Full Transcript
Dr James:
Hey team, what is up? Hope everybody is having a lovely day wherever in the world you’re listening to us. This is James, and welcome back to the Denton Sympathise podcast, and this is a podcast subject that is on the tip of everybody’s tongues recently because the Chancellor has just changed a lot of damn stuff in the background and we need to be up to date with what’s going on so that we can make the best investment decisions. We are, of course, talking about the annual allowance and the lifetime allowance. Don’t worry if that is gibberish to you, don’t worry if that is jargon to you. We’re going to elucidate the meaning of those terms as the podcast progresses. I have my good friend John Doyle sat here in front of me. He is going to be helping us today. John, how are you?
Jon:
I’m very well, mate. I’m very well. As you can imagine, since the budget last week it has gone mad at our end Client questions flying in left, right and centre trying to adjust plans and work out what we do. But it’s all good.
Dr James:
Question right, and I know we’re going to get into this later. Is it returning clients or is it brand new clients who are thinking, holy crap, I’ve got to get an IFA because the pensions are so much more lucrative now in the UK? It’s both.
Jon:
It’s absolutely both. So the first thing that we did Thursday morning is me and Stuart, who’s my associate here, sat down, went through all of our clients. What do we need to adjust? How does this affect the planning that we’ve already got in place? And then we start reaching out to them where it impacts them. But then today and tomorrow I’ve got five new client inquiries that I’ve got to deal with on calls today, All to do with TaxiRend. Give us a chance. We’ve got like two weeks. It’s a real nice mixture of both that’s cool man.
Dr James:
That’s awesome because, of course, it is so much more lucrative now to take your money and stick it in a pension because there’s no lifetime allowance, which is wonderful. But anyway, we’re going to get into that later. Aa and LTA, annual allowance and lifetime allowance let’s establish a baseline level of knowledge. For those out there who these terms are new to, let’s start from there. What do they mean?
Jon:
Okay, We’ll start with the annual allowance. The annual allowance is the amount of money that you’re allowed to put into a pension in any one tax year. Previously, this has been capped at 100% of your earnings or £40,000, whichever is higher Made slightly more complicated by defined benefit pensions like the NHS pension scheme, where there’s a weird calculation we have to do. But yeah, you were capped at 40,000 to put into a pension in any one year. Your annual allowance.
Dr James:
Cool. And then, to build on that, the lifetime allowance, the LTA.
Jon:
Yeah, so the lifetime allowance is then the total amount of pension you’re allowed to have before you have an additional tax charge over and above. This was introduced in 2006 at 1.8 million and it was at 1.5 million Anyway. It’s then been shaved down over the years by successive chancellors and it then stood at just over 1 million. Last year it was 1,073,100. Any pension savings above that would then have incurred an additional tax charge.
Dr James:
And you know what? It’s super interesting that what the Chancellor revealed last Wednesday happened because there was a definite trend in the lifetime allowance, which was that it was going down and they were tightening the noose, so to speak, because it’s such a flippant huge piggy bank that the government can read right.
Jon:
Yeah, there has been. So, like I say, it was introduced in 2006. It had crapped up to about 1.8 million and then subsequent chancellors, starting with George Osborne, had started to shave it down because it was a nice easy target for them to raise a bit of revenue. It got down to about a million and amongst financial advisors and pension nerds there’d been this growing frustration that you’re capping us on how much we can put into a pension and there were all sorts of restrictions on that as well and then you’re capping us on growth off the pension. And it squeezed and squeezed and squeezed. Now there had been rumors leading up to the budget that Jeremy Hunt was going to increase the lifetime allowance, maybe to 1.5 million, maybe to 1.8 million. But I’m there listening to this budget and he’s talking through and then he scraps it completely. Twitter, financial Twitter blows up. No one can believe quite what’s happening. Everyone’s getting a bit excited. It’s a big shock. It’s a big surprise. I don’t think I’ve been that surprised listening to a budget since pension freedoms were announced in sort of 2014. That was a similar sort of experience, just something completely out of the left field. That was quite exciting, quite interesting to us nerds. That’s cool.
Dr James:
Listen, whoever I’m trusting with my money or I’m putting my faith in not just my money, but in terms of any profession I want them to be a damn nerd about it. Okay, because then they know everything that I don’t know and they’re obsessed about it. That’s a wonderful thing. For context, I know that when people exceeded the lifetime allowance in terms of their total pension pot, the measures or what they were subject to in terms of taxation was heavily punitive. Can you just divulge a little bit about what happened when we exceeded that, just so people can understand quite how big a shift this is?
Jon:
Yeah sure, above the lifetime allowance you weren’t allowed any tax free cash. So big, big attraction of pensions is you put money in, you get tax relief at the time, you get a nice tax free lump sum. So above the lifetime allowance you wouldn’t have anything tax free. So everything would have to come out as income and there was an additional tax charge that would get applied. If you took it out and choose to take it out as a lump sum, you would pay an additional tax charge of 55%. If you draw it as income, you would pay an additional tax on top of your sort of marginal tax of 25%. So it was really heavily taxed at that point, still attractive to some people, but quite heavily taxable, causing lots of problems, particularly for people who had a long time in NHS pensions or had been saving into pensions for years and years. It was a paradigm, changing levels of tax.
Dr James:
Well, this is it, because when your money’s in there, obviously you can’t get it out, so to a degree it’s hostage, which is why the government are, so it’s such an easy target to raise and increase taxes. That’s not the full story. I get that. There’s more to it, of course.
Jon:
Each time they’ve reduced the allowance, they brought in some protections. So, as advisors at the moment, we’ve got clients with protections from before 2006,. Protections from 2014, 2016,. All these various different schemes that we have to be aware of and manage. On lifetime allowance, protections that came with the traps if you ever contributed to your pension again or anything like that. So there was always a bit of a protection, but the quid pro quo was you stopped putting any money into pension.
Dr James:
Boom Love that we cover this on the last podcast as well. Accounts and traditional investment accounts. There’s a really good system that you can use to decide which one you want to prioritize and basically just have to decide yourself. There’s only really two metrics. One is how much tax we save upfront whenever we invest, whenever we take our money and place it in one of these accounts, and the access that we wish to have on our money. Now, if access is a total non-negotiable for you, then maybe, by the way, no financial advice or anything like that, just some philosophies or some ideas that you can use to figure out what your plans are. If access is a non-negotiable for you and you are young, then really we might want to prioritize the ISO. Obviously there’s more to it, there’s tax and things like that. If just pure straight up, making a whopping great tax saving is the most important thing for you, particularly when you get into the higher tax rate, the higher tax band then pensions are possibly the priority, but of course with the caveat that we can’t get the money until our late 50s, at the very earliest depends on the pension, of course. I love that little framework. It just makes it so simple because there’s this huge. I’ve seen these spreadsheets, these documents and they’ve got all these columns and rows about what the various pros and cons are of each account, which is fine, because the more information the better. But that little summary helped me a great deal whenever I heard it. There’s only really two, the two main factors, two main things that allow you to make that decision. When do I want to have access to the money? Do I want to retain access to the money the whole time? And what is the tax saving up front? Love that.
Jon:
Yeah, yeah, it’s brilliant.
Dr James:
Boom, okay, nice one Onwards. We’ve established a baseline level of knowledge. What’s changed as of last Wednesday?
Jon:
We’ll start with the biggest surprise, which was that the lifetime allowance was scrapped completely. Okay, so we no longer have a lifetime allowance at all, so anyone can have any size of pension that they want and there’s no longer any additional tax charges beyond that amount. Now it does come with the smallest thing in the tail that your tax-free cash that you can take from a pension is still capped, and it’s capped at £268,275, which is 25% of the old lifetime allowance. So beyond that you won’t get any additional tax-free cash, but you still have all the other benefits of pensions. You’ll still draw that money from your pension at your marginal rate of tax and it still sits outside of your estate from inheritance tax planning perspective as well.
Dr James:
And just to be clear above that 25%, it’s subject to income tax right.
Jon:
Income tax at your marginal rate, so it just comes in as a salary, as income. And if you’re a zero tax payer, basic rate tax payer, higher rate or additional rate tax payer, it will just filter in depending on your tax rates. So the idea is pay into your pension as a higher rate or additional rate tax payer and draw from your pension as a non tax payer or basic rate tax payer, and then you’ve got the really big advantage.
Dr James:
After it’s compounded itself into oblivion, as well. This is what you want, right? Indeed, quick question. Right, and I’m sure this is going to be on the tip of a lot of people’s tongues, on the forefronts of their minds Do these changes apply retrospectively as well as prospectively, as in people who have already exceeded the lifetime allowance? Does this now mean that they don’t have to worry about that, that that’s a load off the shoulders, a load off their mind, because it’s done away with entirely, or is this only going forwards?
Jon:
Okay. So there’s a little phrase that we have in the pension world called a benefit crystallization event. That is the moment where you crystallize your pension, start drawing money from it or take tax free cash or, if it’s the NHS, start drawing the income. We’ve seen this shortened down to a BCE. This will apply to any future benefit crystallization events. So anything that’s happened historically, it won’t change. If you’ve already paid a lifetime allowance charge, if you’ve already drawn from your pension and paid those taxes, you’re not going to be able to get it back. But anything going forward, any new crystallization events, this will apply to it.
Dr James:
So, by extension, because the government have been known to mix things up every once in a while this might be something that causes you to think to yourself actually, now, I’m assuming these rules kick in right now, or is it the next financial year From the 6th of April? Ah, so the next financial year, right? Okay, so maybe what people are now thinking is okay, now’s a good time to flip and crystallize my pension in case things change again. Potentially, who knows? Not that we’re saying that we have to do that. These are all just factors in the overall decision, right?
Jon:
There’s, particularly with the lifetime allowance changes and we’ll come on to some of the other changes in a bit. This seems to be the one that’s caused the most political debate. It’s being framed by labor as a giveaway to the rich. I don’t think it’s necessarily the 1% rich that it’s a giveaway to. I think there’s a lot more mass affluent people who it affects. But there is a worry that labor, if they get in at the next election, could change, reverse this decision. So the question comes up and it’s one of those questions that’s been pulled, put to me by a number of clients is what do we do about this Realities? We don’t know. One of the reasons my clients pay me a lot of monies because I don’t promise to predict the future. It’s impossible to predict the future. We don’t know what will happen. So the main things we can do is number one continue as you were anyway. Don’t be retiring or crystallizing pensions a decade in advance of when you are going to do things just because, and if you’re a long way from retirement, just ignore this. Just keep putting into your pension as you were. The people who might want to think about doing something are those who are within this sort of two to three years of wanting to retire. There might be some planning depending on circumstances that you might bring forward. But if we look at what’s happened historically when the lifetime allowance has been brought in initially in 2006, but then also when it was reduced at each of these moments there was a protection put in place For people who were already beyond the lifetime allowance. So history is a guide to the future. There’s always a little unreliable, but you would expect there to be some form of consideration put into people who are negatively impacted by future changes. So it’s not something where we would go out and drastically change someone’s financial planning because of this. We’re not going to be able to do anything about it. We’re not going to be going getting it overexcited and just throwing every penny they’ve got into the pensions and we won’t be crystallizing and take drawing pensions years ahead of the plan just so we can get in now while there’s a no lifetime allowance.
Dr James:
Cool, thank you for that, and we are going to move on to the annual allowance in just a minute, but just something that’s popped into my head would be interesting to hear your thoughts on this. Naturally, whenever the government make any decision, there’s a certain degree of politics behind it, and I know that you just hinted at this earlier. What’s your theory? Why is this a political play, potentially for the government? What are they trying to encourage? Because there always is some sort of agenda behind these things, which is fine, which I think is okay, because when you make any move, there’s an intended outcome. What’s their desire? What are they trying to encourage?
Jon:
So first, this comes with a massive caveat that this is pure speculation. Of course, yeah, I’m an expert in financial planning. I’m not an expert in politics, unless I’ve been on the wine and we’re around a family table, then I’d definitely become an expert, if my brother in law is listening. So from the conservatives perspective, they’re trying to use this to support the NHS and that’s how they’re framing this All, for lots of doctors, gps, consultants, as well as dentists have been impacted by the lifetime allowance and annual allowance changes over the last few years. It’s causing a number of senior medics to retire early and training at the doctor or dentist takes years and if you’ve got an increase in early retirements, then you’re not going to stem the flow. You’re not going to be able to keep the numbers of doctors up quick enough through training them. So you’ve got to stop the flow, you’ve got to heal the wound and that’s what they’re trying to do a little bit here. I think there’s also an element of it being a little gift to business. You know there’s a lot of senior business people within this who were affected, as well as MPs themselves, but it’s definitely being framed as a way to support the NHS and senior civil servants, and so that’s what they’re trying to do is encourage people back to work, or not necessarily to delay, or to delay retirement a little bit From the labor perspective. They’re seeing this very definitely as a giveaway to people who are already wealthy, and I think partly it’s the one thing in this budget that they can easily attack. You know, the rest of the budget is fairly boring. It was fairly sensible and I think it was deliberately so after the chaos that came from September’s budget, and so they’ve got to jump on something. So I think part of it, speculatively, is this is what they’ve got to go on as the opposition. They’ve got to attack the budget somewhere, and they’re talking about potentially doing an NHS carve out. If they do something, you know, if they get voted in next time, that they’ll protect the NHS pension or doctors and nurses. Who knows, who knows? I think by the time we get there, the world will have moved on from this issue potentially. And one thing we know for sure is politics is always going to affect our financial planning. Tax is always going to have an impact and we can’t plan for it. So we just have to make sure we keep options on the table. We keep choice on the table and adjust as and when we know things right now. Anything beyond that is just speculation. Cool.
Dr James:
Yeah, and another thing that made an interest was it’s certainly a little bit against the grain of what the perception is of austerity, the current perception of austerity, Certainly that is I don’t want to say trendy, but necessary given where the economy is at.
Jon:
Yeah, yeah, it was definitely a surprise. It was definitely a surprise that the lifting it so increasing it up from the 1 million to 1.5, 1.8. Those sort of rumors they made sense. But I think, like us, You’re right there Jess.
Dr James:
Yeah, no, sorry, mike, was just me at your stand, okay.
Jon:
Yeah, so I thought you screened frozen. I think the sting in the tail with this again speculatively, from a political point of view is this decoupling of the tax free cash and the lifetime allowance, because there’s potential for if they get rid of the lifetime allowance and you keep that to shade this tax free cash element down over time, that might be something that people might look at being attacked. It certainly I wouldn’t expect to see it get increased at any point in time because that is a tax giveaway. So there’s a few things you look at. You go well, this is where they might start looking at things. The death benefits is another one that you would speculate on as well.
Dr James:
Yeah, because they’re quite lucrative, the death benefits, or they can be anyway.
Jon:
Yeah, so because the pension is treated as being outside of your estate. So firstly it means that you can have you know if you’ve got 2 million in a pension you’re not. That’s not being pulled into the rest of your state for inheritance tax. That’s very advantageous and at the moment if you die before the age of 75, that whole pension pot, if it’s drawn as a lump or it’s a sort of a defined contribution scheme, that whole pension is tax free, which is incredibly generous. And then after 75, it’s just inherited like a pension, so it’s drawn at the marginal rate of tax of who the beneficiaries are. So we’ve got a very generous scheme at the moment on death benefits which you know politically might be open to some tampering in the future, but that would just be speculation. Right now we can only plan with what is known and that is that these are very, very tax efficient and effective planning vehicles.
Dr James:
Well, with all of these things, the only way you can really fully know how they’re going to transpire it is if you, quite literally, have a crystal pot, because that’s what it is, because it’s humans at the same things and human nature flip flops. We don’t know what the circumstances are going to be, we don’t know any of this stuff. So what you just said is super important. It is circumstantial and it is speculative.
Jon:
And it’s why, like just as in investing, diversification is the only free breakfast. It’s the only free meal. You’ve got to diversify your investments. We’d go the same with our tax wrappers. We diversify our tax wrappers. Don’t have all your assets in a pension, but don’t have all your assets outside of a pension either. Use all of the available tools and you’ll always have some choices when these things get changed or tweaked going forward.
Dr James:
Love that. Let’s talk about the annual allowance, so I know that it’s increased, correct 45,000 to 60,000?.
Jon:
Yes, so that’s again. From next year the annual allowance will be going up from 40,000 to 60,000. This will be a massive help to anyone with NHS pension, particularly the 95 scheme. There’s a few other tweaks within the NHS pension probably enough for a podcast on its own that they’re bringing through just to ease this problem of the pension scheme breaching the annual allowance so often for people. So this raised from 40 to 60, particularly, though, this will also benefit anyone who’s doing a lot of private dentistry, because you’re now able to put more money, either personally or from your company, into your pension and get tax relief. Company directors listen up to this. Your corporation tax rate for most dentists is going up to 25% from next year.
Dr James:
Good to remind everybody about that. I’m excited because I know you’re going with this and there’s a huge savings here, right yeah?
Jon:
so any pension contributions you make from your company will now come with a 25% tax relief, which just incentivises you down this road even more. It becomes a really powerful planning tool. Beyond that, there was a question I saw in the group of someone who had not done any pension planning for a number of years but had an NHS pension from years ago. If that’s your situation, you’ve got this really cool thing called carry forward where you can use your unused allowances from the last three tax years. Now those allowances stay at 40,000 for the previous tax years.
Dr James:
Oh, that would have been really good, wouldn’t it?
Jon:
It means that next year you could be looking at a contribution of 180,000 into a single year pension Right Corporations tax relief. 25% of 180,000 is James.
Dr James:
One more time. Come on, let’s do it I love maths questions. 25% of 180,000, that’ll be a quarter, that’ll be 35-ish thousands, 45. 45, a quarter. Oh yeah, sorry, a quarter. Sorry, I did it, it’s all right. It’s always unfair.
Jon:
I’m annoyed. I’m so annoyed.
Dr James:
That was my moment, the mess that got.
Jon:
That was your moment for sure. Yeah, 45,000. That’s so annoying.
Dr James:
Anyway.
Jon:
So you’ve got passion in your company account, you move that into pensions. You get a nice tax break on doing that. It can be quite attractive piece of planning. Yeah, the other changes to the annual allowance that’s coming through is there’s this thing called the tapered annual allowance. This is a reduced allowance for anyone who is a high earner. Previously, anyone earning over 240,000 would lose their annual allowance until it got down to just 4,000. That tapering is going up to 260,000. You can now earn 260,000 before your annual allowance gets reduced. It’ll get reduced down to 10,000. Even for those high earners there’s still the opportunity to be putting this money away into pension and getting tax relief. Some of those changes we talked about with clients. We’ve got a few clients who just put that 4,000 in as monthly direct debit. That direct debit we’re just going to crank it up to 10,000 from April because it’s just no brainer planning. It’s not costing them a lot of money in real terms for their situation. You might as well maximize it out where you can.
Dr James:
Thank you for that. Anything else that we should know? Anything else that’s changed?
Jon:
Let’s see. There’s the money purchase annual allowance. This is another annual allowance that you’ve got when you’ve drawn income from a defined contribution scheme. You still can put money into a pension. That used to be capped at 4,000. That’s now gone up to 10,000. Again, if you’ve taken some tax free cash and some income from a pension, previously you could only put 4,000 in. That’s going up to 10,000. That’s particularly good if you’re someone who is semi-retired but you’re keeping your hand in. I’ve got a few clients who maybe just do a day, a week of dentistry, or maybe they’re on a board of a charity or something and you get a small amount of income. They can contribute into a pension while still receiving pension income and get that little bit of tax relief, which can be quite nice.
Dr James:
Cool Loads of information there. My next question I feel like a really nice way to round off this podcast would be if we could just crystallize some super tangible action points for people who are listening, based on what’s changed. Obviously, I do get that there’ll be a lot of people in a lot of different situations. Maybe if we could distill those down to a few broad ones. But that’s providing there’s not anything else more that you feel is important to add on what you’ve previously said.
Jon:
Anymore, I think they’re the most important bits. When it comes to the changes in pensions, like I said, there’s some other changes to the NHS scheme that are coming through, but no, I think they’re the main points. It’s the life-harm allowance, it’s the tax-free cash and it’s the annual allowance changes of the big ones for people to be thinking through.
Dr James:
You know what, if there’s enough depth to what you’ve just said about the NHS pension changes, we should 100% do that podcast very soon. That would be cool. Let’s pick that up another time. Action points, action points.
Jon:
So the first one, I think, is to, if you are someone who is contributing to pensions on the regular, is to make sure you’re then thinking about can I maximize this allowance? So I’ve got a number of clients who put 40,000 into their pension every single year, monthly direct. But in it goes question do we need to increase that? Is that something you want to do? Lifetime allowance wise, am I thinking of retiring in the next two or three years? Am I wanting to touch and draw from my pensions? If so, need to review this. How is this going to impact me, Particularly if you’ve got a blend of NHS and private pension? Where do we get tax-free cash from, because we’re now limited. Where we take it from is going to be a really important decision to maximize your retirement income situation. Other sort of things to think through. Anyone whose income is over that 260,000, need to check your pension situation and it’s complicated probably needs a conversation between you, your accountant and your financial planner to make sure you’re not breaching any allowances and giving yourselves problems in the future.
Dr James:
Nice one, john. Thanks so much for your time today. That was a very clean, concise articulation of the changes. I love that and I’m sure that there’ll be a lot of valuable information.
Jon:
It’s been a whirlwind few days so I’m pretty tired, so we’ll see if we’re hopefully all made sense.
Dr James:
No, that was awesome. I think we’ve got a lot of valuable information in there. John, if anybody wants to reach out to you, how are they best able to do that?
Jon:
Yeah, so juniperwealthcouk, We’ve got a contact us page. You can schedule a call or contact us there. I’m juniper underscore John on Instagram and Twitter and you can just tag me in anything on the group as well. If you’re on the Dental Service, I’m always sticking my hand in there and helping where I can.
Dr James:
Well, it’s been very helpful today, that’s for sure. Thanks, annette. Thank you so much for an awesome podcast. Let’s catch up soon, my man. Awesome, thanks a lot.