You also need to understand that retirement is not a linear journey and normally can be broken down into different phases, so you will need to understand what the phases of retirement are and factor this into your planning.
Retirement phases
- On the go: During the early stages of retirement, there’s a strong likelihood that you’ll spend more on travel, hobbies, or home improvements
- Slowing down: While you may be slightly less active, you’re still busy with hobbies, but you may be less inclined to travel long-haul
- Coming to a stop: In later life, your mobility may be more limited, which can increase your expenditure due to needing care
Planning is key
Your retirement income strategy should be planned well in advance to ensure it meets your needs in all phases of your retirement and that:
- Allowances and exemptions are used to their full capacity
- Married couples plan together so income and assets are allocated effectively
An independent Financial Planner can help you plan your retirement, continue reading to understand the benefits of working with a Financial Planner when approaching retirement.
Withdrawing funds in a tax-efficient manner
While this maybe counter-intuitive, when it comes to withdrawing funds, you may want to consider using cash first, followed by taxable investments, ISAs, and finally pensions due to them being exempt from Inheritance tax.
While tax-efficient savings (and spending) helps enhance your wealth for retiring in style, tax-efficient withdrawals helps preserve your capital and increases the chance of having money to leave to your loved ones. So, maximise all your tax allowances including:
- Income Tax allowances
- The Dividend allowance
- 5% return of capital allowance from investment bonds
- Personal savings allowance
- ISA allowance
- Capital Gains Tax allowance
- Inheritance tax allowances
By planning together, couples can use these allowances to maximise the amount of tax-free income available.
Consider spending excess cash first
Ideally, you should hold an emergency fund to cover around six months of regular expenditure. If you have more cash available, consider using this before withdrawing from pensions. Using excess cash allows you to leave funds invested, which may provide enough time for funds to recover any lost value.
Think twice before drawing on your pension
While you may consider your pension as the foundation of your retirement plan, if you have other income that uses your tax allowances, it may be prudent to defer drawing on your pension. Since pension funds benefit from tax-free growth, interest, and dividends, leaving your pension invested is especially useful for maintaining capital value. Plus, pension funds are usually not subject to Inheritance Tax (IHT). Leaving your pension fund intact while drawing on other investments may help to reduce your IHT liability.
Enjoy flexibility from ISA savings
ISAs are considerably more flexible than pensions. Growth, interest, and dividends are all free of tax and you can withdraw money tax-free without restriction. As for IHT, ISAs can be passed between spouses on death, which preserves the tax-efficient treatment.
Useful in reducing tax in retirement, you can use your ISA to:
- Fund large, one-off purchases
- Top up your income – especially useful if your pension exceeds your tax-free allowance
- Make your portfolio more efficient over time, by gradually moving taxable funds across
- Hold inheritance tax-exempt assets within an ISA
Take a savvy approach to investment accounts
A basic and flexible wrapper, investment accounts can hold funds, shares and investment trusts. Interest and dividends are taxable at your marginal rate and selling assets can incur Capital Gains Tax (CGT) if your profit exceeds your annual exemption (£6,000 for 2023/2024 falling to £3000 from 6/4/24). The following strategies can help reduce tax:
- Move your taxable investment accounts into ISAs
- Regularly use your annual CGT exemption to avoid large gains rolling up
- Structure your investments depending on the type of income they generate
Why seek out expert advice when approaching retirement?
Approaching retirement is a significant life transition that involves complex financial, legal, and lifestyle considerations. Seeking expert advice during this phase is crucial for several reasons:
- Financial advisors can help you create a personal and comprehensive retirement plan including a graphical projection of your finances over the next 30 or 40 years, assess your current financial situation, estimate future expenses, and develop strategies to maximize your savings and investments.
- Investment Management: As you transition from the accumulation phase to the decumulation phase of your savings, the way you invest and manage your assets may need to change. An investment planner can help you adjust your portfolio to balance risk and return, taking into account your changing goals, timelines and risk tolerance.
- Tax Planning: Retirement often brings changes to your tax situation. Our experts can help you navigate tax implications of different retirement income sources, ensure withdrawals are tax efficient, and take advantage of available tax breaks and incentives. In addition, your retirement may last over 30 years and tax rules may change during this time so your financial strategy will need to be reviewed regularly. Care Planning: Our Planners can help you navigate care options to ensure your healthcare needs are adequately addressed and taken in account when planning your retirement.
- Estate Planning: Proper estate planning is essential to ensure your assets are distributed according to your wishes and to minimise the impact of taxes and other potential costs on your family.
- Risk Management: Assessing and managing various risks, such as market volatility, inflation, and unexpected expenses, is crucial in retirement planning. Experts can help you identify and mitigate these risks to ensure a more secure financial future.
Seeking expert advice when approaching retirement helps you make informed decisions, navigate complex financial landscapes, and create a personalised plan that aligns with your goals, ultimately contributing to a more secure and enjoyable retirement as well as considerable peace of mind.
Get in touch If you’d like help to create a financial plan to structure a tax-efficient income in retirement, we can help. Please get in touch to arrange a time to chat.