United Kingdom of America??!

Monday 17th March 2025

Plenty of potential headlines to choose from and this one is very much tongue in cheek, although in the current circumstances nobody would be surprised to hear that for our own good we should 'bend the knee' and express extreme gratitude that ‘School Bully Donald’ and his henchmen will look after us and that we should become the 53rd State of the USA after Canada and Greenland succumb!!

And if we don’t agree well the stakes will go higher until we submit. Last Tuesday, the USA imposed 25% tariffs on most imports from Mexico and Canada. Canada had the audacity to introduce retaliatory tariffs to which Trump announced that tariffs on Canadian aluminium and steel would be increased to 50% on 12 March – Top Trumps!

Poor Ukraine ending up with little choice and evidently they are of little consequence to the USA who want to make friends with Russia, mainly because they don’t like, since the Ukraine war, how Russia has cosied up to China, who of course are America’s real competitors.

All a bit scary and the markets have reacted accordingly. It was meant to be a stronger US economy, with lower taxes and deregulation and a more efficient government leading to growth and strong markets. Instead of focusing on the positive, Trump’s policies have focused on the negative with tariffs, trade wars and immigration, with what seems a blanket approach across the world. Perhaps the rest of the world will unite doing more trade amongst themselves which of course will likely be tariff free. Normally a market correction is sparked by a major fundamental event such as the financial crisis in 2008 or the technology bubble in 1999; you wouldn’t expect a correction due to “one man and his dog”.

It has led to renewed concerns about inflation and growth in the USA, exacerbated by softer-than-expected economic and consumer sentiment data. This follows two years of significant returns across most stock markets, particularly in the US. We expected volatility but not to this extent and it was good to see some positive data that the US inflation figures on Wednesday were at their lowest level since April 2021. It will be interesting to see if Trump starts to strong-arm Powell, the Federal Reserve Chairman, demanding interest rate cuts to compensate for his policies that are leading to the lack of confidence.

And it’s that lack of certainty and confidence that is having the negative impact, but we are still a long way from predictions of a recession and confidence can turn very quickly, as indeed we started to see on Friday. We expected this year to be volatile in markets, due to Trump, but to be honest we didn’t expect it to have been so extreme, so we remain positive over the year but it will probably be a more bumpy ride than expected.

Age 75

Most client meetings have focused on the Inheritance Tax (IHT) changes since the October 2024 Budget. With invested pension funds being included in your estate from April 2027 we have therefore been discussing the options you have to alleviate IHT. The change is straight forward in that pension funds not passing to a spouse or civil partner will be part of your estate for IHT.

What is more difficult to explain is the impact of age and in this case age 75, when combined with IHT.

After taking the 25% tax free lump sum any pension you draw is subject to income tax. If death occurs before age 75 the remaining pension fund can currently be paid free of any income tax. After age 75 any payment from the fund is taxed as income on the recipient. This is done by adding it to their current income to see what rate of tax they pay on the amount drawn. This is why being able to retain an inherited pension fund is important so the recipient can draw down as required to minimise the tax, rather than receive it as a lump sum.

The age of 75 is arbitrary and links to old pension rules (pre-1995 and the introduction of Income Drawdown) that meant by the latest age of 75 a pension fund had to be used to buy an annuity. According to the Office for National Statistics (ONS) for those aged under 75, the all-cause mortality rate was 363 per 100,000 population, which is good news that we live longer and a relatively small number passing away before age 75. It therefore is pointless changing this age differential.

The key element to explain in this bulletin is the tax free cash aspect, usually being 25% of your pension fund value. If you die before age 75, the 25% tax free cash, and indeed the remaining 75%, are income tax free for a spouse or civil partner on death. Indeed they are income tax free for a non-spouse/non-civil partner but then IHT will apply from April 2027. However, once aged 75 that tax free cash amount is lost on death as the surviving spouse or civil partner will have to pay income tax on any amount drawn. If not passing to a spouse or civil partner, it means IHT first then income tax, hence a potential rate up to 67% for a non-spouse or non-civil partner.

The conclusion is to make sure any tax free cash remaining is drawn by age 75 and indeed consider whether you could draw it earlier to either spend and enjoy (a very good idea!!) or gift away. One strategy if you do not have the ready funds for an ISA is to draw only £20,000 of your tax free cash allowance each year and use the money to fund an ISA.