Retirement planning is a crucial aspect of your long-term wealth management and is essential if you want to be financially secure in later life.
While we can’t offer you financial advice on where to invest your savings, there are several tax considerations that can help you make more of what you earn.
Before you approach your golden years, it’s essential to have a clear plan in place to ensure that you can retire with confidence.
There are generally some steps that we recommend to our clients throughout their life that can provide a boost to them in retirement. We have gone over them in a little more detail here so you can formulate an effective retirement plan.
Obviously, pensions form the bedrock of most retirement plans.
There are mainly two types of pensions in the UK: the State Pension and private pensions, which include workplace pensions and personal or stakeholder pensions.
Your State Pension and why it’s insufficient
The State Pension is provided by the Government and is based on your National Insurance contribution record.
To qualify for the full State Pension, you need to have 35 years of qualifying National Insurance contributions.
You can check your State Pension forecast here.
In April 2024, the State Pension is set to increase by 8.5 per cent, under the ‘triple lock’ policy.
The new flat-rate State Pension will rise to £221.20 weekly, and the basic State Pension for those eligible before April 2016 will go up to £169.50.
Despite this increase, the State Pension alone may not suffice for a comfortable retirement, so you should always consider it as part of a wider retirement plan.
Personal and workplace pensions
Workplace pensions involve contributions from both you and your employer.
If you are classed as a worker, are aged between 22 and State Pension age and earn at least £10,000 per year, then your employer should enrol you in a workplace pension scheme.
Personal pensions, such as self-invested personal pensions (SIPP), can be set up and paid into by yourself or your employer. These can supplement a workplace pension or form your main pension pot if you are self-employed.
You can contribute whatever you like to your pension and, so long as you are within the allowances, you will not pay tax.
The annual allowance is £60,000 per year for all your personal and workplace pension contributions.
For higher earners, the annual allowance is tapered, decreasing by £1 for every £2 of earnings above £260,000. This reduction continues until it reaches the lower limit of £10,000.
There can be a tax charge on individuals that make a level of contributions to pension schemes that exceeds the level of their relevant UK earnings (e.g. employment and self-employment income) in the tax year. Where an individual has no relevant UK earnings, then they are limited to tax relief on gross pension contributions of £3,600.
The money purchase annual allowance stops people from contributing more than £10,000 per year when they have accessed their pensions benefits.
If you exceed the annual allowance, the excess amount will be added to your other taxable income for that tax year and taxed at your applicable Income Tax rate.
From April 2024, the £1 million lifetime allowance will be fully abolished, ensuring that there is no upper limit on the amount you can put away before being taxed – subject to annual contribution falling below the annual allowance.
The tax benefits that your pension offers
When you contribute to a pension, the amount you put in is effectively topped up by tax relief.
For instance, if you are a basic rate taxpayer, for every £80 you contribute to your pension, the Government adds another £20 in tax relief, effectively making your total contribution £100.
It matches the Income Tax you would have paid on this when you initially received it.
The more you earn, the more tax you can save. So, a higher rate taxpayer, who has been taxed 40 per cent on their income, for example, would receive £40 for every £60 they contribute.
Additionally, the growth of your pension investments is largely tax-free. This contrasts with most other forms of investment, where returns might be subject to Capital Gains Tax or Income Tax.
When you start drawing your pension, up to 25 per cent of the total can usually be taken as a tax-free lump sum, offering a significant tax advantage.
The remainder of your pension is subject to Income Tax when withdrawn, but this is often at a lower rate, especially if your income in retirement is lower than when you were working.
All these tax benefits make pension contributions one of the most tax-efficient ways to save for retirement and we highly recommend that everyone has some kind of pension scheme in their later life plans.
Why you should consider investing in a Lifetime ISA
There are a few genuinely tax-efficient ways to boost your savings during your working life and Lifetime Individual Savings Accounts (LISAs) represent one popular way to do so.
LISAs can only be opened by those over the age of 18 and under 40 and you can only deposit up to £4,000 each year until the age of 50.
The real value of a LISA comes from the fact that the Government will add a 25 per cent bonus to your savings, up to a maximum of £1,000 per year.
You can withdraw from your LISA for either your first home, when you are 60 or over, or when you are terminally ill – early withdrawal for other purposes incur penalties.
Ultimately, these help you achieve your first home or retirement goals more effectively.
A quick note on business succession
Passing your business onto someone else is usually a better option than simply letting it die when you decide you no longer want to work.
(An exception to this is if you are a sole trader who does not employ anyone else).
Without a succession plan, a business may face challenges such as being sold under duress for less than its value or becoming directionless and at risk of failure.
As a result, you need to formulate a well-crafted succession plan that ensures the continuity of your business, your legacy and protects the financial interests of your family or other inheritors.
If you are planning to sell your business, different sale options such as cash purchases or instalment sales can have varying tax implications, both for you and the buyer.
Instalment sales can be particularly advantageous in spreading out your tax liabilities, especially if you are in a family business scenario.
We often recommend changing your business strategy from tax efficiency to maximising business value, which can lead to better offers from buyers but may also result in higher taxes in the short term.
Poor or absent succession planning can lead to financial loss, tax liabilities, and the potential collapse of the business, which is something you should avoid, even if just for your employees’ sake.
Inheritance Tax (IHT) planning
IHT can significantly impact the wealth you pass on, so it is important to take it into account when planning your retirement.
The current Nil-Rate Band is £325,000, so anything above this amount is taxed at 40 per cent. Please note that gifts before death can use up the Nil-Rate Band for up to 7 years when these gifts have not been structured to utilise other allowances.
However, there are exceptions to this.
The Residence Nil-Rate Band means that £175,000 of your primary residence is considered to be tax-free and is added onto your pre-existing Nil-Rate Band. So, if your estate contains a house that will pass to direct descendants, you are entitled to pass on £500,000 before IHT comes into play. The Residence Nil-Rate Band will be tapered for estates worth over £2 million.
Similarly, if you pass the entirety of your estate to a spouse, your Nil-Rate Band and Residence Nil-Rate Band are also included in their IHT calculations.
Because your spouse also has £500,000 to pass down tax-free, when you add your own thresholds and allowances to theirs, you create a scenario where you can leave £1 million to your loved ones without IHT taking effect.
If your estate is likely to end up being worth more than the combined allowances available, then we recommend you contact us to discuss strategies to ensure your wealth passes smoothly to the next generation without Inheritance Tax being levied (such as utilising gifting strategies, trusts, or other tax-efficient vehicles).
If you would like to talk about the fate of your business once you retire, please don’t hesitate to reach out to one of our team who can walk you through your choices and options.
Similarly, if you have any questions regarding your retirement and later life finances, we have the knowledge and expertise to answer them.
To speak to an experienced accountant, please get in touch.