Your financial future needs a spring clean too

People have been spring cleaning their homes for thousands of years – and for good reason. When the warmth needed in the dark days of winter came from wood-burning fires, the advent of lighter days meant the accumulated layers of soot could be washed away. The season of optimism and regrowth also coincides with the start of the new tax year.

Find out which tax benefits and allowances could be available to you to provide confidence in what the future brings.

Financial planning tips for 2024/25

1. Are you using your pension allowances?

You can now enjoy more generous annual pension allowances than in previous years. In April 2023 the annual allowance rose to £60K per annum, this provides a much greater headroom for pension contributions, providing income tax relief at their highest marginal rate.

Meanwhile, high earners and retirees also have more scope to pay into a pension and shield tax from HMRC, with the tapered and money purchase annual allowances both increasing from £4,000 to £10,000. Follow the link to find out more about higher rate pension tax relief.

2. Pensions and tax-efficient death benefits

On 6 April last year, the Lifetime Allowance (LTA) for pensions was abolished. Nevertheless, a cap on the size of any lump sum death benefits that can be paid tax-free should an individual die before the age 75 still exists in the form of the Lump Sum and Death Benefit Allowance (LSDBA). For those without protections, this was set at £1,073,100 – the same level of the LTA that it replaced.

The LSDBA is a combined allowance for both lifetime tax-free lump sums and tax-free death benefits. So, the amount available for lump sum death benefits will be reduced by any tax-free cash amounts the member has taken.

Only lump sum death benefits will be tested against the LSDBA on death before age 75, not pension income. It is important to make sure your pension provides the option of a pension pot that can be passed on to your beneficiaries – not only a lump sum – and, if it doesn’t, it’s time to seek advice. The maximum flexibility on death is provided by the drawdown option.

So, it is important to regularly review your pensions to ensure they will provide the most suitable death benefit options in the event this is needed. Another task for your spring-cleaning list is an assessment of the level of risk in your investments as a whole – and whether it is suitable at this stage of life. Goals and financial aspirations often change with time and circumstance, so you need to assess whether you feel comfortable with the risk profile of your investments.

Not sure when you can afford to retire? Use our pension drawdown calculator for an estimate to help with your financial planning.

3, Get pension nominations up to date

With the LSDBA now in force, it’s now vital you make sure that you have nominated the person that you want to receive the death benefits generated from your pensions. Completing a nomination (also known as an ‘expression of wish’) helps guide the scheme trustees when deciding to whom any death benefits should be paid. However, it also ensures that all the options under the scheme are available to the nominated beneficiaries – something that is particularly important for non-dependant loved ones.

If a non-dependant has not been nominated – and the pension trustees or scheme administrator decides that they should benefit – their only option is sometime through the payment of a lump sum. If the deceased had nominated another individual or has a dependant, the trustees or provider can’t allow anyone else to use the funds for pension purposes. This makes a lump sum their only option – and this may not be the most tax efficient way of doing this due to the LSDBA.

4. Use your ISA allowance annually

Shrinking dividend and capital gains tax (CGT) allowances have made protecting your wealth from future tax inefficiencies via an ISA or pension pot even more important this year.

The CGT allowance – the investment profits you can realise every year without paying tax on the gains – has now been reduced to £3,000. This stood at £6,000 in the 2023-24 tax year and at £12,300 in 2022-23.

Any gains that exceed this allowance are taxed at 10% and 20%, for basic-rate and higher-rate taxpayers respectively. A capital gain of £10,000 outside of tax-efficient wrappers could leave you with a £1,400 CGT bill, if you’re a higher-rate taxpayer.

An ISA is an excellent way of building up a lump sum for the future. The money could be for retirement, university costs for your children or helping them to purchase their first home. Gains earmarked in an ISA wrapper are tax free, as is any money that is withdrawn.

The current ISA allowance is £20,000, which now can be split any way you like across a Stocks & Shares ISA or a Cash ISA. A new ‘British ISA’ may also be introduced to support UK investment, with this proposal currently in a consultation period that lasts until 6 June. If approved, it will give savers an additional annual subscription allowance of £5,000 on top of the existing £20,000 limit, with the additional allowance likely to begin the following tax year (2025/26).

5. Inheritance tax planning: use all available allowances

Inheritance tax (IHT) is a tax on the ‘estate’ of someone who has already passed away. Everybody gets a £325,000 inheritance tax-free allowance. So, if the value of the estate is below £325,000, there’s no inheritance tax to pay. The estate will theoretically be taxed at 40% on any amount above the £325,000 threshold (or 36% if you leave at least 10% of the value after any deductions to a charity in your will).

Since 2017, everyone has also been able to take advantage of something called the residence nil-rate band (RNRB), commonly known as the ‘main-residence’ band. This is an additional allowance – currently worth up to £175,000 – that you can receive on top of the existing £325,000 IHT allowance. To qualify, you need to leave your main residence to your children or grandchildren – and this includes any adopted, foster or stepchildren.

The wealthiest estates may not be able to benefit from the RNRB. Estates worth more than £2m lose this allowance in a tapering fashion. It is withdrawn at a rate of £1 for every £2 over the £2m threshold. The taper test is applied on each death, including those before 6 April 2017.

To determine whether the £2m taper threshold has been passed it is the value of the “net estate” that’s used, which is a different figure from the estate valuation used for IHT purposes. Broadly, this means the value of everything the deceased owns at the time of death, less any liabilities such as an outstanding mortgage. Therefore, certain exemptions cannot be deducted.

Lifetime gifts are also excluded as they’ll no longer be owned by the deceased at the time of death. This applies even if these gifts were made during the seven years that preceded it. This allows gifts that have been made right up to the point of death to be used to bring the value used for tapering below the £2m threshold.

It is important to take advice if you feel you may have an estate that could lose the RNRB as reinstating it is the starting point of the strategy to minimise the IHT bill your estate will face. A Charles Stanley financial planner can provide holistic advice on ways to reduce your liability, as well as how you may reinstate your RNRB.

6. Get a valid will and a lasting power of attorney

Writing a will allows you to have control over what happens to your property, money and belongings after you die. Without a will you will die “intestate” and your estate will be subject to the intestacy laws – and your estate may not be divided amongst those you cherish in a manner that you deem fit. It is also advisable to keep a list of all your assets along with your will. This is vital for accounts that you hold online, which can change regularly and increases the risk that some assets will be forgotten and not be included in your estate.

A lasting power of attorney is also another extremely important document. It allows someone to act on your behalf should you become incapacitated. However, you are limited to what planning you can personally carry out after an LPA comes into force. It is extremely restrictive when it comes to IHT planning – so it is important that all this is completed while you are fit and healthy.

About Mia Kahrimanovic

Mia joined the Charles Stanley in 2017 and has been a financial advisor since 2002. Prior to joining Charles Stanley she was Senior Private Client Adviser with Close Brothers and Lloyds. Mia specialises in providing financial advice on Inheritance Tax Planning, general investments and retirement planning. Mia holds BSc in Economics and Chartered Diploma in Financial Planning.

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