28th June 2022 - Alicia Buckingham

Tax in Retirement

When you have spent your working life building a pension to support you in retirement, it’s important to make the right choices. This includes how and when to draw your pension. Traditionally your only option at retirement was to purchase an annuity– straight forward and simple.

Post 2015

However, after the 2015 Pension Reforms, there are now multiple ways in which you can access your pension benefits, with each being more complex than the last, and having different tax consequences. This leaves most people feeling overwhelmed and wanting to seek financial advice.

Annuities typically offer poor value for money meaning individuals tend to remain invested within their pensions for the remainder of their life. This means most individuals see very little changes to their financial plan before and after retirement. There is one obvious change and that is how you take an income in retirement. It goes without saying, with more ways to take your pension there is increased opportunities for tax efficiency. But there’s also potential to make a costly mistake.

Considering Other Retirement Income Options

Typically, pensions are not the only products which are used to provide an income in retirement. Assets such as ISAs, Bonds and Rental Properties can be used in supplementing income too. However, each of these have different tax rules when using the capital to provide an income.

Given we all spend most of our lives saving for retirement, a pension often becomes the first point of call when trying to generate an income. Unfortunately many people forget despite the first 25% being tax-free, the remainder will be taxed at their marginal rate. When considering this and that withdrawals from ISAs are tax-free, it is worth investigating other options to plan the most tax efficient approach.

There are many other tax-related advantages associated with various products which should be accounted for in retirement. One of the most common mistakes made by individuals is taking larger lump sums from their pension over their tax-free-cash allowance. HMRC then apply ‘emergency tax’ to this withdrawal meaning they receive less than anticipated.

By taking large lump sums the risk of being pushed into the higher rate tax band is very real. Especially if you are at the top end of the basic rate tax band. One way to counteract this would be to straddle various tax years in hope of remaining a 20% taxpayer.

Approaching or in retirement?

As everyone’s financial circumstances are unique, there is no specific way which is best for everyone, therefore, it is impossible to ensure you aren’t paying more tax than required without professional advice from someone who knows the obstacles and how to avoid them.

When approaching retirement, you should speak to an adviser to ensure you’re taking income in the most tax-efficient way. By seeking advice, you will be able to draw a tax efficient income, inevitably leaving more money for you to spend on the things that are important to you.

If you would like to discuss this article with one of our Financial Planners, please contact us here.

Risk warnings

This article is distributed for educational purposes. It should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author. It does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Errors and omissions excepted.

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