So on Wednesday 3rd March 2021, UK Chancellor Rishi Sunak stepped up and delivered the Budget 2021, the second Budget of his reign.
It’s been a busy few years for Mr Sunak, having only become an MP in 2015. At least he had a bit more time to prepare for this Budget after having only 27 days in the job as Chancellor before delivering his first Budget last year.
Although his time in parliament has been short, Rishi Sunak is developing a reputation as a slick operator and his latest Budget has been seen by voters as the fairest Budget over the last 10 years.
But not all is as it seems at first and the longer term impact to your retirement income in particular is likely to be damaging.
Budget 2021 headlines
I know you have probably seen much of this already but let’s just recap on the Budget 2021 headlines.
- Coronavirus Job Support Scheme extended to September 2021 across the UK (employer contribution of 10% required in July and 20% in August and September).
- Self–Employment Income Support Scheme (SEISS) extended to September 2021 across UK, with those who filed a tax return in 2019/20 now being able to claim for the first time.
- Stamp Duty Land Tax (SDLT) temporary cut in England and Northern Ireland extended until September 2021. The £500,000 nil rate band will be extended until 30 June 2021 then it will be set at £250,000 until 30 September 2021 returning to its standard level of £125,000 on 1 October 2021.
- New mortgage guarantee scheme to enable all UK homebuyers to secure a 95% mortgage on properties up to £600,000 – only a 5% deposit needed.
- Fuel duty and alcohol duties are frozen.
These were certainly the popular announcements. More giveaways to help the economy recover from COVID-19.
But it’s the Income Tax, Capital Gains Tax, Inheritance Tax and Pension Lifetime Allowance announcements that I want to focus on.
The Budget 2021 has the potential to significantly reduce your retirement income
The Chancellor was very clever in that he didn’t actually increase any of the above taxes, which also means he didn’t break a Conservative election manifesto promise.
But he did freeze the allowances and bandings, meaning that over the next few years if prices rise (which they inevitably always do because of inflation) more is going to be needed to be withdrawn from your pensions and investments to continue your standard of living.
This could end tipping you into higher rates of tax.
- For 2021/22 the Personal Allowance is increasing to £12,570, basic rate band to £37,700 meaning a higher rate threshold of £50,270 – but then these figures will be frozen until April 2026. No changes to dividend allowance, personal savings allowance, starting rate band for savings.
This is going to be damaging for pension income that you have no control over. So pensions like defined benefit and the State Pensions where the income you receive pays out every year and usually rises with inflation.
Capital Gains Tax
- Capital Gains Tax (CGT) annual exempt amount frozen at £12,300 until April 2026. No change to the tax rates for CGT.
This will impact investments you hold outside of an ISA. Things like general investment accounts and property. The capital value of real assets like equities and property tend to rise over the long term, usually above inflation therefore you are going to start building bigger and bigger gains inside your portfolios. It’s normally a good idea to utilise your CGT allowance every year but the money withdrawn this way is going to buy you less and less in the future.
- Inheritance nil rate band frozen at £325,000 and residence nil rate band at £175,000 until April 2026 (and the residence nil rate band taper threshold remains at £2 million until April 2026).
The allowances you can use before paying any Inheritance Tax are frozen once again. Much like with CGT your wealth is likely to rise over time (especially if it is invested the right way) so if your allowances stay the same, it means potentially more Inheritance Tax paid by your loved ones on your death.
Pension Lifetime Allowance
- Lifetime Allowance for pensions frozen at £1,073,100 until April 2026. No changes to annual allowance, money purchase annual allowance or tapered annual allowance figures or rules.
Pensions are a great way to accumulate wealth because of the tax relief you get when making contributions. The problem now is, the more you have saved into a pension and the better the investment strategy, the more likely you are to hit the Lifetime Allowance and this tax charge will undo a lot of the good work you have done building up the pension.
You may think that £1m+ in pensions sounds like a lot but remember this includes all pensions including defined benefit pensions which use a 20x income plus lump sum formula to work out the value for Lifetime Allowances purposes.
Now more than ever a plan is needed to structure your investments in the right way so you are paying into the right tax wrappers at the right time to take advantage of all the allowances available to you when you come to need a retirement income.
We can help.
This will be your first retirement, but for us, we have done it hundreds of times. So please get in touch for a no obligation, free 15-minute conversation so we can help you understand where you stand and what you need to do next.
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Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.