Post-Budget financial planning dos and don'ts

Ahead of last week’s Autumn Budget, many rushed to sell assets to avoid a potential capital gains tax (CGT) hike; others took tax-free cash out of their pension in case it was reduced. Both moves were based on speculation. If the first turned out well because CGT rates were effectively increased, the second was not so effective – those people will now have a big sum sitting in a less tax-efficient environment.

It goes to show that playing with financial planning without knowing all the facts is risky. But now that we broadly know what is coming, we can start to adapt our behaviours – with caution.

For starters, if you were intent on saving as much as possible into your pension as a tool to minimise inheritance tax (IHT), you may well now want to rethink your approach. If you live beyond March 2027, your pensions will form part of your estate, and if the estate’s overall value is above the tax-free threshold, IHT will apply, including on your pension pots.

So pensions will become an unpalatable option for passing on wealth, especially once you are over 75. If you die after turning 75, your pots will be subject to IHT first, and then your beneficiaries will have to pay income tax on any income they draw from it. If you have used up your IHT tax-free threshold elsewhere and they are higher-rate taxpayers, the pot could in practice be taxed at a 40 per cent rate twice.

Equally, it is sensible not to rush into anything just yet. David Goodfellow, head of wealth planning at Canaccord Genuity Wealth Management, stresses how we still don’t know the details of the legislation, which will not come into force for almost two-and-a-half years.

Claire Trott, divisional director for retirement and holistic planning at St James's Place, agrees that people should avoid knee-jerk reactions, particularly withdrawing money from their pensions without a plan b. “You take it out today, you get hit by a bus, it is definitely subject to IHT,” she says.

Pensions retain plenty of advantages, from tax relief on contributions to tax-free asset growth and dividends. Meanwhile, taking money out incurs income tax; so while you should make sure you use up your tax-free personal allowance of £12,570 every year, after that you might still be better off spending your individual savings account (Isa) first. Overall, while loading up your pension to save on IHT will no longer make sense in future, it doesn’t mean you should empty your pot tomorrow. 

Trott explains the change is meant to drive people to spend their pensions in their lifetime. “It doesn't mean pensions are any worse. It just means pensions will end up being used for what they're designed for, which is providing an income in retirement,” she argues.

The good news is that there is no need to review your retirement plans per se, because there was nothing impacting them directly in the Budget. Both the 25 per cent tax-free lump sum and pension tax relief were unchanged, despite fears to the contrary. So if you were already using your pension simply as a retirement vehicle, you can rest easy and continue doing what you were doing.

In short, don’t panic, think about your planning options carefully, and adjust your behaviour accordingly only when you are confident it is the right option for you. You have plenty of time to do so ahead of April 2027.