At Saltus, we typically work with high-net-worth clients with investable wealth of £250,000 upwards.
It is therefore unsurprising that a common request is for us to cut through the pension noise and identify the opportunities, so here are five things high-net-worth individuals are doing with their pensions.
Lifetime Allowance (LTA) abolished
The LTA placed a cap on the amount that could accrue within a pension before it became subject to a tax charge. As a result, many clients who were at risk of breaching this threshold decided to halt pension contributions.
With the removal of the LTA, we have been switching back on pension contributions for many. Although it is a ‘watch this space’, under current legislation, pensions remain a great vehicle to generate income tax relief at your marginal rate. Plus, they are outside of your estate for inheritance tax (IHT), which is another common concern.
Transitional tax-free amount certificates
For clients who have previously utilised all or some of their LTA, we are reviewing whether they should be applying for a transitional tax-free amount certificate. It is a fiddly, nuanced piece of legislation, but in the right circumstances, it may ensure clients have additional tax-free cash.
In some circumstances the uplift can be significant, such as where a client started receiving an income from a final salary scheme, which did not include a tax-free lump sum, but it still used up a large percentage of their available LTA.
As always, the caveat here is you only have one chance to apply, and it must be done before any further benefits are taken from your pension.
Individual Protection 2016
When the LTA was reduced from £1.25m to £1m, the former Government introduced Individual Protection 2016, which enabled a client to protect the value of their pensions on 5 April 2016, to an overall maximum of £1.25m. We are still able to apply for clients if we believe they qualify, but the application deadline of 5 April 2025 is fast approaching.
The reason this is so important is the new Lump Sum Allowance and Lump Sum and Death Benefit Allowance are calculated based on the LTA. If you have a higher protected LTA, then these allowances will also be higher.
Increased allowances
At the start of the 2023/24 tax year, the Conservative Government introduced increases to the various allowances that impact the amount you can contribute to a pension.
The annual allowance was increased from £40,000 to £60,000. For an additional-rate taxpayer, the marginal rate tax relief on that extra £20,000 of gross contribution is £9,000.
The adjusted income level, from which the annual allowance starts to then taper, has increased from £240,000 to £260,000, meaning people who were previously tapered may now have a full annual allowance available.
Even for clients whose earnings still result in a fully tapered annual allowance, the amount they can contribute has increased from £4,000 to £10,000.
I have often found when speaking to new clients that this went unnoticed because the headlines at the time focused on the LTA removal. Unlike ISAs, pension carry forward rules allow us to go back three tax years and utilise any of a client’s unused annual allowance.
Venture Capital Trusts (VCTs)
For a number of clients, the ability to make further pension contributions is limited by virtue of their earnings or their previous contributions. In situations such as these, we would consider products such as VCTs. Previously considered esoteric, these are much more commonplace and a great alternative for clients who want to reduce their income tax liability.
Each tax year, you can contribute up to £200,000 and receive up to £60,000 in income tax relief, with no clawback if held for five years. Other features include tax-free dividends and tax-free capital gains once sold. After five years, this feasibly could become a self-funding strategy, as money from year one becomes available for re-investment.
These products are high risk, which is why the incentives are so attractive, and they are only suitable for clients with a high capacity for loss.
I have only scratched the surface, but pensions provide incentives at all stages. On contributions into your pension, you receive marginal rate tax relief, growth while the monies remain invested is tax-free, and then on the way out, you receive access to a certain amount of tax-free cash. Ensuring these are optimised should form a key cornerstone of any financial plan, and financial planners such as Saltus are here to assist.
Alex Pugh is a chartered financial planner at Saltus
Saltus is a wealth management company that combines empathy and intellect in equal measure. It helps its clients achieve their goals in life through expert financial planning as well as providing sharp, focused investment management.
It started life as an investment management firm in 2004, yet over the years saw that providing high-quality investment management is just one of the ways it could help people achieve their aspirations. Saltus Financial Planning was launched in 2015, with the aim of being an industry leader in providing financial advice.
The Saltus group now employs over 200 people.
