Methods to protecting yourself and preparing for retirement
What are your goals for retirement? Do you want to travel the world and go on various holidays? Or maybe start a new hobby you’ve always wanted to try?
Whatever you are planning, if you wish to have a ‘comfortable’ retirement, then you need to ensure you have enough in the pot to fund your lifestyle.
However, retirement planning can be complicated. Therefore, consulting with a financial adviser from a private wealth management firm is worth considering, to help you to make the most of your pension, structure your assets correctly, and effectively use tax wrappers.
With this in mind, let us explain more about tax-efficient investing in retirement.
To make the most of your retirement income, planning ahead is essential. This can involve diversifying the tax wrappers available to you.
Tax wrappers are a way to structure your wealth in various tax vehicles to reduce the tax you’ll pay in retirement. This could be a pension or individual savings account (ISA).
Each tax wrapper has varying benefits, and how they are applied will vary depending on your personal circumstances and the stage that you have reached in your retirement plan i.e., if you are trying to grow your wealth, or you are at an age that you wish to draw from your assets.
Some of the main tax wrappers that you can use are:
Pensions can be great vehicles to grow your wealth. This is mainly because pension contributions are gross of all tax. Growth within the pension is also free of capital gains tax (CGT). You can usually take up to 25% of the amount built up in your pension as a tax-free lump sum (as of tax year 21/22). However, when it comes to withdrawing the remaining amount, this is taxed as income, in line with the marginal rate.
An Individual Savings Account (ISA)
Any contributions to an ISA are net of income tax and national insurance, however, it is a tax-free environment. Once the contribution has been made, there is no further tax to be paid. Withdrawals from an ISA can also be taken without any tax implications.
A General Investment Account (GIA)
The contributions made to a GIA are net income tax and national insurance. GIAs are a fully taxable environment and are subject to income tax and CGT, at respective marginal rates. You can make use of your annual CGT allowance to access a significant portion of your money, without paying tax. Any gains over and above £12,300 (CGT allowance for tax year 21/22) are taxed at a marginal CGT rate.
Contributions are net income tax and national insurance. However, bonds work to effectively defer tax. Each year, you can access 5% of your initial investment with no immediate tax implications. Bonds are fees of CGT but gains withdrawn from a bond are taxed as income, in line with the marginal rate.
Tax efficiency in retirement
Effective use of the different tax wrappers, by combining them in the right way, can have a significant impact on your wealth. If you have structured your assets wisely, you can access your income in retirement in a tax-efficient way.
Let’s consider an individual with investments across the four tax wrappers. They can make use of their tax-free personal allowance, meaning they can withdraw £12,570 from their pension pot without having to pay tax.
They can withdraw any amount from their ISA without tax penalties, and make use of the annual CGT allowance to access £12,300 from their GIA. Finally, they can withdraw the equivalent of 5% of their capital from their bond, with no tax to pay on this amount.
To ensure that you are taking full advantage of these tax wrappers, and making the most of your retirement income, it is always best to consult with an expert financial planner or adviser.
Disclaimer: Information is correct to the best of our understanding as of the date of publication. Nothing within this content is intended as or can be relied upon as financial advice. Capital is at risk. You may get back less than you invested.