Maximising Income in Retirement
Despite the prospect of interest rate rises in the months ahead anyone reliant on cash- based returns will know how poor these remain.
When looking ahead to retirement the importance of income becomes even more important and it makes sense to maximise the tax efficiency of your savings probably the most tax efficient form of saving remains pension contributions.
Payments into pensions qualify for tax rebates up to your highest rate of tax (subject to certain limits). Anyone who owns a company can also consider making company pension contributions which in turn are tax deductible in terms of the company’s profit. From a personal perspective it is possible to contribute up to 100% of your earnings subject to a £40,000 limit per tax year. Under certain circumstances even higher contributions can be made.
Whilst invested in pensions the funds themselves grow virtually free of tax. Upon retirement (currently from age 55 onwards) it is possible to draw a tax- free lump sum of up to 25%. Whilst many people use this money to pay off any outstanding loans or even to help family members or even to pay for holidays, this can be converted to income production and help boost tax free income in retirement. Indeed, it is also possible to convert part of the fund to produce guaranteed income to help boost your basic ‘pension income’ and supplement State Pensions.
Attractive as pensions are from a tax planning perspective, despite new pension freedoms they do remain less accessible until you reach the minimum retirement age. A good plan therefore is to build up an ISA portfolio alongside pensions.
Cash ISA’s are perhaps the most accessible although savings rates are often lower than ordinary savings products. More importantly cash ISA’s cannot usually match the rate of inflation so if invested for growth they will usually erode in real value over time.
A more attractive option for many is to consider stocks & shares ISAs. Up to £20,000 per annum can be contributed per individual so a married couple can contribute up to £40,000 per annum. Whilst there is no tax relief on contributions themselves, like pensions the funds can grow virtually free of tax. Perhaps most important for many is that ISA’s can provide a tax- free income stream, whilst the capital itself can be accessed at any time tax free.
It really does pay to take independent financial advice in the area of both pensions and ISA’s, so as to strike the right balance in terms of tax relief and accessibility. Moreover, it is important to establish the correct investment structure so as to match as closely as possible your views on investment risk and volatility. Every individual is slightly different in terms of their objectives and how they feel about risk so individual portfolios can be designed to match each individual’s needs. By researching the whole of market, it is also possible to minimise the costs involved.
Finally, it is also worth bearing in mind that pensions can remain outside an individual‘s estate for inheritance tax purposes and can be passed down to family members intact if structured correctly. ISA’s in contrast will always form part of an estate for IHT purposes.
If you or your clients would like further information please contact Shaun Bell, on 01548 856444 or email email@example.com .
Sabre Financial is a trading title of Sabre Financial Planning Ltd. Sabre Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
By Sabre Financial | Wednesday, August 01, 2018