Providing income in retirement tax efficiently
Origen Private Client Adviser
Income in retirement can come from many sources. Nella Correia considers the options for
providing retirement income and some of the tax consequences.
Many clients reaching retirement have a diverse portfolio of
investments and pension plans. Careful planning can help you to get more from
your investments now and also help to pass on as much as possible after you die
to your beneficiaries.
Taking income from the right places
You can normally take the first 25% of your pension fund tax
free. Thereafter any income you take from your pension fund will be taxed at
your marginal rate of Income Tax. For example, if you are a basic rate taxpayer,
to receive £10,000 income you would need take £12,500 out of your pension
fund. In comparison, if you take income
from an ISA your withdrawals will be tax free, i.e. withdrawing £10,000 from an
ISA will give you £10,000 as no tax is deducted.
Therefore you should always consider taking income from your
ISA investments first before taking money out of your pension fund.
wealth for the next generation
If the total value of your estate is above the Inheritance
Tax threshold, the excess would be subject to a 40% tax charge upon your death.
By using an ISA or other investments outside of your pension to meet your
income needs, you could potentially reduce the value of your estate for
Inheritance Tax purposes.
Conversely, a pension fund will be held outside of your
estate and under the current rules it can be passed on to your chosen
beneficiaries without being subject to Inheritance Tax. By leaving it to grow,
you can increase its value and your chosen beneficiaries can benefit in full
from this growth.
If you die before age 75, these benefits will be tax free.
From age 75 or over, these benefits will be taxable at the marginal rate of the
beneficiary. Pension benefits will be subject to a Lifetime Allowance test and
where total benefits exceed the allowance of £1,030,000, a charge may apply.
As with any investment, you should remember that your
capital may be at risk, the value of your investment and the income received
can go down as well as up.
Alternative planning options
If you are below age 66, you will become entitled to the
State Pension in the future and this may reduce the level of income you need to
take in retirement.
For this income or other existing investments, you could
consider some alternatives such as investments which qualify for Business
Property Relief which will qualify for an exemption from Inheritance Tax after
two years. These investments can be higher risk though, so they may not suit
your needs or your attitude to risk.
You could also consider gifting assets into Trusts, which
also will remove these assets from the value of your estate for Inheritance Tax
purposes. However you care needs to be taken as this option can be hard to reverse as you will be
giving up either the capital or the asset in full.
If you are considering
reviewing your retirement income needs, please speak to your Origen adviser.
This article is
intended to be for information only and should not be taken as financial
advice. Before you take any action you should seek advice to check the
suitability and tax consequences.
[ Date Posted: 31/05/2018 10:39:35 ]