06 Jan 2025
Ahead of the Budget, our research report ‘Retirement Advice in the UK: Time for Change?’ produced with NextWealth found that advisers’ overriding wish was for simplification, consistency and certainty. This did not materialise. Worse, a particularly long gap between the election and the Budget allowed for destabilising speculation to build. Clients worried that they needed to take action to avoid a nasty tax bill, based on increasingly alarmist headlines.
The survey showed that clients’ main concern ahead of the budget was whether they should take the tax-free cash on their pension. There were also concerns on capital gains tax, which saw a rush to sell assets1. Capital gains tax receipts rose by 16.3% in the third quarter to £572mn, with tax experts blaming a cut in the annual tax-free allowance, and investors looking to realise gains ahead of the budget. Another wave of receipts is expected in January.
There was also the familiar fevered speculation about whether the government would cut tax relief on pensions. As it was, the government left it untouched, but the speculation is unlikely to end with the Budget. The Pensions Review is still in its early stages and could bring meaningful changes to the way pensions are taxed. At the same time, worries around business property relief weighed on the AIM market, with speculation that the current generous inheritance tax treatment would be cut.
The reality
The reality was not as dramatic as initially feared, but there were still plenty of changes for advisers to navigate – as one independent financial adviser said, “well, it certainly made the landscape a lot more complicated with some of the easier tools, such as pensions being outside of inheritance tax, removed.”
The headline changes for advisers included a move to put unused pensions into the inheritance tax net, a small rise in capital gains tax for share sales, a reduction in IHT relief on AIM shares from 100% to 50%, and a cut in agricultural land and business property relief from 100% to 50% on amounts over £1m.
Advisers expect a high number of clients to be affected, particularly by the pensions tax change, which had become a staple of financial planning. 23% of advisers said all their clients would be affected by the pension tax changes on death, while 38% said it would impact most of their clients. It was the most impactful change. Advisers put it ahead of a raft of potential changes, including CGT changes, tax relief changes, a reduction in the cash free tax allowance or the reintroduction of the lifetime allowance. Before the Budget, 72% of financial advisers said they would typically leave pensions until last for clients drawing down capital.
In contrast to other Budget changes, such as VAT on school fees and employer NI contributions, many of the changes will be implemented relatively slowly. Financial advisers have until April 2027 to work out how their retirement income strategies will change for clients who are impacted, but the consensus among our interviewees was that the Budget has removed one of the “easier tools” and “a neat way of passing on assets”.
Potential beneficiaries
There is a question over whether some of the tax-incentivised savings areas could benefit from the new rules. Will investors channel more investment towards venture capital trusts, for example, or AIM IHT solutions, now that they cannot pass on their pension tax free? It is early days, but demand may increase.
Annuities could also come back into favour. There are now fewer advantages to keeping money in drawdown, at the same time as annuity rates are at their highest level in more than a decade2. That said, a financial planner interviewed post-Budget cautioned that clients often seek some form of value protection to guard the amount of money used to purchase an annuity, and the tax position on this is unclear.
It could certainly increase the level of gifting, as clients look to move money out of the inheritance tax net. Advisers have raised concerns about clients ‘over-gifting’ and running out of money. This may be a particular issue around care home costs.
More advice
The Budget may have plenty of downsides, but it should drive demand for expert guidance and increase the value of advice. In the run-up to the Autumn Budget, a fifth of advised clients said planned changes to pensions taxation increased their confidence in having professional financial advice.
One chartered financial planner said: “This is great for us, really, because clients are going to need more planning, and they’re going to need more planning everywhere. Because if you have been sheltering pensions for IHT, then actually they are now available to be used for income generation and assets that are in the estate, you can possibly do something else to get them outside of the estate.”
Changes to tax rates and allowances are a significant driver of demand for advice, and particularly changes to inheritance tax. The new rules may draw more people into the inheritance tax net. One independent financial adviser said: “A couple in the South East who own their own home, need to build up decent-sized defined contribution pension pots to provide for their retirement, could find a premature death creates an inheritance tax bill where there wouldn’t have been one before.”
This is all grist to the mill for financial advisers. It will create more people with the need for advice and more need for advice among existing clients. That said, it will derail some of the effective financial planning strategies used by advisers over the past decade and may require a rethink.
Source: Research conducted by NextWealth for BNY Investments, based on response to a survey with 2028 retirement-focused financial adviser and 254 consumers of retirement advice conducted between 9 September 2024 and 21 September 2024.
For more information and download the Retirement Advice in the UK: Time for Change report visit the research page here:
1Financial Times. "UK capital gains tax receipts surge ahead of budget" 22 October 2024. https://www.ft.com/content/1f6a6e98-eb3f-4c1b-87c5-d65842015e95
2https://www.sharingpensions.co.uk/annuity-rates-chart-latest.html