Recent figures from the Office for National Statistics (ONS) confirm that your clients’ pension is likely to make up most of their overall wealth.

Private pensions have held the largest share of Brits’ wealth for the last decade, but the proportion has been rising. In the period from 2006 to 2008, private pensions comprised 34% of UK adults’ total wealth. This has increased to 42% in 2018 to 2020.

During the same period – and despite rising house prices – property as an overall proportion fell from 42% to 36%.

The ONS cite lower levels of homeownership among younger people, the introduction of auto-enrolment, and the increase in the State Pension Age as reasons for pensions’ continued dominance.

This dominance places a lot of pressure on your clients’ retirement plans and means that managing pension funds effectively is vitally important.

Here are three useful points your clients should consider:

1. The importance of growing pension wealth early and tax-efficiently

Pensions are a long-term, tax-efficient investment in an individual’s life after work. Starting to contribute early is particularly helpful, as is making the most of all available tax efficiencies.

Start saving early

Paying into a pension from an early age allows for more contributions. The effects of compound growth can make a huge difference to the size of a pension pot over the long term, especially on top of long-term investment growth.

Have a clear grasp of budgeting and learn to pay your future self first

Budgeting and cashflow modelling are key to any financial plan. Paying our future selves first – by putting money aside for pensions and investments first and then budgeting with what remains – is a great way to provide for a future retirement while being comfortable in the present.

Maximise tax relief

Pension contributions attract tax relief at 20% up to the Annual Allowance of £40,000 for the 2021/22 tax year (or 100% of earnings, if lower). Contributing up to this amount, if they can afford to, will see your clients receive the largest possible top-up from the government.

Higher- and additional-rate taxpayers can also claim extra relief through their self-assessment tax return.

Understand the alternative allowances that might apply

High-earners should be aware that they might trigger the pensions taper if their threshold income exceeds £200,000. This could reduce their Annual Allowance to just £4,000, seriously affecting the amount of money they contribute tax-efficiently.

Make the most of workplace pensions

When your clients pay into their workplace pension, they also receive a contribution from their employer. Some employers will even match a contribution increase made by their employee. Opting into a company’s salary sacrifice scheme can also be tax-efficient in some circumstances, by lowering National Insurance for the employee and employer.

At Boolers, our experts can help your clients build their pension wealth in the most tax-efficient way for them.

2. Understanding how best to pass wealth to the next generation

Last year, the chancellor announced that the Inheritance Tax nil-rate band (NRB) and the residence nil-rate band (RNRB) would be frozen at their current levels until 2026. The NRB will remain at £325,000 with the RNRB at £175,000.

These freezes will have implications for many families over the next few years, as the value of investments and house prices rise.

Passing the family home to children or grandchildren on death remains very tax-efficient, but your clients might consider looking to their pensions too.

Unused pensions remain outside of an estate for IHT purposes and can be passed on tax-free on death before age 75 in most cases. If an individual dies after age 75, the beneficiary will pay tax on the amount they receive at their marginal rate.

With the largest proportion of wealth likely to be held in your clients’ pensions, incorporating retirement funds into estate planning can be incredibly tax-efficient and Boolers’ team of experts can help.

3. Factoring in the cost of later-life care

Spending in retirement is never uniform and managing withdrawals over several decades requires careful budgeting.

Your clients will need to consider how they intend to live their dream retirement in the present, while also leaving sufficient funds to pay for care if their health deteriorates in the future. Recent ONS figures confirm that while life expectancy is rising, so too is the number of years we are likely to live in poor health.

Individuals who aren’t looking to pass on their property on death might consider equity release as a way to fund care.

Lifetime mortgages and home reversion plans might provide the capital required to pay for care, but so could well-managed pension funds. Lump sums or regular, fixed withdrawals could plug what is likely – according to the Telegraph at least – to be a social care black hole, for many.

Get in touch

If you have clients who would benefit from long-term financial planning in the wake of the pandemic, whether to help manage their retirement, protection, or estate planning, please get in touch. Email or call 0116 240 7070.

Please note

The value of your investment 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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

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

Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.