Deferral Allowance Overlooked by Retirement Planning Advisors


Economists have noted the propensity of UK households to accumulate “excess savings” during the pandemic with a mixture of academic satisfaction and quiet admiration, says Christine Hallett, CEO of Milton Keynes-based Options For Your Tomorrow.

A study by AA Financial Services found that 85% of UK adults were spending significantly less during lockdown. Our monthly fuel bills have gone down by an average of £49; we saved £57 by not venturing out to the pub or restaurant and pocketed an additional £53 by avoiding the high street and spending online instead. On average, households found themselves better off by more than £600 a month, prompting almost a third (31%) of adults to increase their level of savings.

According to wealth management firm Investec, during 2021 Britain’s ‘savings surplus’ soared by £73bn, to £185bn, or 9% of GDP, or the equivalent of £6,600 per household.

“Excess savings” is not a new phenomenon; Economists argue that an increase in the propensity to save is primarily a consequence of the prolonged global decline in interest rates, a theory advanced in 2005 by former US Federal Reserve Chairman Ben Bernanke, who identified a ‘global savings glut’ as the main explanation for the low interest rate.

A closer look at the distribution of ‘excess savings’ accumulated during the pandemic shows that it has primarily accrued to high-income households, with a cohort showing a much lower propensity to spend from income or wealth. compared to their low-income counterparts.

Indeed, a survey by accounting group NMG suggests that only 10% of households whose lockdown-related savings have increased intend to spend them, while 70% prefer to keep their savings in bank accounts. However, a fifth plan to use their savings to supplement their retirement plan, invest or reduce their existing debt.

The role of property in this unfolding economic scenario cannot be ignored.

Historically, homeowners feel wealthier as property values ​​increase, even if they have little or no intention to sell. As house prices rise, homeowners become more confident, which translates into higher levels of investment and spending.

There is no doubt that homeowners have emerged from the pandemic in much better shape, financially speaking, than they were at the end of 2019. According to the Office for National Statistics (ONS), between January 2020 and January 2022, average house prices rose by £40,822. , to £273,762, an increase of 17.6%.

This combination of “excess savings” and regular, authoritative confirmation that their homes are worth much more than they were worth before the pandemic is a powerful incentive for people to convert some of their pandemic-induced savings into investments at longer term. The incentive to invest is strengthened as we appear to be entering a prolonged period of rising inflation.

And with UK inflation recently hitting a 40-year high of 9%, interest in property shows few signs of waning.

Real estate is generally considered a reliable asset during times of inflation, mainly because its value tends to increase along with the prevailing rate of inflation. In addition, if the real estate asset is leveraged, i.e. it comes with a mortgage, its value will increase not by the amount of the initial cash deposit with which it was bought, maybe 10% to 25% of the purchase price, but of the total value of the property.

Financial advisers are aware that many existing investors wish to use the current possibility of “excess savings” to supplement an existing pension or to create a new private pension, such as an SIPP, and thus benefit from immediate tax relief on contributions up to a maximum of £40,000.

A smaller number of investors may prefer to switch to another SIPP platform, but there is an additional retirement-related opportunity that a significant number of investors can take advantage of.

Few savers regularly use their full annual pension contribution allowance, although the evident magnitude of the savings glut presents them with a perfect opportunity to address it.

According to Christine Hallett, CEO of Milton Keynes-based Options For Your Tomorrow, “If you haven’t used your full annual allowance in the last three tax years, deferral allows you to ‘fill in’ any gaps, provided you were a member of a registered pension scheme during the relevant period.

“For example, someone who earned £50,000 in 2019-20 and saved £1,200 a month in their SIPP could theoretically use their excess savings and invest up to £25,600 in their pension for the year. tax ending April 2020. Such an investment would attract tax reduction of £6,400.

“Certain conditions must be met before such an investment can be accelerated, but the deferral option is often overlooked by IFAs despite its obvious appeal.”

During the first quarter of 2022, a variety of reliable surveys and reports have consistently shown that most surplus economies continue to wallow in peanut-earning bank accounts.

On the eve of the new tax year, this could therefore be an ideal time to examine any gaps in SIPP contributions from previous years and use some of any excess savings to fill them and attract generous tax breaks in same time.

By Christine Hallett, CEO of Milton Keynes-based Options For Your Tomorrow

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