Beware of Taxes in Retirement

After paying taxes for a lifetime, few people are keen on paying any more than they need to on their retirement nest egg. The pension freedoms changes have given retirees more choice than ever before while helping to reduce the amount of tax they need to pay in retirement.

Pre-retirement preparations

It's important to determine whether your current pension policy will allow you to take income flexibly as not all pensions offer this option. High rate taxpayers should save into pensions before other investment vehicles in order to benefit from tax relief.

Take advantage of the carry-forward allowance to use unused allowance from the previous three years and contribute the maximum possible within your annual allowance.

Spread your savings

Once you have utilised your pension allowance, the ISA (Individual Savings Account) could be your next focus as the money invested in the ISA will be tax free. In addition, it's possible to use your annual CGT (capital gains tax) allowance of £11,700 in order to move other investments, where a profit has been made, inside an ISA wrapper. In addition, investment bonds that allow you to defer tax to retirement if you anticipate being a basic rate taxpayer then could also be an attractive option.

Taking your retirement income

Having a wide range of investment wrappers means that you can potentially use your tax allowances for pensions, or CGT allowance for other non ISA investments in order to reduce your tax bill.

Pension contributions - The tax breaks

Higher rate taxpayers especially benefit from tax relief, being able to claim higher rate tax relief as part of their self assessment in addition to automatic basic rate tax relief at the time of contribution.

Looking to the future

Think about future tax liabilities, especially when IHT could become an issue for you. Also, consider taking your tax free cash in more than one portion rather than all at once, this could help to minimise your tax bill in each individual year.

Are you heading towards retirement and thinking of taking an income from your pension?

Contact Westminster Wealth Management today and one of our skilled advisers can construct a financial plan for you that will enable you to meet your financial goals.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Information is based on our current understanding of taxation legislation and regulations which is subject to change.