Following several months of Budget-related leaks of variable accuracy, comprising wild suggestions, unconfirmed supposition and nailed-on certainties, Chancellor Rachel Reeves finally delivered her maiden Autumn Budget to a packed House of Commons earlier today.
Ms Reeves’ speech confirmed much of what had already been leaked and published in print or online, an alarming volume of which referred to the apparent existence of an elusive £22 billion “black hole” in the nation’s accounts, an inclusion designed to justify increases in taxation.
As expected, the Chancellor rubber stamped the abolition of winter fuel payments for more than nine million pensioners and gave the nod to increases in Capital Gains Tax and Inheritance Tax, simultaneously drawing in great swathes of people to the income tax net by freezing the annual personal allowance threshold of £12,570. The threshold, in place since 2021, was already frozen until 2028, but Ms Reeves offered no respite for taxpayers.
Moreover, by implementing a ‘jobs tax’ by raising employer NIC by 1.2% to 15% and lowering the threshold from £9,100 to just £5,000 before NIC kicks in, the Chancellor also showed she is willing to split hairs and continue to maintain that this is ‘not a tax on working people’, even though it is. As any callow GCSE economics student will tell you, if you tax jobs, you invariably end up with far fewer of them, as is the case in France and Spain where unemployment, especially among younger people (aged 18-30), is eye-wateringly high.
After a lifetime of work, retirees may have expected a little more generosity from Ms Reeves, yet the truth is that few tax-paying groups are as compliant and non-complaining as pensioners. Earlier this year, a report published by the Institute for Fiscal Studies (IFS) revealed that in the 13 years since 2010-11, the proportion of people aged 65 and above who are now liable to pay income tax has risen by more than one third, from 50% to 68%.
Furthermore, although an estimated 90% of pensioners pay income tax at the basic rate of 20%, their earning power has been compromised over the past decade-and-a-half. IFS analysis shows that a pensioner earning £25,000 in 2010-11 would have paid £2,093 in income tax. During the current tax year (2024-25), the amount of tax payable will rise to £2,486, an increase of more than 18%. Under both Conservative and Labour, the lack of protest against the respective governments’ successful attempts to dig deeper into taxpayers’ pockets has been conspicuous by its absence.
Yet an increasing number of older people are not prepared to sit on their hands and allow politicians to help themselves to their financial wealth, lifetime savings which have, of course, already been taxed. This was confirmed last week when one national firm of financial advisers revealed that the number of its customers accessing their 25% tax-free lump sum from their pensions was a staggering 32% higher than it was in the same month last year.
Additionally, this budget has just removed the inheritance tax-free transfer of pension funds to heirs of their estate. This will certainly affect the estate planning of many retirees moving forward.
There have, apparently, been mutterings at the Treasury regarding this so-called (tax-free) ‘perk’ and it would be no surprise if the current tax-free withdrawal limit of £268,275 was lowered. Nor, while we’re on the subject, are millions of pensioners confident that the ‘triple lock’ applied to their state pension will remain untouched over the course of the current parliament. The fact that these matters have almost certainly been discussed in Treasury circles should ring alarm bells among retirees.
After all, the Chancellor has delivered concrete evidence of her government’s preparedness to implement a policy of tax and spend and it appears probable that this commitment will not be reversed.
However, today’s announcement need not be part of a miserable procession of doom and gloom for older people. Granted, their longer-term plans are bound to be affected by today’s tax-related announcements, while pension withdrawal rules may change in the near future. Yet most homeowners aged 55 and above have the option of accessing the often substantial ‘hidden wealth’ accumulated within the home.
Equity release enables older homeowners to benefit by tapping into their existing property wealth, usually accumulated over several decades. This ‘hidden wealth’ can, of course, be very significant and accessing it can have an immediate impact upon a homeowners’ financial position.
In short, bricks and mortar have proved an exceptional form of wealth creation for millions of older property owners, an overwhelming majority of whom are acutely aware of their property’s current value, especially as a sizeable proportion have already repaid their mortgage. Moreover, gaining access to this presently inactive property wealth is relatively straight forward, while the funds from the process of releasing equity are free of tax, a welcome bonus considering how older homeowners are being taxed.
A shift in how the funds released from the home are used is expected over the next few years. Over the past decade, statistics show that around 60% of the wealth released by older homeowners is used to either repay an outstanding mortgage or to finance home improvements. Around 35% is employed to pay for items such as a new car or holidays.
Following Ms Reeves’ Budget, Mark Gregory, Chief Executive Office of Equity Release Supermarket, the UK’s largest independent equity release firm, believes that equity release could be used primarily to improve older homeowners’ financial position.
“The fallout from today’s Budget announcements will be felt among some groups such as employers and older people more than others. And now that the Chancellor has shown her hand, we cannot rule out further taxation of income over the duration of the current parliament. The question is: do older homeowners simply accept this premise or do they do something about it,” asks Mr Gregory.
How can this Autumn budget also affect equity release interest rates themselves?
Indirectly, equity release interest rates follow the direction of travel of government gilts rather than the Bank of England base rate. The government is realigning their debt by Reeves announcing the government will shift its focus to public sector net financial liabilities (PSNFL) instead of public sector net debt (PSND), excluding the Bank of England, with the goal of reducing it as a proportion of the economy
We have seen the consequences of adjusting such government finances by the immediate effect on government gilts rates, where the most popular – UK 15 Year Gilt index has already risen following todays budget. As lenders use this index as a barometer for their own interest rates, this may signal a shorter term rate rise, however we shall see the fallout of the budget over the next week or so, before witnessing the longer term effect.
With the tax-free personal allowance frozen for the foreseeable future, it‘s clear that incomes will effectively fall. However, unlike their younger counterparts, many older homeowners are not in a position (nor do they want) to go back to work in order to boost their finances.
Accordingly, there are a clutch of reasons why more and more people will consider equity release to offer relief from steadily rising taxes.
As stated above, the funds accessed from the homeowners’ ‘hidden wealth’ are free of tax, while most equity release providers offer a range of flexible withdrawal plans – there’s no need to take the lump sum in one go, for instance. Providers registered with the Equity Release Council also guarantee that homeowners – or their offspring – will never have to contend with ‘negative equity’. Perhaps most importantly of all for millions of people who remain understandably attached to their home, they retain the right to live in the property either until their demise or until they move to full-time residential care.
For many homeowners, equity release can be used to provide a timely boost to their finances over the longer term. It’s a trend likely to gather momentum over the next 4-5 years as homeowners tap into their wealth, perhaps mindful of the age-old adage: “You can’t take it with you…”
To discuss any of these areas that have been impacted by the latest budget, please contact one of the specialist equity release advisers at Equity Release Supermarket on 0800 802 1051.
