting deadline may prove difficult.
IHT payments must be reported and paid within six months of the month of the member’s death.
From April 2027, pension administrators will face this same deadline, with interest charges for late payments.
After 12 months, the member’s beneficiaries will share liability with administrators for any outstanding IHT on pension funds.
HMRC expects only about 10% of estates to exceed the IHT threshold, currently set at £325,000 (with a potential extra £175,000 if a home is left to direct descendants).
Pension administrators are required to report IHT information only when payable on unused funds or lump sum death benefits.
HMRC clarified that IHT changes won’t apply to certain life policy products purchased with or alongside pensions as part of an employer package.
Further consultations may address specific exclusions for excepted life assurance and unregistered top-up pensions.
While aspects of the Budget 2024 bring relief for pension contributors, new IHT rules on death benefits from 2027 introduce additional obligations for pension schemes and PRs.
This development could significantly impact estate planning for pension holders.
If you have any queries or comments about this article on tax changes for pensions in UK Budget 2024 then please get in touch.
When you contribute to a retirement plan, such as a 401(k) or an Individual Retirement Account (IRA), you’re saving money for your future.
These contributions are often tax-deferred, which means you don’t pay taxes on the money you contribute until you withdraw it in retirement.
Every year, the IRS sets limits on how much you can contribute to these accounts, and in 2024, those limits have increased.
For 2024, the 401(k) contribution limit has been raised by £500, meaning you can now contribute up to £23,000 per year.
If you’re 50 or older, you can also make catch-up contributions, allowing you to contribute an additional £7,500 per year.
For IRAs, the contribution limit has increased to £7,000. However, unlike 401(k) plans, the catch-up contribution for IRAs remains the same at £1,000 for those aged 50 or older.
These increased limits are great news for anyone saving for retirement. The more money you can contribute to a retirement account, the more tax-deferred growth you can enjoy.
For people nearing retirement age, catch-up contributions are especially helpful because they allow you to save more during the final years of your working life.
The IRS adjusts contribution limits every year to keep up with inflation.
As the cost of living goes up, it’s important that people are able to save more for retirement to ensure they have enough money to live on in the future.
These adjustments help make sure that your savings don’t lose value over time.
The increase in retirement contribution limits for 2024 gives people more opportunities to save for their future.
By taking full advantage of these higher limits, you can grow your retirement savings and ensure a more comfortable retirement.
Whether you’re just starting your retirement journey or catching up on savings, these increases are a positive change for everyone.
If you have any queries about this article on the 2024 Retirement Contribution Limits, or US tax matters in general, then please get in touch.
The enactment of the Finance Act 2024 marks a significant overhaul of the UK’s pensions tax framework, particularly with the abolition of the Lifetime Allowance (LTA).
This adjustment, initially announced in the Spring 2023 Budget, removes a cap that has governed tax-efficient pension savings since 2006.
The key changes can be summarised as follows:
The LTA, a cornerstone of pension savings taxation, has been dismantled, removing the upper limit on tax-efficient pension savings.
To replace the LTA, two new allowances have been introduced:
Caps tax-free pension commencement lump sums (PCLS) or the tax-free portion of un-crystallised funds pension lump sums (UFPLS).
Sets the combined lifetime and death benefits cap.
For the 2024/25 tax year, the LSA is set at £268,275, and the LSDBA is £1,073,100.
This new provision allows for further lump sum payments beyond the LSA limits, subject to marginal-rate income tax.
Caps tax-free overseas transfers, aligning with an individual’s LSDBA at £1,073,100 for the 2024/25 tax year.
The obligation for scheme administrators to report LTA-related events to HMRC has been replaced with a requirement to report payments exceeding the LSA/LSDBA limits.
Members receiving a PCLS must now receive “Relevant Benefit Crystallisation Event (RBCE) statements,” detailing the remaining mounts of their LSA and LSDBA.
In light of these substantial changes, trustees of occupational pension schemes should consider two primary actions:
Trustees should ensure administrators are prepared for the incoming changes, including the incorporation of new lump sum allowances in retirement planning and compliance with reporting requirements.
Additionally, trustees should verify that any ongoing buy-out transactions with insurers consider the updated framework.
Trustees may need to amend scheme rules to accommodate the ability to pay PCELS, remove outdated references to the LTA, and potentially adjust benefit accrual limits. While an overriding amendment in the Finance Act 2024 provides temporary relief, proactive adjustments may simplify scheme governance in the long run.
The Finance Act 2024 represents a shift in the taxation of pension savings in the UK.
By abolishing the Lifetime Allowance and introducing new allowances and reporting requirements, the Act aims to simplify the pensions tax landscape.
Of course, it hasn’t done any such thing!
If you have any queries about this article on changes to the lifetime allowance, or other UK tax matters, then please get in touch.
In July the Government published draft legislation dealing with the abolition of the lifetime allowance (LTA) with effect from 6 April 2024.
The draft legislation provides for the introduction of two new lump sum allowances which will apply to an individual and are used when a relevant lump sum is paid in respect of an individual and at least part of that lump sum is tax free.
The new allowances are the lump sum and death benefit allowance of £1,073,100 (the same as the LTA immediately before its abolition) and the lump sum allowance of £268,275 (25% of the LTA immediately before its abolition).
The individual’s lump sum allowance is used when the individual takes tax free cash in the form of:
The individual’s lump sum and death benefit allowance is used when the individual takes tax free cash in the form of an authorised lump sum and also when a person receives tax free cash in the form of an authorised lump sum death benefit in respect of the individual.
Where part of a lump sum is taxable and part isn’t, only the tax free element counts towards the relevant lump sum allowance.
Pension benefits will be taxed through the existing income tax structure for pension income. To the extent that a lump sum is taxable, it will normally be taxed at the recipient’s marginal rate of income tax.
A “pension commencement lump sum” equating to 25% of the value of the benefits being taken can generally be taken tax free provided the individual has sufficient headroom available under both types of lump sum allowance. 25% of an UFPLS will also be tax free provided the individual has sufficient lump sum allowance headroom.
Any amount in excess of the limits will be taxed as pension income.
Lump sum death benefits paid within 2 years in respect of a deceased member aged under 75 will generally still be tax free provided there is sufficient headroom under the deceased individual’s lump sum and death benefit allowance. Any excess will generally be taxed as income in the hands of the recipient.
The draft legislation contains extensive provisions dealing with individuals who currently benefit from the various statutory protections in relation to the LTA.
“Primary protection” will cease to exist, but will be replaced with a new set of protections.
For individuals with enhanced protection, their “applicable amount” for a pension commencement lump sum is the amount that could have been paid on 6 April 2023.
The deadline for applying for fixed/individual protection 2016 will be 5 April 2025.
The Government plans to publish transitional provisions to deal with the situation where one or more lump sums have been paid in respect of an individual before 6 April 2024, but at least one further lump sum is paid on or after that date.
When the draft legislation was first published, the Association of Consulting Actuaries suggested that it would have the effect of extending to defined benefits the “pension freedoms” that have applied to money purchase benefits since 6 April 2015.
In its Pension schemes newsletter 152 HMRC has confirmed that it is not the Government’s intention to significantly expand pension freedoms.
As we prepare for the abolition of the lifetime allowance (LTA) and the introduction of new lump sum allowances in April 2024, the UK pension landscape is undergoing a transformative shift.
These changes, unveiled in the government’s draft legislation, bring both challenges and opportunities for individuals and pension scheme providers.
Understanding the intricacies of the individual lump sum allowance, the lump sum and death benefit allowance, and the taxation implications for various scenarios is paramount.
The introduction of transitional measures and the preservation of certain protections, albeit with modifications, underscore the government’s commitment to managing this transition smoothly.
Importantly, HMRC’s assurance that there will be no significant expansion of pension freedoms in relation to defined benefits provides clarity in an ever-evolving landscape.
If you have any queries about the lifetime allowance changes, or any other UK tax matters, then please do get in touch.
The cost of retirement is increasingly becoming a concern, with rising food and energy prices contributing to the growing expenses. In fact, the amount needed for a minimum living standard in retirement has surged by nearly £2,000 in the past year.
As you diligently contribute to your personal or workplace pension plan, it’s essential to have a clear understanding of the funds required to support your post-work life. Fortunately, the recently updated Retirement Living Standards, developed by the Pensions and Lifetime Savings Association (PLSA), offer valuable insights into the annual income necessary for a comfortable retirement.
By utilising these standards, combined with our comprehensive tools and resources, you can effectively plan for the future you desire.
For single pensioners, the minimum required to survive has increased by 18% to £12,800 per year in 2022. Retired couples face an even greater rise of 19%, now needing a minimum of £19,900 annually, representing a £3,200 increase, according to a study conducted at Loughborough University and funded by the PLSA.
Don’t let the cost of retirement catch you off guard. Take proactive steps today to assess your financial needs and plan for a secure future. Leverage the Retirement Living Standards and our resources to make informed decisions and confidently navigate your retirement journey.
As retirement approaches, envisioning your post-work plans becomes crucial. Will you embark on exciting vacations or consider home renovations? Perhaps a new car is on the horizon. To effectively plan for your future, it’s essential to ask yourself these important questions.
By understanding your anticipated expenses during retirement, you can determine the necessary savings required to fulfil your aspirations. Don’t overlook the significance of financial preparedness in ensuring a comfortable retirement.
Take the time to assess your financial goals and evaluate the potential costs associated with your desired lifestyle. This proactive approach will empower you to make informed decisions and establish a robust savings plan.
Prepare for a fulfilling retirement by acknowledging your financial needs and setting realistic goals. Begin saving now to secure the future you envision.
The Pensions and Lifetime Savings Association (PLSA) has introduced three retirement living standards, categorised as minimum, moderate, and comfortable. These standards, developed in collaboration with Loughborough University, offer valuable insights into the financial requirements across different levels of lifestyle.
Each standard incorporates the cost of various goods and services, forming “baskets” that track price changes over time, including home maintenance, food and drink, transportation, holidays and leisure, clothing, and support for others. These standards provide a comprehensive view of the annual income needed for both individuals and couples.
By familiarising yourself with retirement living standards, you can gain a clearer understanding of the potential costs associated with different lifestyles during retirement. Use this knowledge to plan effectively and work towards achieving your desired level of financial comfort.
Ensure your retirement aligns with your aspirations by utilising the PLSA’s retirement living standards as a valuable resource in your financial planning journey.
Achieving a retirement income of £50,000 per year is relatively uncommon among pensioners. According to Loughborough University researchers, approximately 72% of the total population are projected to meet at least the minimum standard of living in retirement. Around one-fifth of the population is on track for a moderate income level, while 8% can expect a comfortable retirement. However, it’s important to note that these figures were calculated before last year’s significant inflation surge.
Ensuring financial security during retirement is a priority for many individuals. While reaching the £50,000 bracket may be challenging, it’s crucial to plan diligently to meet at least the minimum standard of living. By staying proactive and making informed decisions, you can increase your chances of attaining the desired level of financial stability in your post-work years.
If the prospect of relying on a monthly income of £1,000 or less in retirement is unsettling, it’s time to take action and save more before you stop working. But how much should you save?
We consulted researchers from Loughborough University and the PLSA to determine the additional savings required for individuals and couples to reach the minimum, moderate, and comfortable retirement brackets if they retire at age 67, even with the full new state pension. The projected amounts ranged from £0 to £530,000.
Encouragingly, the table highlights a £0 figure: If both partners receive the full £10,600 state pension, their combined income surpasses the minimum requirement of £19,900 for a comfortable retirement.
However, the challenging reality is that a single person aiming for a comfortable retirement must save a significant £500,000 by the age of 67, all while managing mortgage or rent payments and coping with the ever-rising cost of living.
Take control of your retirement future by calculating your savings goals. By developing a comprehensive savings plan, you can work towards achieving the financial security necessary for a comfortable retirement.
Source: Loughborough University and the Pensions and Lifetime Savings Association. (London figures may vary)
Source: Loughborough University and the PLSA
Plan and save accordingly to achieve the desired living standard in retirement. Consider these benchmarks as you work towards securing a financially stable future.
For individuals who feel unprepared to fully retire or simply prefer to stay partially active in the workforce, semi-retirement can offer distinct advantages. In this scenario, you may require a lower income compared to complete retirement since you’ll continue to receive earnings from your employer. With semi-retirement, you have the option to supplement your income by accessing pension funds or utilising other savings before tapping into your retirement plan.
By strategically balancing work and leisure, you can enjoy financial stability while gradually transitioning into retirement. Evaluate your financial situation, including available savings and potential pension options, to determine the most suitable approach for semi-retirement. This flexible path allows you to continue saving for the future while enjoying the benefits of reduced working hours and increased leisure time.
Are you ready to plan for a comfortable retirement in the UK? Don’t leave your financial future to chance. Take control of your retirement savings with these steps:
Remember, the key to a comfortable retirement lies in proactive planning and taking action today. Start building your retirement nest egg and pave the way for a financially secure future with the help from Tax Natives.
Following the implementation of Gibraltar’s new “auto-enrolment” pension scheme for Gibraltar’s largest employers—so-called “Enterprise” employers with over 250 staff – on 1 August 2021, the phased roll-out moved on to the second tranche of employers—large employers with more than 100 workers—who, by 1 July 2022 needed to provide a workplace pension plan.
The Private Sector Pensions Act 2019 ensures that people living and working in Gibraltar, will be financially protected in their later years.
Like the UK’s auto-enrolment pensions regime, the Act requires all employers in Gibraltar to provide access to a workplace pension plan and the existing State pension for all eligible employees.
If an employee chooses to join the pension scheme, the Act requires both the employer and employee to make regular minimum contributions to the employee’s pension fund.
The Act was implemented in phases to give smaller organisations more time to adjust to the new requirements.
The following deadlines were set for employer compliance under the phased implementation:
The Gibraltar Financial Services Commission (GFSC) has been selected as Pensions Commissioner under the Act to ensure that employers and those who administer pension schemes comply with the relevant requirements.
The GFSC maintains a register of employers who provide pension plans for their employees.
Employers are required to register within 90 days of the dates listed above. Employers must submit the following information:
Once an employer applies that the GFSC deems compliant with the Act, it has 21 days to enter the employer’s and its employees’ details onto the register.
Employers must inform the GFSC of any of the following events within 30 days:
The position of Spanish-resident workers in Gibraltar concerning whether the Spanish Ministry of Finance will accept contributions to their Gibraltar pension plan for Spanish tax relief purposes has yet to be clarified.
As a result, many Spanish resident workers refrain from participating in pension plans provided by their employers in Gibraltar.
During the ongoing negotiations to establish Gibraltar’s post-Brexit relationship with the European Union, hopefully this issue will be addressed.
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