Wealth Management Update September 2024

Chancellor Rachel Reeves recently revealed a massive £22 billion shortfall in the UK’s public finances for 2024/25, caused by unfunded commitments. With the Autumn Budget looming on 30 October, tough choices on taxes and spending are expected, with Keir Starmer warning that the first budget “is going to be painful”. Although some spending cuts have been announced, Reeves admits they won’t be enough. Despite promising not to raise taxes that hit working people, like National Insurance, income tax, or VAT, other tax changes are looking more than likely.

One area under scrutiny is Pension Tax Relief, which costs the Treasury £48.3 billion annually. A proposed flat rate of 30% for all could generate an extra £2.7-£3.0 billion each year. However, scrapping higher tax relief rates seems unlikely due to its complexity and potential backlash. Any changes would need to balance fairness and encourage retirement savings.

Another potential target s the annual Pension allowance, which has recently increased from £40,000 to £60,000. Rolling this back could limit tax-free savings for high earners, but it might also push public sector workers to retire early. Additionally, the popular 25% tax-free lump sum retirees can withdraw from their pension pots is at risk. Reducing this benefit could undermine confidence in the pension system.

Inheritance tax (IHT) could also see changes as the government looks to tap into the wealth transfer from the ageing baby boomer generation. Revising IHT rules, especially for business and agricultural properties, could generate revenue but would need careful consideration to avoid negative impacts on small businesses and rural communities.

Lastly, Capital Gains Tax (CGT) might be adjusted, with some in the Labour Party advocating for aligning CGT rates with income tax. If this happens, it will likely be done with little notice to prevent a rush of asset sales.

Speculation is rife and is sure to remain that way until any changes are announced. Whilst we can all make educated guesses about how things turn out, it is usually unwise to make changes without knowing the facts – so for now we must all wait and see.

Source: HMRC

Frozen Tax Brackets Could Hit Hard

New data from HM Revenue and Customs reveals that the government’s decision to freeze income tax thresholds will result in 3.1 million pensioners—about one in five—paying higher or additional rate tax by the 2027/28 tax year. This increase is due to “fiscal drag,” where more people are pulled into higher tax brackets as their incomes rise while tax thresholds remain unchanged.

The analysis shows that between 2022 and 2028, around 2.7 million people aged 60 and over will move into the higher-rate tax bracket, while nearly half a million will face the additional rate. Notably, over a third of these individuals will be 70 or older, highlighting the significant impact on older pensioners. With 16.8 million people aged 60 and over in the UK, this means that nearly one in five will be paying more tax by the end of the decade.

The situation is even more pronounced among those who do pay income tax, as the proportion of over-60s dragged into higher tax brackets is likely to be higher than the overall figures suggest. This comes at a time when the Chancellor has signalled potential tax increases in the upcoming October Budget, although income tax rates themselves are unlikely to change.

Given these challenges, it’s crucial for those nearing, or in, retirement to manage their finances effectively to minimise their tax burden. Maximising pension contributions is a key strategy, as these can help individuals stay within lower tax brackets while also benefiting from significant tax relief. Most people can earn tax relief on contributions up to £60,000 annually, and unused allowances from the past three years can be carried forward.

For those already drawing from their pensions, careful management of withdrawals can help reduce tax liabilities. Additionally, deferring the state pension can increase the eventual payments, though this added income could also be subject to tax.

In light of these changes, planning ahead is essential to protect your income and ensure a more secure retirement.

For more information, contact us on 02920 450 143 or email us on info@penguinwealth.com and we’ll send you a recording of our Tax Webinar from earlier this year, which covers tax planning.

Protecting Your Legacy: How to Avoid Inheritance Disputes

Inheritance disputes are becoming increasingly common, often due to rising property values, complex family relationships, and the growing prevalence of dementia. Last year, over 10,000 wills were contested in the UK—an all-time high in recent history. As your assets, particularly property, appreciate in value, it’s important to be aware of the potential for disagreements among those you leave behind.

Take, for example, a case where a £1 million inheritance led to a bitter, seven-year legal battle among four siblings. Their mother’s decision to leave most of her estate to one daughter left the others feeling unfairly treated, leading to a prolonged and costly dispute. Situations like this underscore the importance of careful planning when it comes to distributing your estate.

In England and Wales, you have the freedom to decide how your assets are distributed—a principle known as “testamentary freedom.” However, if your family members feel they’ve been unfairly excluded, they can challenge your will by lodging a “caveat.” This can delay the distribution of your estate and lead to lengthy and expensive legal battles, sometimes costing tens of thousands of pounds.

The number of these disputes is on the rise, particularly in complex family situations, such as blended families, where multiple people may feel entitled to a share of your estate. Contesting a will isn’t something that happens easily or cheaply. Challenges are typically based on concerns about your mental capacity when the will was made, undue influence from others, or even allegations of forgery. Additionally, a will can be invalidated if it doesn’t meet specific legal requirements.

To protect your legacy and prevent disputes, it’s vital to communicate your wishes clearly to your loved ones. Ensure your will is properly drafted and witnessed by qualified professionals. By taking these steps, you can help ensure that your estate is distributed according to your wishes, without unnecessary legal battles or family conflicts.

As always, we are here to assist you with any questions or concerns regarding your estate planning. It’s important to ensure your legacy is secure, and your loved ones are cared for.

Have a read of our Penguin Trust Guide to see how we can help ensure your legacy is secure and that your loved ones are cared for. Download our Guide here, and get in touch with us on 02920 450 143 or info@penguinwealth.com when you want to get started on your legacy planning.

Inflation Edges Up: What Does It Mean In Real Life?

The UK’s inflation rate has nudged up for the first time this year, hitting 2.2% in July—just over the Bank of England’s 2% target. This slight bump was expected, mainly because gas and electricity prices didn’t drop as much as they did last year. While this rise is smaller than many experts thought it would be, it does mean that prices are creeping up faster than they have been in recent months. Still, it’s nothing like the steep increases we saw in 2022 and 2023 when energy and food costs soared.

The Bank of England thinks inflation might climb a bit more, possibly reaching 2.75% in the coming months before cooling down below 2% next year. They’re keeping a close eye on things as their next meeting in September approaches. Recently, the Bank cut interest rates to 5%, down from 5.25%—the first time they’ve lowered rates since the pandemic. While this is good news for savers, it might mean higher costs for mortgages and loans, so it’s a bit of a balancing act.

As for what’s next, experts are split. Some think the Bank could cut rates again as soon as September, which could ease the pressure on borrowers. But there are still some worries about ongoing price increases, especially in areas like services, where costs can be unpredictable due to things like airfare and hotel prices.

Even with this small uptick in inflation, things are looking more stable than in the past couple of years. The cost of living has been tough for many, especially for those on lower incomes, but with food price inflation easing to 1.5% in July, there’s a glimmer of hope that we’re on the right track. Meanwhile, the housing market is showing modest growth, with UK property prices up by 2.7% over the past year.

While the economic outlook is still a bit uncertain, the key is to stay informed and make the most of these gradual changes as they come. As always, we’re here to help you navigate through these shifts and make the best decisions for your financial future.

Source: HMRC

Harris Steps Up, Trump Fights Back

As the November 5th American presidential election gets closer, things are heating up in unexpected ways. What looked like it would be a repeat showdown between Joe Biden and Donald Trump has taken a surprising twist. After a rough debate performance in June, Biden’s ability to continue as the Democratic candidate came into question. By July 21st, he decided to step down, backing his Vice-President, Kamala Harris, as the new Democratic nominee.

Now, Kamala Harris has the challenge of introducing herself to voters and standing up against Trump’s campaign. While Biden’s time in office has been marked by high inflation, big policy moves, and some international turmoil—issues the Republicans will likely try to pin on Harris—she does have a key advantage: her age. At 59, she’s much younger than both Biden and Trump, which might appeal to voters looking for a fresh face.

On the other side, Donald Trump remains a controversial figure. His involvement in trying to overturn the 2020 election results, the federal charges he’s facing, and his conviction related to hush-money payments all cast a shadow over his campaign. Things got even more intense on July 13th when a young man attempted to assassinate Trump at a rally in Pennsylvania, barely missing him but tragically killing someone in the crowd. While this led to calls for cooling down the political tension, Trump quickly returned to his usual fiery speeches.

For those of us in the UK, these changes in the US election could have ripple effects. The political climate in the US can influence global markets, international relations, and economic policies, which might indirectly impact your investments and financial plans here.

It’s a good idea to stay updated and think about how these global events could affect your financial strategy. As always, we’re here to help you navigate any uncertainties and keep your financial plans on the right track in a shifting world.