2 key Budget announcements that may affect your financial plan

Chancellor Rachel Reeves delivered the new Labour government’s first Budget on 30 October 2024. Amid the announcements were key changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT) that could affect your financial plan.

Ahead of the Budget, prime minister Keir Starmer said it would be “painful” as there was a £22 billion black hole in the public finances. Indeed, Reeves went on to announce measures that would raise annual tax revenues by £40 billion by 2030.

Some of these taxes will be paid by businesses, but others could affect your personal finances. Here are two changes you might want to consider when reviewing your financial plan.

1.  The main rates of Capital Gains Tax have increased

There was a lot of speculation that Reeves would announce changes to CGT. In the Budget, she revealed the rates would indeed rise. It could mean you pay more tax than you expect when selling assets.

CGT is a type of tax you pay if you make a profit when you dispose of assets such as:

· Investments that are not held in a tax-efficient wrapper, like an ISA

· Personal possessions worth more than £6,000 (excluding your car)

· Property that is not your main home

· Business assets.

In 2024/25, you can make profits of up to £3,000 before CGT is due. This is known as the “Annual Exempt Amount”. If profits exceed this threshold, you may be liable for CGT.

The changes Reeves announced to CGT rates came into effect immediately on 30 October 2024. The rate of CGT you pay depends on your other taxable income. If you’re a:

· Higher- or additional-rate taxpayer, your CGT rate has increased from 20% to 24%

·  Basic-rate taxpayer, you may benefit from a lower CGT rate of 18%, which has increased from 10%, if the taxable amount falls within the basic-rate Income Tax band.

So, it might be more important than ever to consider how to reduce your CGT liability as part of your financial plan. For example, you may:

·  Spread disposing of assets over several tax years

· Focus on increasing investments held in a tax-efficient wrapper

· Pass on assets to your spouse or civil partner to make use of their Annual Exempt Amount.

We could work with you to understand if you may be liable for CGT and the steps you might take to mitigate a large or unexpected tax bill.

2. Your pension may form part of your estate for Inheritance Tax purposes

Currently, your pension isn’t usually included in your estate for IHT purposes. As a result, you may have planned to use other assets to fund your later years so you could pass on wealth tax-efficiently through your pension.

However, Reeves announced she would close this “loophole” that gives pensions preferable IHT treatment.

From 6 April 2027, your unspent pension pot will be included in your estate when calculating an IHT liability. The change could mean the number of estates that pay IHT doubles.

Under the existing rules, around 4% of estates are liable for IHT and it raises about £7 billion a year for the government. However, the Budget states that bringing pensions into the scope of IHT will affect around 8% of estates each year. Reeves added the changes would boost IHT receipts by £2 billion a year by the end of the forecast period (2029/30).

So, if you haven’t previously considered IHT as part of your estate plan, you may need to now.

The threshold for paying IHT is known as the nil-rate band and is £325,000 in 2024/25. In most cases, you can also use the residence nil-rate band if you pass on your main home to a direct descendant. In 2024/25, the residence nil-rate band is £175,000.

In addition, you can pass on unused allowances to your spouse or civil partner. In effect, that means, as a couple, you could leave behind up to £1 million before IHT may be due.

It’s important to note that both the nil-rate band and residence nil-rate band are frozen until 6 April 2030 and will not rise in line with inflation.

As a result, you might need to consider how the value of your assets will change and whether growth could affect what you’ll leave behind for loved ones.

Previously, you may have increased pension contributions to build up a tax-efficient nest egg that you could leave to your family when you pass away. A financial review could help you assess if it’s still the right option for you in light of the changes.

Get in touch to talk about the impact the Budget could have on your plans

If you’d like to discuss how the Autumn Budget could affect your finances and how you might keep your plans on track, please get in touch. We can work with you to create a tailored plan that reflects the changes and aligns with your aspirations.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Guide: Your retirement choices: How to generate an income in later life

Retirement on your terms is likely to be one of the key elements of your financial plan.

So, as you approach or reach retirement, now is the time for you to start thinking about enjoying a comfortable life when you stop working.

Many people see retirement as the start of their “second life” – the time when you have the chance to do all the things you want to do. You may have been planning this moment for many decades and have grand plans for what you might like to do in the years ahead.

If you haven’t already done so, now is also the time to start thinking about your income in retirement, and how long it may need to last.

Aside from taking all your fund in one go – or not taking it at all and leaving it to pass to your heirs – there are four main options:

· Buy an income for a fixed period or for life, known as an “annuity”.

· Take an adjustable income, known as “flexi-access drawdown” (or sometimes just “drawdown”).

· Take lump sums from your pension fund, sometimes known as “uncrystallised funds pension lump sums” (UFPLS).

· Mix and match different options.

This useful guide explains the advantages and disadvantages of each option, as well as some other areas you might want to consider when planning for retirement.

Download your copy of ‘Your retirement choices: How to generate an income in later life’ to find out more now.

If you’d like to talk about your retirement plan, please contact us to arrange a meeting.

2 valuable types of financial protection to consider if you have a family

How would your family cope financially if you passed away? It may be a difficult question to consider, but it could also be an important one. Understanding the challenges your family could face may mean you’re able to identify steps to protect them, including taking out financial protection if appropriate.

Financial protection is a type of insurance that would pay out when certain conditions are met to provide a financial safety net when the unexpected happens.

If you’re considering how to provide for your family should the worst happen, there are two key types of financial protection you might want to consider.

1. Life insurance would pay out a lump sum to your family

If you passed away during the term, life insurance would pay out a lump sum to your beneficiary. Your family would be able to use this money however they wish.

When taking out life insurance, you can choose how much you’d like the potential payout to be. The figure, along with other factors, like your health, would affect the premiums you’d need to pay to maintain the cover.

2. Family income benefit could provide your family with a regular income

Family income benefit would also provide your loved ones with financial support if you passed away. However, instead of receiving a lump sum, they’d benefit from a regular income for a defined period.

Again, you can select the income your family would receive if you passed away and you’d need to pay premiums to maintain the cover.

Life insurance v family income benefit: Which is right for your family?

Both life insurance and family income benefit could provide your family with financial security at a time when they’re grieving. It could mean they’re able to maintain their lifestyle or allow your partner to take time away from work to care for your children.

So, which option is right for you? There isn’t a clear answer, and it’ll depend on your family’s needs and priorities.

Life insurance could be an appropriate option if you’d like to provide your family with a way to pay off large financial commitments, such as an outstanding mortgage. You might even choose decreasing term life insurance, where the payout could fall in line with the mortgage repayments you’re making – this could reduce the premiums you’d need to pay.

Receiving a lump sum payout could also be the right option if you want to provide your family with flexibility. They could use the money how they wish, from paying day-to-day costs to investing the money to create a nest egg for your child.

However, life insurance might not be right for you if your partner isn’t comfortable handling large financial sums.

As family income benefit would provide a regular income, it could ensure your family’s ability to meet essential outgoings. Your loved one might also find regular payments more reassuring and easier to manage than a larger one-off lump sum.

There are drawbacks to choosing family income benefit too. As they wouldn’t receive a lump sum, it could provide them with less financial freedom and might limit their options.

You don’t have to choose between life insurance and family income benefit. You might decide they are both appropriate for your family.

For example, you may choose to take out life insurance so your family would have enough to pay off large financial commitments, such as your mortgage. You could then take out family income benefit to cover day-to-day costs until your children reach adulthood. 

While it may be a difficult conversation to have, speaking to your partner about your worries and financial protection options could be valuable.

If you don’t already, involving your partner in your overall financial plan could be useful too. Suddenly being responsible for financial commitments and long-term plans if it isn’t something they’ve been involved in before could be overwhelming.

By including them in financial reviews, they might be better equipped to handle the family’s finances and they may be more comfortable seeking support from your financial planner if they already have an established relationship.

Contact us to discuss how you could create financial security for your family

As well as taking out financial protection that would pay out if you passed away, there might be other steps you could take to improve your family’s financial resilience. Please contact us to discuss creating a financial plan that places those who are most important to you at the centre.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions.

Why inflation solutions should remain part of your long-term financial plan

High inflation has been a hot topic over the last couple of years, and as its pace stabilises, you might think it no longer needs to be part of your financial plan. Yet, skipping inflation when calculating your long-term finances could leave you with a shortfall.

The government sets the Bank of England (BoE) a target of keeping inflation at 2%.

The BoE explains that inflation that is too high or moves around a lot makes it hard for businesses to set the right prices and for people to plan their spending. However, inflation that is too low, or even negative, may put people off spending because they expect prices to fall. This hesitation to spend could lead to companies failing and people losing their jobs.

As a result, stable inflation is important for the economy.

A combination of the Covid-19 pandemic and the war in Ukraine, as well as other factors, led to the UK and many other countries experiencing a period of high inflation. Indeed, according to the Office for National Statistics (ONS), inflation reached a peak of 11.1% in October 2022 – the highest rate recorded in more than 40 years.

The good news is that the rate of inflation has since fallen and started to stabilise. In the 12 months to August 2024, the ONS reported inflation was slightly above the BoE’s target at 2.2%.

While the immediate pressure of prices rising sharply has eased, that doesn’t mean you can forget about inflation when you’re reviewing your long-term finances.

Even when inflation is stable, prices are often rising

While inflation meeting the BoE’s target won’t often make headlines, it still means that the cost of goods and services is rising. You might think 2% inflation won’t affect your finances too much. Yet, when you look at the long-term impact, the effect could be harmful if it’s something you’ve overlooked.

According to the BoE, inflation averaged 2% a year between 2010 and 2020. So, if you had £20,000 in 2010, you’d need almost £24,320 in 2020 just to maintain the spending power you had a decade ago.

That could have a substantial effect on some parts of your financial plan. For instance, if you’ve set a retirement income without considering how it may need to grow to support your lifestyle, you could find you face a shortfall. During a retirement that could span decades, the effects of even 2% inflation might really add up.

Inflation has only hit the target rate 30% of the time since 1997

What’s more, while the BoE has an inflation target, there are factors outside of its control that may cause it to rise or fall, as the last few years have demonstrated.

Indeed, according to a report in FTAdviser, since 1997, the BoE has missed its target around 70% of the time, and it’s more likely to be above the target than below it.

As a result, even if you’ve factored a 2% rise in inflation into your long-term plan, you could still experience outgoings rising at a quicker pace than your income. Considering the effects of a high inflation environment may help you secure your finances and keep goals on track even when factors outside of your control lead to expenses increasing.

Making inflation part of your financial plan

It’s impossible to know what the rate of inflation will be next year, and when you’re creating a long-term financial plan, you might want to weigh up the effect of inflation over decades. While you can’t predict what will happen, there are often steps you can take to incorporate it into your finances and provide security.

As part of your financial plan, you might consider how to:

• Create a financial buffer in case inflation is higher than you expect

• Use other assets to support your income during periods of high inflation

• Grow your wealth at a pace that could match or beat the rate of inflation

• Regularly review your short- and long-term finances to ensure they continue to reflect your current circumstances.

An effective financial plan could help you prepare for the unknown, including the inflation rate.

Contact us to discuss how to incorporate inflation into your financial plan

If you’d like to review your financial plan and understand how inflation might affect your outgoings, we could help. Please contact us to arrange a meeting with our team.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Climbing annuity rates could boost your retirement income

Purchasing an annuity could provide you with a regular income throughout retirement. And rising annuity rates could help your pension savings go further.

An annuity is something you buy, often with the money saved in your pension, which then provides a guaranteed income. The annuity rate offered affects the income you’d receive and it can vary between providers.

If you’re nearing retirement, the good news is that annuity rates have increased. According to the Standard Life Annuity Rate Tracker, the average annuity rate for a healthy 65-year-old was more than 7% in June 2024. 

Let’s say you have £100,000 to purchase an annuity. If you were offered a rate of 5%, you’d receive an annual income of £5,000. With an annuity rate of 7%, you’d receive £7,000. So, rising annuity rates could help you get more out of your pension savings. 

The above figures provide an example of how an annuity could support your retirement, but several factors will affect the income you could receive. Rates can also vary between providers, so it may be worthwhile shopping around before you purchase an annuity.

Choosing an annuity could provide you with financial security

One of the key benefits of choosing an annuity is that you’ll receive a regular income that you know you can rely on. For some people, this security could provide peace of mind when they retire. As your money will no longer be invested, you will also be protected from market volatility.

If knowing how much income you’ll receive each month in retirement would make you feel more comfortable, an annuity could be right for you.

However, there are drawbacks to consider too.

Compared to other options, an annuity is less flexible. For example, you cannot take a higher income from an annuity to cover a period of increased outgoings. So, considering how your income needs may change in retirement could be useful.

In addition, your savings could remain invested with alternative options. While this means your money would be exposed to investment risk, it also provides an opportunity for your retirement savings to grow further.

It’s important to weigh up the pros and cons of annuities before you purchase one, as it may not be possible to change your mind afterwards. We could help you assess how to turn your pension into a retirement income in a way that aligns with your goals and needs.

4 valuable questions to answer if you’re purchasing an annuity

1. Would you benefit from a joint annuity?

If you’re retirement planning with your partner, you might find that a joint annuity is valuable. A joint annuity would continue to provide an income for your partner if you pass away first. It could provide both you and your partner with peace of mind and ensure their financial security.

You’ll usually be able to decide how much of the income they’d receive, such as 60% of the full annuity. So, it might be worthwhile calculating how much they’d need to cover essential expenses and to maintain their lifestyle.

2. Do you want your income to rise in line with inflation?

Some annuities will pay out a static income for the rest of your life. This may be suitable for some people, but it’s often wise to consider the effect of inflation.

Inflation means the cost of goods and services rises. So, if your income doesn’t increase too, it’d gradually buy less. Let’s say you purchased an annuity in 2003 that provides an annual income of £30,000. According to the Bank of England, two decades later, you’d need an income of more than £52,500 simply to maintain your spending power.

So, choosing an annuity that will provide an income that increases each year could be valuable.

3. Do you qualify for an enhanced annuity?

Research suggests some retirees could be missing out on a potentially higher income by not taking out an enhanced annuity.

An enhanced annuity might offer you a higher income because of your medical history or current state of health. It may cover a wide variety of health issues, such as diabetes, high blood pressure, or chronic asthma. Some lifestyles that could reduce your life expectancy, such as smoking, might also mean you’re eligible for an enhanced annuity.

Yet, according to a report in IFA Magazine, 84% of retired annuity holders who would likely qualify for an enhanced annuity do not have one.

4. What proportion of your pension do you want to use to buy an annuity?

Finally, you may want to consider how much of your pension you wish to use to purchase an annuity.

When accessing your pension, you can choose to mix and match your options to create an income that suits your needs. So, you might decide to use half of your pension to secure a regular, reliable income through an annuity. You may then flexibly access the remainder when you need to.

Get in touch if you’d like to discuss your pension and annuities

If you have questions about annuities or would like to arrange a meeting to talk about your retirement plan, please get in touch.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

3 insightful pieces of data that could help you remain calm during market volatility

When you read that investment markets have fallen you might feel nervous or scared about the effect it could have on your future. Emotions like these sometimes lead to impulsive decisions that aren’t always in your best interest when you consider the long term. So, read on to discover some insightful pieces of data that could help you remain calm.

Volatility is part of investing – a huge range of factors might influence whether a stock market rises or falls. However, history shows that, over the long term, markets typically go on to deliver returns.

Recently, markets experienced volatility amid fears that the US was on track for a recession. Indeed, on 2 August 2024, US technology-focused index Nasdaq fell 10% from its peak. Just a few days later, the market rallied, and it was technology firms that led the way.

Concerns about the US economy weren’t confined to the US indices either. Markets fell in Europe and Asia too. In fact, Japan’s Nikkei index suffered its worst day since 1987 following the news. Again, it didn’t take long for the markets to bounce back.

Returns cannot be guaranteed and recoveries may be over longer periods. Yet, the above example highlights how making a knee-jerk decision due to volatility could harm your long-term wealth. If you’d responded by selling your investments when you saw markets were falling, you’d have missed out on the recovery.

So, if volatility is part of your experience when investing, how can you remain calm? These pieces of data could help you hold your nerve.

1. Investment risk falls over a longer time frame

It’s important to note that all investments carry some risk. There is a chance that you could receive less than the original amount you invested. However, the level of risk varies between investments, so you could invest in a way that reflects your risk profile and financial circumstances.

Usually, it’s a good idea to invest with a five-year minimum time frame. By investing for longer, you’re giving your investments a chance to recover if they fall due to short-term volatility.

Research supports this too. Using almost 100 years of data on the US stock market, Schroders found that if you invested for a month, you would have lost 40% of the time. Interestingly, when you invest for longer, your odds of losing money start to fall.

When invested for five years, the odds of losing money fall to 22%, and at 10 years it falls to 13%. The research shows there have been no 20-year periods during the time analysed where stocks lost money overall.

You can’t rule out risk entirely, but by investing for a long-term goal, you could minimise the chance of losing money.

2. Sharp drops in the market occur more often than you think

One of the reasons investors react to market movements is that sharp falls may feel like they’re unprecedented and that you should act as a result. Yet, the Schroders research suggests that sharp falls are more common than you might think.

Analysing the MSCI World Index, which captures large and mid-cap representations across 23 developed countries, the study found that 10% falls happen in more years than they don’t. Indeed, in the 52 calendar years to 2024, investors experienced a 10% fall in 30 of them.

Even significant falls of 20% may occur more than you expect – roughly every six years.

Despite these dips, markets have delivered returns over the 50 years analysed. So, holding your nerve during these sharp falls often makes sense when you take a long-term view.

3. Periods of “heightened fear” could be more lucrative

The Vix Index measures expected volatility in the US market– it’s often referred to as the market’s “fear gauge”. It can highlight when investors perceive there is a greater risk of losing money. For example, it last reached a significant peak in May 2022 in the aftermath of the invasion of Ukraine.

Schroders has assessed how your investments would fare if you sold assets during periods of “heightened fear” to hold your wealth in cash, and then shifted back to investments when the fear receded. Taking this approach when invested in the S&P 500 – an index of the 500 largest public companies in the US – would have yielded average returns of 7.4% a year between 1990 and 2024.

However, if you didn’t let fear affect your investment decisions and remained invested, you may have benefited from average annual returns of 9.9%.

So, even when it seems like investing isn’t a good idea because of the economic environment or geopolitical tensions, it could be worthwhile taking a step back to consider what’s driving your decision.

Contact us to talk about your investments

If you have questions about investing and how it could support your financial goals, please get in touch.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Inheritance Tax: How does the UK compare internationally?

More than 70% of Brits think Inheritance Tax (IHT) is unfair, according to a poll carried out by Tax Policy Associates in 2023. You might consider how other countries handle taxing assets when you pass away to be “fairer”, read on to find out more.

Over the last few months, you’ve read about how IHT works in the UK and some of the steps you may take to reduce a potential bill.

In the UK, IHT is a type of tax that’s levied on the estate of someone who has passed away if the total value exceeds certain thresholds. The portion of estates above the threshold may be liable for IHT at a standard rate of 40% in 2024/25.

Many countries have some form of IHT. Indeed, according to euronews, 19 countries in the EU levy some form of tax on inheritances, gifts, or estates.

So, how does the UK differ in the way that it taxes estates? Read on to discover how other countries tax assets after you’ve passed away.

Several countries have no form of Inheritance Tax

While many countries do levy a tax when passing on assets, there are a few that don’t have any form of IHT. For example, Austria abolished IHT in 2008, and Norway followed suit in 2014.

In the UK, modern IHT tax dates back to 1894 when an estate duty was introduced. However, there were different types of IHT going much further back. While there have been calls to abolish IHT in the UK, it’s not a step Conservative or Labour governments have taken so far.

The threshold for paying Inheritance Tax varies significantly between countries

Among countries that have IHT, the majority of estates fall under tax thresholds and aren’t liable.

As a result, taxes on estates typically make up a small proportion of total tax revenues. In fact, the Financial Times reports only four of the 38 countries that are part of the Organisation for Economic Co-operation and Development (OECD) derive more than 1% of their total tax revenue from inheritances, estates, or gifts – Belgium, France, Japan, and South Korea.

The threshold for paying IHT varies significantly. In the UK, in 2024/25, the nil-rate band is £325,000. If the value of your estate is above this figure, IHT might be due.

In contrast, a Belgium citizen might need to consider an IHT bill if the value of their estate is more than just €12,500 (£10,505) depending on the region they live and who their beneficiaries are.

On the other end of the scale, in the US, federal estate tax is only required if the value of the estate exceeds $13.61 million (£10.25 million), and only six states levy additional IHT.

Many countries tax the recipient rather than the estate

The UK is an outlier in how it taxes the assets of the deceased. The UK is one of a small number of countries that tax the estate and consider the total value, not how the assets will be distributed. Denmark and the US also take a similar approach.

In many other countries, rather than taxing the estate, the recipient is taxed. So, an IHT bill would consider the gains each recipient has made and their personal circumstances.

In a 2023 report, the Institute for Fiscal Studies stated that taxing recipients and considering their wealth would be “the most appropriate way of taxing inheritances”, if IHT aims to reduce the effect of inherited wealth on inequalities. It notes this would allow a “transfer of £500,000 to a millionaire to be taxed differently from a transfer of £500,000 from the same estate to someone who is poor”.

The majority of countries favour a progressive Inheritance Tax rate

Again, the UK is an outlier by having a flat rate of IHT. In 2024/25, the portion of your estate that is liable for IHT would be taxed at a standard rate of 40% in most cases.

In contrast, many other countries favour a progressive tax – where the tax rate is increased for estates that have a higher value. For example, in Denmark the IHT rate is between 15% and 25%, and in Belgium, it could range from 3% to as high as 80%. 

Many other taxes in the UK are progressive. For instance, you may pay a higher rate of Income Tax on the proportion of your income that exceeds the higher- or additional-rate thresholds. So, making IHT progressive could align it with other taxes.

Contact us to talk about Inheritance Tax

If you’d like to talk about your estate’s potential IHT liability and the steps you could take to reduce the potential bill, please contact us.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate Inheritance Tax planning.