Financial Advice

Think Carefully When Planning Your Retirement

Retirement is Not Just About Pensions!


July 2017

When considering retirement planning it is easy to get blinkered and just consider pensions, in reality clients often have a variety of assets that can provide retirement income however, often this was not actually planned.

Many people are not able to contribute as much as they would like to pensions. Following the pensions freedoms introduced in April 2015 those over 55 have been able to flexibly access their money purchase pensions. Those who have done so are subject to the Money Purchase Annual Allowance, this is a restriction on the maximum tax relievable contributions that can be made to pensions and was initially set at £10,000 p.a. There was a proposal prior to the election to reduce it to £4,000 p.a. We understand that this will be in the Finance Bill later in the year and backdated to 6th April 2017. High earners can also be caught by the new Tapered Annual Allowance which also restricts the maximum tax relievable contributions that can be made.

One asset that has become very popular in retirement planning has been Buy to Let, although recent tax changes and reported property value falls have lessened the appeal.

Stocks and shares ISAs are another good way to save for retirement, particularly for the under 40s who now qualify for the New Lifetime ISA and benefit from a 25% bonus on contributions of up to £4,000 p.a. tax free withdrawals can then be taken from age 60. Even for those over 40 Stocks and Shares ISAS can be a very effective way to save for retirement, although no tax relief is available on contributions, unlike pensions, income and gains can be taken tax free. Don’t forget that cash ISAs can be transferred into Stocks and Shares ISAs, which do not have to be too risky.

Off-shore investment bonds can be another tax efficient way to save, particularly for higher and additional rate tax payers who will be basic rate tax payers in retirement, particularly if they are caught by the tapered annual allowance rules. Funds held offshore have very little tax deducted so grow faster than the same funds held on-shore, income tax is only payable when withdrawals are paid back to the UK.

Onshore investment bonds can provide a good source of tax efficient income, whilst the fund pays tax on its growth and income, there is no liability to basic rate tax on withdrawals. Withdrawals of 5% of the original investment can be taken for 20 years before any liability to higher rate tax is assessed.

One tax allowance that we all have but few make use of is the annual capital gains tax exemption, gains of up to £11,300 can be taken currently with no liability to capital gains tax (CGT). An investment into a portfolio of collective investments targeting growth (rather than Income) can be managed to provide an income stream by encashing units, provided the gain on those units remains below the annual exemption there would be no CGT liability.

When planning for retirement pension contributions should always be considered first, due to the tax relief available and the tax efficient way that pension funds grow. If you are unable to make the contributions that you want there are many other alternatives to be considered, good independent financial advice will help to identify the most suitable solutions depending on individual circumstances.

Mark Barr

Chartered Financial Planner / STEP Affiliate