During your working years you may have accumulated a number of different types of savings, such as ISAs and pensions. Naturally you’ll want to make these savings stretch as far as possible to see you through your retirement and possibly beyond.

For most people, there is no escaping some sort of tax in retirement, but through proper planning and making use of the allowances and reliefs available to you, it is possible to significantly reduce, and in some instances even negate the need to pay tax on your retirement income.

If you are married or in a civil partnership you can both benefit from various tax allowances to build a tax efficient income. You may therefore want to consider the ownership of your current arrangements to take advantage of your allowances as well as the different tax rates you may have.

You can usually transfer assets between your spouse/partner tax-free, which means if you have different tax bands you can transfer these assets between you in order to take advantage of any unused tax allowances or lower rate tax brackets.

Savings

Historically, where interest rates have been low, cash hasn’t formed part of the wider retirement income strategy up until now.

Each individual has £5,000 of savings income that can be received before any tax is paid. This applies to any bank or building society accounts that pay interest. So, for those with cash in the bank, you can hold around £250,000 in cash paying an interest rate of 2% before there is any tax to pay, £500,000 for a couple, if eligible.

State pension

Each individual can receive up to the personal allowance without any tax to pay. Earned income, rental income and pension income all fall within this category.

Generally, most personal allowances are taken up by state pension once in payment, although there can be a few years from retiring until state pension becomes payable. With careful planning you could release more income that is attributed to income tax within your personal allowance in the years prior to your state pension commencing.

ISAs

If you have contributed the full amount into a Stocks & Shares ISA each year since inception you could have accumulated in excess of £200,000 tax efficient savings, before taking into consideration any growth. All withdrawals from an ISA are tax free. These can be funded by natural income or selling assets. These withdrawals could form part of your overall retirement strategy without worrying about paying tax on the income or capital gains.

General Investment Accounts (GIAs)

As with ISAs, General Investment Accounts can provide an income in the form of savings and/or dividends. Providing the income you generate is within the annual dividend and savings allowance, this income can be free of tax.

You could also draw down on your General Investment Account holdings tax free, providing any realised gains are within your annual Capital Gains tax allowance.

A tax free transfer between spouses/partners could double the amount of allowance available if only held in one person’s name.
 

 

Personal Pensions/Self Invested Personal Pensions

The majority of personal pension arrangements allow you to take up to 25% tax free cash from your accumulated personal pensions. The remainder is then taxed at your marginal rate of tax. Therefore, by phasing tax free cash payments or a combination of tax free cash and pension income, this could keep you within your personal allowance.

Investment Bonds

Income from Investment Bonds, whether onshore or offshore, is not tax free but tax deferred. You can therefore make withdrawals from an onshore or offshore investment bond of up to 5% per annum of the original amount invested, for a period of twenty years and defer any tax payable for future years.You could also draw down on your General Investment Account holdings tax free, providing any realised gains are within your annual Capital Gains tax allowance.

VCTs

Venture Capital Trusts are high risk investments that can provide you with a number of tax efficiencies. One of the tax advantages being they can provide tax free dividends.

Structuring your income

As you can see there are many ways in which to generate a tax efficient income in retirement. The key to ensuring you have the most tax efficient retirement income strategy is to plan well in advance and ensure all your allowances and exemptions are fully utilised.

A combination of the above, with the objective of generating a tax free retirement income, could look something like this, where all payments would fall within allowances or tax free.

To illustrate this, we’ve created a simple example that looks at a couple’s pension assets, savings and investments to create a tax-free retirement income of over £50,000 pa.

BillState pension£11,502
MarjorieState pension£11,502
BillISA £300,000 (2% income yield)£6,000
MarjorieISA £300,000 (2% income yield)£6,000
BillSavings £50,000 (2% interest)£1,000
MarjorieSavings £50,000 (2% interest)£1,000
BillInvestments £140,000 (3% dividend yield)£4,200
MarjorieInvestments £140,000 (3% dividend yield)£4,200
BillPension £600,000 (part tax free cash, part income)£2,000
MarjoriePension £400,000 (part tax free cash, part income)£2,000
BillVCT £90,000 (3% tax free dividends)£2,800
Total £52,204


Assumptions are based on rates and allowances from 2024/25 tax year.

As the above example demonstrates, there are numerous options and significant flexibility in how you draw your retirement income. For instance, rather than utilising the 25% of your pension that you can draw tax-free as a lump sum, it can make sense to phase this tax-free amount over a longer period, and with investment growth there is the potential for the total amount of tax-free lump sum to be higher. It may also be advantageous to defer drawing on your pension until you have used up other taxable and tax-free savings such as general investment accounts and ISAs if reducing your inheritance tax liability is important to you.
 

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7 tips to help you achieve your retirement goals

We share some tips to help you achieve your goals and fulfil the lifestyle you’ll want to enjoy in retirement.

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Important information

The contents of this publication do not constitute a personal recommendation or advice and the products and/or services referred to may not be suitable for all investors. It is important to consult a professional adviser before taking any action or making any decisions.

The value of investments and the income derived from them can go down as well as up and you could get back less than you originally invested.  Your capital is at risk.

Tax treatment is dependent on individual circumstances. This information is provided in good faith and is based upon our understanding of current tax law and HMRC practice, which may be subject to change in the future.
 

Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.