In the run up to the Budget, I received the traditional phone calls a few days before from a couple of journalists asking for my predictions.
I‘m too long in the tooth, having done this job for 20 years now, to pay any attention to what might be in the Budget because it’s largely a total waste of time.
Where I do spend my energy and efforts though is analysing the Budget once it's been announced and ratified through parliament.
That methodology has never been more sensible than this Budget in which the government raised the annual allowance for pension contributions from £40,000 to £60,, and abolished the lifetime allowance for pensions, before they receive a higher rate tax of 55%.
Following the announcement, the PFS issued a statement: Dr Matthew Connell, Director of Policy and Public Affairs said:
"We welcome the abolition of the lifetime pension savings allowance. Members of the Personal Finance Society have collectively spent thousands of hours keeping up-to-date with the lifetime allowance and its impact on different groups of savers. Now, this time can be spent much more productively coaching clients on more fundamental advice issues, such as understanding risk and achieving their financial goals."
I imagine many of you will agree with this. The government already caps the amount you can pay into a pension at £60,000 a year, so why add further complexity with the limit? Tax receipts shouldn’t be their concern. Their focus should be squarely on the millions of people who are currently underfunding their retirement plans - if they even have a retirement plan – as we know, many are heading towards dependency on the state.
Motivation towards achieving goals
I work with senior NHS medics and as soon as the Budget was announced I was contacted by people wanting start paying more into a personal pension – the one thing advisers have spent a decade discouraging them to do.
But I think the abolition of the LTA will be more beneficial to people in their 40s. When there was a cap in place, it was hard for them to feel enthusiastic about the amount they were saving because they couldn’t see their wealth build up. Of course they could put it elsewhere, but psychologically an ISA isn’t seen as relevant. Now that’s been lifted which creates additional motivation.
I think that’s what the government was trying to do – it’s just that it was more palatable to say that it was done to prevent older medics from retiring. But whether someone who’s already long into retirement will now want to give it all up and go back remains to be seen.
I think the Budget changes support planners in other ways too
To me the changes highlight the importance of the initial plan and the ongoing support, how they interact with each other, and why the ongoing service - often the harder service to persuade people to take up - is in fact the more valuable.
WealthMap is our financial planning process which involves one-to-one sessions with me following a specific approach to financial planning based on how we can extract the most value from our relationship with money. The culmination of this is the WealthMap report.
That's the plan. An objective of somebody within that plan might be to save £2 million by the age of 60. And that will give them ‘optionality’ because when it comes to retirement, everybody wants more options than less. £2 million gives them the option of retiring, but not the necessity.
They can choose from a whole range of options that would have sat firmly in our WealthMap planning sessions and alongside a whole range of objectives. But the path we take to reach that £2 million, and the tax wrappers we’ll use, will be in a constant state of flux. Investment returns will be variable. Inflation amounts will be variable. Contributions will be variable.
Our ongoing service Momentum allows the constant reiteration of the WealthMap plan to keep people on course, but also to make sure that however we reach that £2 million, it's optimised in the correct set of wrappers.
So the next 12 months we'll be looking at everybody's WealthMap plan to think about whether perhaps they should have a little less money in ISAs and a little bit more money in pensions now. Would that be more tax efficient? The slash to the rate of Capital Gains Tax means that we now need to focus more on ISA contributions than on leaving money within a company and applying for entrepreneurs relief. All these will now need to be considered within an individual's WealthMap planning in our ongoing Momentum sessions.
The plan should be on runners
You don’t put your car in for an MOT and then run it into the ground. This is how I position the ongoing service. The plan needs to be a living, breathing thing. My wife and I go through our financial plan every 12 weeks. This may seem excessive, but we want to make sure it’s working.
We go through 21 questions, look at whether any of our fundamental goals have changed, or changes in legislation means we need to amend things; that way it’s always up-to-date.
I understand why clients find it hard to see that value in the ongoing planning once the plan has been created, but one final analogy I would use is the Everest one: the hard work isn’t over once you’ve reached the top; 85% all accidents happen in first hour of descent: people relax, and lose concentration. They’ve achieved their goal and think they can sit back. As we all know, with the plan, the journey has only just begun.
Ian Linden, our Pensions Technical Manager, recently held a webinar 'Spring Statement: helping your clients pay more into their SIPPs'. You can catch up on the recording here.