28th April 2015 at 2:50pm
I’ll be honest. Before I joined Standard Life, I had very little clue about pensions.
My dad had instilled in me it was a “good thing to do” to pay into my workplace pension, when I first got the chance to. Beyond that, I hadn’t paid much attention.
That has changed over the last 10 years, as I’ve come to realise what it means to build pension savings. And with Budget changes coming into play on 6 April, things have become very interesting indeed.
Whether it’s a new car, paying for a holiday, speedboat or wedding, building up savings opens doors to how you want your life to be.
There can be no doubting the need to save for our retirement but we also need to be thinking about how we access that cash once we’re there. Tax is a major factor if you’re in the fortunate position to have saved well in a variety of different ‘pots.’ You will have choices about what order to access and spend those savings.
For example, let’s say you’ve saved into a pension, an ISA and you also have a portfolio of investments. And in the years ahead, a loved one has left you their pension pot, which they had not fully spent before they died.
What’s the most effective way to use that blend of savings to support you when you stop working full-time?
Here are some tax factors to keep in mind
- Withdrawals from an ISA are tax free.
- You have an annual capital gains tax allowance of £11,100 in tax year 2015/16, so selling some of your portfolio could give you tax-free money.
- If you have inherited a pension pot from someone who died before the age of 75, withdrawals from that source are usually tax free.
- You can take up to 25% tax free cash from your own pension.
- The standard personal allowance for income tax is £10,600 in tax year 2015/16.
- You start to pay 40% tax on income above £42,385 in tax year 2015/16.
- You may have taxable State Pension or other income to take into account.
Those are some of the pieces of the tax jigsaw puzzle which could influence how you take out the money you need each year.
As you’ll see, there are various ways you might access your savings within the £42,385 threshold, before 40% income tax kicks in. You might spend some of your inherited pension, spend some of your ISA, use some tax-free cash from your pension, or use some of your capital gains tax allowance before you access the taxable bit of your pension. The sequence of access matters, if you are intending to be a 20% tax payer in retirement. More than one approach is available and it all comes down to personal circumstances.
How you assemble your annual money jigsaw is up to you. If you have the knowledge, you can take a DIY approach, or you may want to pay for advice, given the complexities with tax. In a future blog I’ll look at a case study in more detail.
This blog and any responses to comments are not financial advice. A stocks and shares ISA and a pension are investments – their value can go up or down and may be worth less than you paid in. Law and tax rules can change in the future.