While some may have been able to make savings during the lockdown, coronavirus restrictions have meant others have found themselves worse-off. With COVID-19 rules taking their toll on some people’s long-term savings, many working-age adults have said they’re contemplating delaying retirement.
It’s a topic Kay Ingram, Public Policy Director at national financial planning group LEBC, recently addressed, in her latest series of Insights alerts.
Sharing her top tips for improving one’s financial lot, the chartered financial planner explained parents and grandparents may be able to help younger generations avoid a retirement delay.
“Lockdown has hit them twice – first in March 2020, when markets fell rapidly in response to the first lockdown, thereby reducing the value of their pension pots, and then by limiting their ability to save through redundancy, furlough, or loss of self-employment,” Ms Ingram said.
In contrast, older retired generations have “seen little shift” in their income.
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Following a 3.9 percent rise to the UK state pension in April 2020, the UK state pension this year increase by 2.5 percent, under the triple lock mechanism.
With lockdown restrictions meaning pubs, restaurants and holidays were temporarily off limits, many have managed to save “handsomely”, Ms Ingram said.
Bank of England data shows last year, savers built up £148billion of ‘involuntary’ savings.
This was £100billion more than the year before.
If parents and grandparents have surplus income or savings, it may be they are able to help younger family members to save for retirement, Ms Ingram said.
She suggested they could do so with the help of a double tax break, “both rumoured to be under threat earlier this year, but left intact by Rishi Sunak in his recent Budget”.
These two tax breaks are pensions tax relief and an Inheritance Tax exemption for gifts from surplus income.
On the latter, Ms Ingram said: “Lifetime gifts made from surplus income are exempt from Inheritance Tax (IHT), regardless of the amount given or how long the donor lives from the date of the gift.
“To qualify for this exemption, the gift must be regular (ideally paid over two tax years or more) and must not reduce the donor’s standard of living.”
Addressing pensions tax relief, Ms Ingram said: “Every UK resident under the age of 75 may save into a pension plan and receive tax relief on the savings made at their highest marginal rate of income tax, or at least 20 percent if not a taxpayer; this includes pension savings funded by third parties.”
The double tax break could be accessed by combining a gift from the surplus income of an older family member, reducing the eventual taxable estate of the donor, and saving this into a younger family member’s pension.
This is then boosted by tax relief on the savings.
As such, it could be that families are able to overcome the short-term impacts of lockdown on their longer term retirement plans, Ms Ingram said.
There’s a further consideration too, for those who are claiming benefits.
This is that pension savings are disregarded for the purpose of means-tested benefits while the claimant is under state pension age.
Other savings of more than £6,000 reduce eligibility for benefits and once savings are more than £16,000, eligibility can be eliminated.
“Stopping or reducing pension savings, even for a short while, can seriously disrupt long-term retirement plans,” Ms Ingram said.
“Where family members less impacted by the financial impact of lockdown can help, making funds available for pension savings can amplify the value of the gift once tax relief on pension savings is considered.
“Making those gifts now, prior to any future changes in Inheritance Tax, may help the pension savings benefit from any recovery as the economy opens up.”
People who are ineligible for the gifts from the surplus income exemption for IHT may be able to use the annual gift allowance of £3,000, which is exempt from IHT and can be carried forward for one year, the chartered financial planner explained.
Any one-off gift above this level would be potentially exempt from the date of gift and fall outside the estate after seven years.