Speaking to FTAdviser, Tully explained that from April, the state pension increases by a record 10.1 per cent, taking the single tier state pension above £200 a week for the first time.
“The state pension will be back under the microscope,” he said. “The government is due to publish the outcome of the state pension age review before May 2023.
“That will tell us the government’s timetable for future increases to the state pension age which, whatever the decision, will be a highly controversial move.”
He said understandably people will feel more protective and dependent on their retirement income as they get closer to being able to claim it.
Consumer duty
Tully said the big regulatory move in 2023 is the introduction of the consumer duty.
He said the new consumer duty aims to help clients avoid foreseeable harm and pursue their financial objectives in the best possible way.
“Providers and advisers need to ensure governance of products is suitable, and there will be ongoing focus on value for money across all elements the client is paying for,” he said.
“And providers and advisers will need to support consumers in understanding the product they are using, and the implications in terms of sustainability of income, taxation and so on. There will also need to be suitable support in place for clients who display vulnerable characteristics.”
From an economic point of view, continuing the freeze on limits such as the higher rate tax threshold, pension lifetime allowance and IHT nil rate band “may not sound so bad”, but it will send a “chill wind through personal finances", he said.
“These stealth taxes raise significant amounts of money for the government and mean many more people will be affected including some who have done little or no planning.
“The lifetime allowance is less than half what it was 10 years ago in real terms, and IHT is no longer a tax just for the wealthy, so conversations around lifetime allowance, estate planning and IHT need to take place for more people and happen much earlier in life.”
From April 2023, the dividend allowance will be reduced from £2,000 to £1,000, and then halved again from tax year 2024/25 down to £500, for individuals.
The individual capital gains tax exemption will reduce from £12,300 to £6,000 from tax year 2023/24, and then to £3,000 on 2024/25.
“These changes are bad news for the average investor holding money in unwrapped portfolios outside Isas and pensions," Tully said.
“There could be an opportunity for these investors to take gains in these portfolios and invest into Isas and pensions. Where these contributions have already been maximised, investment bonds provide a real investment opportunity without limiting the investment options.”
Tully explained that using an investment bond wrapper could enhance tax efficiency of the money as it is a non-income producing asset.
“Those clients who are yet to use their CGT exemptions for this tax year have until April to take advantage before the changes come in. Where appropriate the spousal exemption for CGT could be used to equalise the assets before selling which means both CGT exemptions could be fully used.”
Looking back
Reflecting on the past year, Tully described it as “a tumultuous year for markets and investments”, much of which would not have been anticipated by clients.
“One area of positive news is the increase in annuity rates which the rising gilt yields have driven", he said.
“Rates have increased by more than 50 per cent this year, meaning rates are at their highest since 2011. This massive jump brings the benefit of guaranteed income back into focus for many retirees.”
Tully explained that drawdown has huge benefits for many people given the flexibility it offers but using an annuity as part of a retirement strategy alongside drawdown, or gradually phasing into annuity as a retiree gets older, is looking increasingly attractive.
However, he said using all an individual’s pension savings to buy an annuity on one day may be an “unwise strategy”.
“Phasing annuity purchase as the client gets older removes the risk of locking into one rate when prices are changing,” he said.
“And clients can potentially benefit from increased rates due to ageing and deteriorating health. Used in tandem with drawdown the client can maintain investment exposure to hedge against inflation.
“And if the annuity is held within a drawdown wrapper, the client has the flexibility to vary the income they take, as well as the ability to pass on benefits tax efficiently following their death.”
Elsewhere, Tully explained that the cost-of-living crisis saw withdrawals from pensions for April to June 2022 at £3.57bn, a 23 per cent increase from the same quarter in 2021.
“It is completely understandable people are dipping into their pensions to make ends meet and prioritising heating and eating above their savings at this difficult time,” he said.
“However, it is important that the government, regulators and industry help people make the best decisions. Dripping funds out gradually rather than all at once can save tax.
“And if taxable income is taken then the money purchase annual allowance will limit future savings to a lowly £4,000 a year – so only taking some tax-free cash may be the best option, especially if they plan to continue working and contributing at some point in future.”
sonia.rach@ft.com
What do you think about the issues raised by this story? Email us on FTAletters@ft.com to let us know
