At a glance
- Using the full range of tax breaks available on ISAs, pensions, dividends and capital gains will help boost your pension pot, ready for your retirement.
- Both pension and ISA annual allowances offer real tax efficiencies.
- Managing your current assets tax-efficiently will help you achieve the lifestyle you’re looking forward to, as you get older.
Planning your tax-smart retirement
Some days you can’t imagine ever retiring. Other days, it can’t come soon enough. But there will be a day when you want to put work behind you. And a rewarding, comfortable retirement is something that takes careful financial planning.
These days, retirement planning is about making sure you’ve got plenty of options to live later-life the way you want to, not the way your retirement income means you have to.
That’s why it really pays to use your tax allowances and reliefs each year to boost your pension pot, as you get closer to that retirement party.
Buying yourself some choices
Retirement takes a lot of planning. And the more you can save, the more life choices you’ll have in later life. But nobody is unaffected by the continuing cost of living crisis, so whatever you can save, it makes sense to be as tax efficient as possible.
The first step is to take a good look at your current financial circumstances, and make sure your money and assets are working as tax-efficiently as possible. You should look at the range of different assets you could save into, including your pension or ISAs, or other products. Each one has a varying degree of risk, and tax-efficiency.
ISAs and pensions – your building blocks
You’ll almost certainly be using ISA savings and pensions as one of your main sources of income in retirement. Both of these can help shelter your dividends, interest or other profit from tax, and help make your money go much further.
One of the best ways to boost your pension pot before tax year-end is to use your full pension annual allowance if you can. In 2023-24. This Includes contributions from yourself, your employer, any third party as well as tax relief paid to the pension. The current annual allowance is £60,000.
However, you’ll only personally get tax relief on contributions up to 100% of your earnings, or £3,600 – whichever is lower – in each tax year.
If you have not fully used your allowance in the previous three tax years you can carry it forward for up to 3 tax years. Any amount paid in excess of your available annual allowance, including any carried forward will be subject to an income tax charge.
Using other allowances to boost your retirement income
The tax breaks don’t stop at pensions and ISAs. If you make a profit from selling assets outside your ISA or pension, the annual Capital Gains Tax (CGT) exemption for 2023/24 is £6,000. If you are planning to sell an asset, it’s worth doing so before tax year-end, as the CGT allowance will reduce to £3,000 in 2024/25.
You can’t carry this allowance over so it’s another ‘use-it-or-lose-it’ tax break.
If you’ve already used up your ISA allowance, there’s still the Personal Savings Allowance (PSA), which can help save tax. You can earn up to £1,000 of interest tax free in this tax year if you’re a basic-rate taxpayer. This drops to £500 per year for higher-rate taxpayers, and additional-rate taxpayers can’t claim at all.
Think about any dividends you earn, too. Dividends earned from shares held in ISAs or received by pensions are tax free. You can also earn up to £1,000 before you pay tax if the dividends are outside those wrappers. The dividend allowance is also dropping to £500 in the 2024/25 tax year.
The Dividend Tax for basic-rate taxpayers in 2023/24 is 8.75% and for higher-rate taxpayers, it’s 33.75%. For additional-rate payers, the rate is 39.35%.
Taking financial advice for your retirement planning
The turbulence of the past couple of years has made many people rethink their long-term life plans. In particular when they retire, and how they want to spend their retirement. Coming up to tax year-end is a good time to talk your plans through with a financial adviser and discuss making any changes.
A financial adviser is there to keep on top of changes and give you a heads-up on the tax allowances that can help you feel financially secure about your future and look forward to retirement confident that your money will last as long as you need it to.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
SJP Approved 10/01/2024