As someone self-employed, facing the everyday challenges of managing your own business, preparing your pension for 2024 may not be top of your list of things to do. However, the last few years have seen significant changes in pension regulations, and more will follow in the 2024/25 tax year and beyond. Consequently, it’s essential to get your pension affairs in order as we approach the end of 2023 and move into 2024, an area where we can use our expertise to assist.
Planning for retirement
Before looking at recent and future pension legislation changes, we have compiled a helpful retirement checklist. We will cover these issues in more detail in this article, but there are four main areas to focus on:-
- Personal pension
- State pension
- Sources of income in retirement
- Budgeting for lifestyle changes
While it is essential to look at each of these issues in isolation, they must be considered as part of your retirement jigsaw to ensure you have sufficient income in later life.
Personal pension
In these challenging economic times, cutting back on your pension contributions to balance your business and household budgets may be tempting. If this is the case, where possible, this should be seen as a short-term adjustment, as any reduction in pension contributions today may significantly impact your long-term finances. Unfortunately, as someone self-employed, you don’t have the fallback of an employee pension contribution.
This is where the ability to carry forward any unused annual pension allowance from the previous three tax years could prove invaluable as your finances improve. If you start your pension relatively early, you could contribute for 40 years and upwards. This is where the true impact of cumulative returns comes into play, similar to interest on interest in a bank account.
We will now look at the more recent changes in pensions legislation and how these will affect your short, medium and long-term plans.
Recent changes in pension legislation
During the current tax year, there were two significant changes in pension legislation related to annual and lifetime allowances.
Annual allowance
From 6 April 2023, the annual allowance for pension contributions (subject to tax relief) increased from £40,000-£60,000, or your yearly income, whichever is the lowest. While you can contribute over these limits, these figures relate to those contributions subject to tax relief.
For higher-rate taxpayers, the adjusted income limit increases from £240,000-£260,000, the level where tapering applies to the annual pension contribution allowance.
Lifetime allowance
We also saw changes to the lifetime allowance in the 2023/24 tax year, abolishing the previous limit on tax-free pension fund savings. The tax charged on funds more than the lifetime allowance prompted many to reconsider their pension contributions. The lifetime allowance no longer applies and will be removed entirely in the 2024/25 tax year. However, the cap on the tax-free lump sum, previously 25% of £1.073 million, will still apply – this equates to a maximum of £268,275.
Future changes in pension legislation
Amidst the changes to the annual and lifetime allowances, HMRC is also looking to change the death benefit charge on pensions. There are two particular scenarios which will be impacted:-
If you die before age 75
At this moment in time, if you die before the age of 75, those who inherit your self-employed personal pension won’t pay any tax (subject to funds being paid or moved within two years of your death).
Under the proposed new legislation, the government will bring in a Lump Sum and Death Benefit Allowance of £1,073,100, the same as the soon-to-be-defunct lifetime allowance. Any transfers from your pension scheme within two years of your death would be tax-free, subject to the Lump Sum and Death Benefit Allowance. Where the transfer exceeds the allowance, the excess will be added to the beneficiary’s income and charged at their marginal income tax rate.
If you die after age 75
Those who inherit your pension fund assets if you die after age 75 will be taxed on any income at their marginal income tax rate at the point of withdrawal.
In the future, to all intents and purposes, the situation for beneficiaries if you die after reaching 75 will be unchanged. Any lump sum, inherited drawdown or annuity income would be subject to the individual’s marginal income tax rate.
Pension beneficiaries
You must update your pension beneficiaries (and beneficiaries for your broader assets) to ensure that your estate goes to the correct people. Unfortunately, failing to update your beneficiaries, for example, in the event of a divorce, could divert your assets away from preferred recipients. While it may be possible to take court action to resolve such issues, there is no certainty, and even a successful claim would take time, and additional expense, to conclude. Keep your list of beneficiaries up to date!
State pension
The state pension is often ignored when looking at retirement income calculations, but currently standing at up to £203.85 a week, it is not insignificant. Those with 35 qualifying years on their national insurance record will be eligible for a full state pension. Those with at least ten qualifying years will be eligible for a reduced state pension.
In a similar fashion to the ability to backdate some of your personal pension contributions, you can also make up any shortfall in national insurance contributions going back six years. This can be useful when you have gone through a period of difficulty with your business, with profits down and available funds in short supply.
Currently, the old (pre-April 2016) and new (post-April 2016) state pensions are covered by the triple lock. This is a commitment from the government to increase the state pension each year by the higher of:-
- Average earnings growth
- CPI inflation
- 2.5%
Unfortunately, the current government has not committed to retaining the triple lock ahead of the next general election, which will be in 2025 at the latest.
State pension age
At the moment, the state pension age is 66 years for both men and women, although this is expected to change in the future. While these plans are subject to amendments, the following increases have been discussed:-
- An increase to 67 between 2026 and 2028
- An increase to 68 between 2044 and 2046
There is talk of pushing the state pension age to 70 in due course, although this would be many years down the line.
Sources of income in retirement
When reviewing your pension plans for 2024 and beyond, it is crucial to consider potential alternative sources of income in retirement. These could include:-
- Investment Income
- Property income
- Insurance policies
- Proceeds from the sale of your business
- Employment income
You will pay income tax on funds received in later life which are in excess of your personal allowance, which will reduce your net receipts. While your pension will be central to your retirement plans, it is essential to utilise, where possible, additional tax allowances and reliefs.
Budgeting for lifestyle changes
Many people save as much as possible in their pension plans and additional investments without considering lifestyle changes in the future. It is probably best to consider your preferred lifestyle in retirement, cost of living, etc, and work backwards to identify your required income. Where do you start with regard to future income requirements?
To give you an idea, the Retirement Living Standards website, part of the Pensions and Lifetime Savings Association, will provide you with an estimate of income required for various retirement scenarios. You will need to add additional costs such as a mortgage, rent, social care and pension income tax, but it gives you a broad idea of the cost of living.
Pensions for the self-employed
Pensions for the self-employed are more challenging than for those in regular employment, where their employer will also contribute – and there are also additional benefits such as sick pay. Therefore, it is vital to take advice about your pension plans as soon as possible because the earlier you start contributing, the greater the potential for long-term capital growth.
Aside from additional sources of income, there may be occasions where your income is relatively high, and you can fill gaps in your personal pension and national insurance contributions. It is also important to stay abreast of changes in the pensions industry, particularly what, at the moment, seem to be regular updates to regulations. Actions taken or not taken today could significantly impact your pension income further down the line.
Conclusion
Preparing your pension plans for 2024 and beyond is an ongoing process, subject to adjustment in line with your personal finances and changing regulations. As we have covered above, there are many different factors to consider that will impact your income in retirement. Consequently, you must take professional financial advice at the earliest opportunity to enhance your chances of long-term capital appreciation.
Our team has expertise and experience advising self-employed individuals about pensions, wider personal finances and the protection of assets and income. Critically, these plans can be flexible and adjusted to take changing circumstances into account.
Contact one of the team today, and we can discuss your current circumstances in more detail and your plans and aspirations for the future.
