Providing income in retirement tax efficiently

Income in retirement

Nella Correia

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.

Protecting your 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. 

CA2608 10/18

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