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For years, “spending your pension last” was the financial planning mantra recited by wealth managers. After the budget in October, it changed to “spend your pension before Rachel Reeves did it”.
Succession tax will be extended to the not spent pension pots of 2027 – which prompted the rich well -advised to rethink radical of their retirement plans. That retirees choose to withdraw money from pensions and spend it, offer it to the next generation or leave it where it is, it should be a “gold mine” for the treasure, generating 40 billion Sterling books in additional taxes over the next two decades, according to former Minister of Pensions Sir Steve Webb.
It will be music to the ears of anyone could be chancellor by 2030 (I bet that it will not be reeves) when the tax revenues of this change should accelerate. But could behavioral changes offer a short-term increase for the real estate market and the consumer economy?
Webb is well placed to calculate the upward potential. Now a partner of the LCP of advice, he has based his estimate on the large number of final wage pensions that have been transferred by benefits defined between 2015-2020, generally by men at the end of the fifty working for first -rate societies.
The ultra-basic interest rate era has provided high transfer values, trying more than 100,000 retirees to exchange the safety of an income that dies with them for a more flexible investment pot that they might transmit to their heirs without IHT (and in certain cases, free of income tax) – so far.
Aside from spouses and civil partners, from 2027, anyone inherited from a pension pot could have to pay the IHT and income tax at the highest marginal rate. To avoid this “double taxation”, financial advisers and their customers assess the merits to withdraw retirement withdrawals. These would be subject to income tax, but the prudent use of gift allowance (including the so-called “seven-year rule”) could reduce the responsibility of the IHT or completely remove it.
The property deposits to children or grandchildren will be the first thought for many. Last year, the Bank of Mum and Dad spent 9.2 billion pounds sterling by supporting 335,000 house purchases in the United Kingdom, according to Legal & General, with almost half of buyers under the age of 35 family assistance. If this ratio increases as Reeves modifies mortgage affordability for the first buyers, it could increase the prices of real estate and the income of stamp duties.
David Hearne, an approved financial planner at FPP, says the measures will reshape the great transfer of generational wealth. Many of its customers now plan to make regular retirement withdrawals (incurring an income tax at the exit) and to finance retirement contributions for their adult children, who will receive tax loss and employers’ contributions on the way .
He predicts the release of actions to extract the value of the family home will be a popular tool. The money taken in this way can be spent or gifted, debts reducing the value of the succession and reducing the bite of IHT invoices.
To encourage retirees rich to spend and take advantage of their money, Hearne keeps a large coil of 40% stickers on his desk as a conversation starter. “Spending £ 20,000 on a lifetime’s travel could be considered only £ 12,000, because money will not be subject to 40% to death,” he said.
While the advisers and their customers come back to plans, could that advance expenses to kill VAT receipts and stimulate the British economy?
Despite the impactful predictions of LCP, Paul Dales, British chief economist at Capital Economics, has doubts. “It is not a huge difference for the global economy,” he says, “although it may be for individuals or their heirs.”
Many will come down to timing. If retirees withdraw more pension pots earlier than expected, this will reduce their power to spend in recent years. And although the richest can spend (or give) with confidence, the greatest concern for those who are less rich is to balance the risk of investment against the risk of longevity.
Those of my own circle which made it possible to fix well stored sums by transferring their service pension defined in a SIPP had a breathtaking week while Deepseek allowed the world’s stock markets.
Answer the pension too much and they may lack retired money. In addition, they will have abandoned any advantage for spouse in their defined service regime and will have to provide enough for a surviving partner. This, and the lottery of care costs, could be an obstacle for expenses and gifts.
Difficult choices await us. But with more than half of all those who withdrew by 2060, planning not to save enough, these are great problems to have.
Claer Barrett is the FT consumption publisher and author of the FT Sort your financial life Newsletter series; cloer.barrett@ft.com; Instagram and Tiktok @claerb
cloer.barrett@ft.com
