Updated: Jul 22, 2022
When planning for retirement, it’s important to take into account other assets apart from the pension fund as they can make an important contribution and there are often tax implications.
At Reeves we can put together the most tax efficient retirement plan for you, taking all your assets into account.
ISAs, which are popular for long term saving, have different tax rules from pensions. The income is tax free and so, if there is a significant amount in the ISA, that can be used in conjunction with the annual personal tax allowance to provide tax free income in the first few years of retirement. Or, for the significantly wealthy, investment bonds could provide 5% tax deferred income each year.
Then there is the potential impact of inherited money. For various reasons, people often don’t often factor this in. However, the fact remains that it is likely to happen for a lot of people and could have a significant impact on retirement plans.
The vast majority of people will qualify for the state pension. This provides a guaranteed income – currently £9,300 a year – which will be paid throughout retirement. This reduces the amount of heavy lifting your pension pot has to do and has to be factored into retirement planning.
Finally, there’s property in the form of bricks and mortar. Retirement usually comes when children have flown the nest and people no longer need a home that’s too large for their needs and calls for greater maintenance. They choose to downsize and, by doing so, release equity which provides more funds for retirement. Alternatively, if they don’t want to move, they may choose the equity release route (which is too complex a subject to examine in depth here). Or, if they have additional property, they might keep this in retirement to provide them with rental income. The relative merits of doing that or of disposal to release equity depends on circumstances and Reeves can provide advice. By releasing equity from the house/downsizing later in retirement, you have more that you can take from pension in the earlier years.
Reeves client Colin Carter planned to take a cash free lump sum in the early years of his retirement so he and his wife Sylvia could buy their dream home by the coast. However, this would have meant a significant withdrawal from his pension, limiting the remaining capital and meaning income tax being paid earlier in retirement. As a result, Colin’s retirement plan was showing a deficit by the age of 85.
We discussed their situation with Colin and Sylvia: how they felt about their retirement and how long they would be likely to live in their new home. Colin and Sylvia don’t have children and so weren’t worried about the effect of inheritance tax on their estate. They decided that this home would be sufficient until they turned 80; from then they would move to a smaller house/bungalow. By doing this they would release £100,000 of equity and this money would be used for retirement planning.
An alternative method would be equity release. They could stay in the dream house and get a ‘reverse mortgage’.
As a result of our advice, they have been able to retire comfortably to their dream home and their retirement plan still shows a surplus at the age of 90.
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The articles are for information only and should not be construed as advice or a recommendation.
Names have been changed to protect identity.
No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.