Pension tax upheaval boosts wealth managers

The sweeping changes to pension taxes announced this year in chancellor Jeremy Hunt’s Budget have delivered a big boost to the wealth management industry.

As richer Britons, with substantial pension pots, have sought to work out the impact of the reforms, they have turned to financial advisers and wealth managers for assistance.

The industry has responded by focusing on pensions advice as a leading product and using it as a way to encourage more wealthy people to appoint managers to look after their pension savings.

From the 2023-24 financial year onwards, the amount individuals can pay into their pension fund, tax-free, will increase from £40,000 to £60,000 each year. Additionally, the lifetime allowance of £1,000,000 is being abolished.

In the light of these changes, Savanta conducted research to investigate the effects of these changes on wealthy individuals to see how they will invest in pension funds. The research surveyed individuals with over £1mn investable assets.

Many wealth managers (22 of 26) believe changes in pension policy have been very important to their clients. “Pensions are the second-largest asset people are likely ever to own. You wouldn’t purchase a home without professional advice, so it seems only logical to seek professional financial advice in relation to your pension,” says William Stevens, head of financial planning at Killik & Co.

Using our quarterly survey of UK millionaires, Savanta’s MillionaireVue, we estimate that three in five millionaires have a pension they’re yet to draw down on, meaning the change affected at least 2mn of the country’s wealthiest.

Two in three wealthy people who still pay into their pensions plan to take advice on the subject in light of the changes, particularly those who have £5mn-plus in investable assets. 

Almost 80 per cent of them are aware of the changes. The percentage of this falls to only 69 per cent among those with £5mn or more in investable assets, perhaps because their wealth is more diversified beyond pension pots and so the changes have less impact on their total wealth.

Close to 50 per cent of wealthy individuals are not investing into pension pots. This highlights a missed opportunity for many, as pensions are an effective vehicle not only for building wealth, but for those who don’t rely on their pension, this can be a tax-efficient way to pass on wealth. 

Working with a wealth manager helps the wealthy ensure they are taking full advantage of new pension allowances. Those who use execution-only investment platforms are the most aware of the changes, on Savanta’s survey data, but they are least likely to be taking advantage of it, compared to those who are already taking advice.

This is in line with reports from 23 of 26 leading wealth managers we surveyed who stated that at least some of their clients increased contributions to tax- shielded pension pots in light of the changes to the lifetime allowance.

The changes won’t stop there. Two in three wealthy people who still pay into their pensions plan to take advice on the subject in light of the changes, particularly those who have £5mn-plus in investable assets. 

They’re right to do so. The changes made to pension allowances present an opportunity for individuals to revisit their financial plan as a whole, ensuring they’re making decisions that will not only take advantage of pension allowances but also contribute to long term success. 

David Barks is a senior director in the wealth practice at Savanta, a global market research agency