There is no doubt that the privileged tax status a pension receives, and the most recent freedoms announced by the Chancellor, make it the number one choice for long term investment.
Invariably, most of us will look to our pension plans to provide income, but in so doing we could be wasting our annual tax-free allowances.
The established pattern of using pensions for income, whilst earmarking savings and investments for other purposes, future inheritance perhaps, or a rainy day fund, needs a rethink.
Ironically, it could even be argued that pension funds should be the last port of call for retirement income, particularly for those who are intent on legacy planning.
When one thinks that we currently have provision for a personal tax-free allowance of £10,600, possibly a further £5,000 available from tax-free savings income and an annual Capital Gains tax allowance of £11,100; up to £26,700 of income and capital gains is available, tax-free, this year.
Having a range of investment wrappers will undoubtedly increase the scope for tax efficient income in retirement, but as a general rule, when taking income, it will be better to realise, first, investment from Unit Trusts and Investment Bonds; followed by ISA’s; leaving Pension until last.
Pensions enjoy the same tax-free gross roll-up as an ISA, but unlike other investments, are generally free of Inheritance tax. Furthermore, the new death benefit rules provide greater choice on whom and how pension wealth can be inherited. On death pre-age 75, pension investment can be passed tax-free. On death post 75, a beneficiary will be able to draw income, taxed at their marginal rate.
So, for those who may want to strike a balance between sufficient income in retirement, but at the same time keep an eye on legacy provision from unused funds on death, should consider the following:
- A break in the instinctive link between retirement income and pensions. For over 55’s, a pension is like any other savings pot.
- Maximisation of available tax allowances.
- Annual review of future requirements.
- Preservation of tax privileged savings for as long as possible.
An income solution which limits both the tax paid on withdrawal, but which preserves the greatest inheritance potential will be the clear winner.
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This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.
