What advisers are asking us now

Hello and welcome to today's episode. I'm Kimberly Dondo, and today I'm joined by Justin Corliss and Fiona Hanrahan from Royal London. Thank you both for joining me today. So before we get into the main part of this episode, could you both just give a brief introduction of yourself and your background at Royal London? Justin, do you want to start?

Yeah, absolutely. Hi, everyone. I'm Justin Collis. I'm part of the technical marketing team here at Royal London. I've been involved in in financial services since 1997. You'll probably tell from the accent I began in on foreign shores in Australia came across to Scotland in 2002 and have worked for various different life offices in different capacities ever since.

Right. And Fiona.

Hi everyone. I'm Fiona. I've worked for Royal London for nearly ten years, but I've worked in financial services since leaving university in 1998. I've worked for a couple of other providers and also worked as a paraplanner and financial planner as well, so hopefully you can see both sides of that market.

OK, great. So we've got a few points to discuss in this episode from issues relating to the changes to employer and National Insurance contributions which take place from April this year to changes to pension death benefits as a result of the abolition of the lifetime allowance and a few things in between.

So Justin, thinking back to October 2024's budget, there was an announcement of changes to the employer. National Insurance payments. Could you outline what the main changes were?

Yes, absolutely happy to do that. So the employer, National Insurance, right increased from 13.8% to 15% on the 6th of April 2025. So pretty recently now in addition, the threshold at which employers begin to paying employers National Insurance contributions decreased from £9,100 down to £5,000 now on a slightly brighter note, OK, we do need to be aware of the change too.

The employment allowance. Now, that's the proportion of an employers National Insurance bill that the employer doesn't have to pay now prior to the 6th of April 2025, this was only available to an employer whose total National Insurance bill for the year would fall below £100,000. And if that was the case, they wouldn't have to pay the 1st £5,000 of the employer's National Insurance that they would.

Otherwise, have been liable for now, the budget changed that.

OK, so from the 6th of April 2025, the employment allowance was increased from £5,000 up to £10,500 and perhaps just as significantly it was. It became available to all eligible employers. So that means it's now available to employers with a National Insurance bill over £100,000.

OK. And what is the likely? Oh, OK, let me start that again. And what is this likely to mean for employers impacted by this?

OK, now I just want to point out that the reduction of the threshold for when employers need to start paying employers National Insurance from £9,100 to £5,000 in isolation will mean an increase in employers, National Insurance costs of £615 per year per employee. Now let's take that a step further, OK.

And consider the impact of both the threshold reduction and the rate increase.

Let's consider somebody who's on £35,000 per annum and I'd just use that figure because it's approximately the average salary for a full time adult in the UK. So all other things being equal, these changes would see employers paying an additional National Insurance contribution for somebody on £35,000 a year of £925.80 per annum.

That's a pretty hefty increase in employers, National Insurance bills. And do you know what? In the research that Royal London carried out just after the budget employers were already showing signs of concern, they said. This could impact wage growth and recruitment, and that it would likely impact profits and it could lead to price increases for the goods and services they produce. Yes, the changes to the employment allowance will help some. The increase in the allowance itself from £5,000 up to £10,500.

And the relaxation of the eligibility criteria will see some employers, National Insurance bills stay the same, or even possibly reduce. But for many employers, this is likely to mean an increase in their National Insurance costs.

OK. And how can employers mitigate this likely cost increase?

Well, one way of mitigating some of the impact of the National Insurance rate rise is using salary exchange for pension contributions. Now, as I'm sure all the people listening are aware of, the vast majority at very least, virtually all employers are required to operate a workplace pension. And while many use salary exchange while doing this, the majority don't.

However, salary exchange is likely to be much more appealing now following the recent increase in employee.
National Insurance. So in the lead up to the budget, there was quite a lot of speculation that employer National Insurance would be levied on employer pension contributions. But of course now we know that didn't happen. Instead, the overall rate of employer National Insurance increased by 1.2% that 13.8 up to 15%.

But as employer pension contributions are still not liable to employer National Insurance, it's important to remember that when pension contributions are made via salary exchange, all the pension contribution is an employer contribution and that could be turned to the advantage of both employers and employees when salary exchange is used, the employee's salary is reduced and as a result the employer makes a National Insurance saving because they don't have to pay employers National Insurance on the portion of salary they're not paying to the employee.

And the employee, unsurprisingly, doesn't have to pay employee National Insurance.

On the portion of salary that they're no longer receiving now, these savings are often redirected into the employees pension scheme into their pension contribution, meaning the contribution is increased for the same take home pay that the employee was receiving when making a pension contribution without using salary exchange. Alternatively, the employer can retain their National Insurance savings in the business, which can mean a reduction in the cost to employ that individual, which could be used to mitigate some of the increased National Insurance costs resulting from the employer National Insurance changes. We may see more employers altering their approach to salary negotiations with employees, perhaps with a greater focus on the overall remuneration package rather than such a heavy focus on headline salary alone.

OK. And Fiona, although the lifetime allowance was abolished over a year ago, I know this is something you're still asked about regularly. So what do you think are the key parts of this that advisers need to be aware of?

Thank you. This was a change announced in the budget on the 15th of March 2023 and the lifetime allowance was abolished completely with effect from the 6th of April 2024. And it's worth saying that the taxation of pension death benefits has always been a subject we ask lots of questions on the abolition of the lifetime allowance and how this impacted the taxation of pension death benefits. As you would expect, therefore has been something we've been talking about for a few months now and.

I expect this won't decrease as we start to look forward to inheritance tax, potentially applying to. So on death before age 75, there's no longer a potential test against the lifetime allowance, but instead a test against the remaining lump sum and death benefit allowance. This is what replaced the lifetime allowance and is only relevant if a beneficiary takes a lump sum on the death of a member before the age of 75. That's really important death benefits on death after age 75 are subject to income tax on the beneficiary when they take those benefits, regardless of whether they take them as a lump sum.

Or beneficiary draw down and it might be worth clarifying what a lump sum is for the purposes of testing against the remaining lump sum and death benefit allowance. And if a member dies before age 75 and that plan pays out a lump sum directly to the beneficiaries, then this is tested against the remaining lump sum and death benefit allowance and therefore potentially fully tax free. If it's within this allowance, any part of the lump sum over the remaining lump sum and death benefit lives is subject to income tax on the beneficiary.

If a beneficiary goes into beneficiary drawdown, where a plan would be set up in that beneficiary's name, any payments from this would not be a lump sum, and that would be even if they took it all as one all at once. This would still be classed as beneficiary draw down and therefore tax free during the lifetime of that beneficiary lump sums taken on death before age 75 from uncrystallised and crystallised benefits are tested against the remaining lump sum and death benefit loans, but any death benefits from benefits in drawdown before the 6th of April 2024 are not tested against the remaining lump sum and death benefits allowance. The logic here is that they would have been tested against the lifetime allowance when they went into drawdown, so it would be unfair to effectively test them again. So anyone with benefits and draw down before and after the 6th of April 2024 should be aware of the potential difference in the income tax treatment on death.

And that can be a lot of information for people to wade through. So what do you feel the main course to action are here for advisers?

Yeah. Definitely making sure beneficiary drawdown is available before the member dies is absolutely vital. If this is an option that the beneficiary is likely to want, and this is because it's not possible to transfer to a plan for beneficiary drawdown after the death of the member. If the plan doesn't offer it in the 1st place, it's too late at this point, so there's a really important point here about the value of advice as well as a link to the cross cutting rule as part of the consumer duty.

By making sure that beneficiary drawdown is available before the death of a member, you are potentially avoiding that foreseeable harm. In other words, the tax charge. Remember on death before age 75, there won't be a charge to income tax for the beneficiary if they choose beneficiary draw down regardless of the fund value. And it's also important to make sure an expression of wishes is kept up to date. This will likely allow benefits to be paid more quickly.

And to the correct people. Remember, if there is going to be a surviving dependent.

Non dependence will need to be named on the form if they want to be offered drawdown, and it's not clear how this process will work after the 6th of April 2027, so it's vital to keep an eye on the progression of these changes.

And back to you, Justin, thinking back to the October 2024 budget again, which feels like it was a millennia ago, but it really wasn't. It contained a proposal to levy IHT inheritance tax on unused pensions from April 2027. Could you give a bit more detail around this? I know everyone's talking about it at the moment.

Well, absolutely. And you're right, that has been a massive topic of conversation in the advice industry since that point. Now, many people will be aware on the call, but that there was a consultation that closed on the 22nd of January this year, 2025. But we're still waiting for a response to that consultation. So although it's very likely this will go ahead, we don't have all the detail at present, which does make it difficult to formulate detailed plans for clients to deal with this potential charge.

From consultation, it seems there's not much that's out of scope. OK, but as with many changes with broad impact, there are still plenty of parts that that require some clarity.

And what impact is this likely to have on the advice process?

Well, the first thing to say is that this change has the potential to bring many more people into scope of inheritance tax. If we consider for example a non married person living in a home worth £450,000 and having £50,000 in savings and £400,000 of unused defined contribution pension funds if they were to die today. Their estate, subject to inheritance tax, would be £500,000 as pensions are subject to inheritance tax at the moment, so between their standard inheritance tax, nil rate band and their residence nil rate band, they have an inheritance tax free allowance of £500,000 and they may feel that inheritance tax not really a factor for them. However, if that same person dies after April 2027 once again with £450,000 property 50,000 in savings and 400,000 of unused define contribution pension funds.

There would be a likely inheritance tax charge due of 40% of £400,000, which is £160,000. So quite a significant difference. Now the perceived wisdom has previously been to spend everything else in retirement 1st and the pension last as it was free of inheritance tax. If that's no longer the case, then decumulation strategies are likely to change.

Do remember though, that pensions are still the best vehicle for retirement planning, so for most people, funding pensions as much as they can is still likely to be the right answer now. There's also likely to be much greater focus on investment products with inheritance tax benefits. Furthermore, from an advice perspective, there's likely to be greater need for true protection specialists to cover inheritance tax liabilities. So this could mean we see more wealth advisors not currently experts in protection solutions to mitigate inheritance tax.

Specialists in that area or cultivating a relationship with true protection specialists who already hold this expertise.

And Fiona, I know you've been asked this a lot since the October 2024 budget, but as we don't know all the detail of the IHT on pensions proposal, what could advisers be doing now to prepare?

Well, I would obviously recommend keeping up to date with the progression of the changes. We are expecting more information in the summer, but our working assumption is that inheritance tax is going to apply to pensions, but the practicalities of how it's going to be paid is a detail we're waiting on. Perhaps if you're predominantly involved in pensions, it would be worth familiarising yourself with inheritance tax exemptions.

In particular, the ones I see being the most important would be the spicy.

The normal expenditure out of income exemption, the annual exemption and perhaps gifts for education and maintenance, keeping records as vital. If your family are looking to confirm any of the gifts you've made during your lifetime, the actually 403 form is the form you'd use to do this, and it's got a really useful section for keeping records.

And there will be clients right now with pension funds, they're looking to pass on on their death rather than take benefits from. So clients like this might benefit from making lifetime guests from these funds sooner rather than later.
And this is definitely worth discussing as this could save inheritance tax in the long run.

OK. And Fiona, we had the spring statement recently on the 26th of March, just a couple weeks ago. So what do you feel the key takeaways were for advisers from this? Some didn't feel like they were much.

Yeah. Yeah. Rachel Reeves delivered the government's 2025 spring statement on the 26th of March 2025. And you know, there was nothing really in that statement or in the related documents, which would impact anything we've discussed here. But it's worth remembering ISAs were briefly mentioned in the accompanying documents and the following statement was the government is looking at options for reforms to individual savings accounts.

That get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment and support the growth mission. Alongside this, the government is working closely with the Financial Conduct Authority to deliver a system of targeted support to give people the confidence to invest. So this is really just one to keep an eye on.

Yeah, I think there's probably a lot that we can look forward to for this year's October budget. I think a lot more clarity will be seen there and hopefully maybe we can pick up this conversation again to kind of delve more into that.

Definitely.

But thank you so much to both of you for speaking with me today. This was a great conversation.

You're welcome. Thank you so much.

Thank you.