Doing nothing with your pension and using any other savings first may be the most tax-efficient way of making one’s money go further in retirement, Neil McGillivray has said.
According to the head of technical support at James Hay Partnership and chairman of the Association of Member-Directed Pension Schemes (Amps), phonecalls enquiring about the new pension freedoms have gone from a “trickle to a flood”, but he said it was “essential to preserve as much of the pension pot as possible.
“In the past, one tended traditionally to strip out the income, but now one should protect it as much as possible. One will see advisers encouraging clients to take out the minimum a year – say within the personal tax allowance of £10,600 – and use other assets such as Isas, investments and possibly even equity release to supplement the income needed.”
By doing so, clients could hold onto their pension rather than use up all their pension income early in retirement, meaning they could use it for long-term care if needed, or pass it on to the beneficiaries in a lower-taxed environment.
For example, he said: “If someone dies and the house is worth £500,000 and they have an Isa of £350,000, there is £825,000 worth of assets that are liable for inheritance tax if someone just eats away at their pension.
“If, however, the client has a need for income, they could use the Isa allowance up first, then, depending on health, they could borrow £175,000, say, on the house to give them an income and spend what is left. Then the remaining £325,000 on the house comes into the nil-rate band and the pension passes on more tax-effectively on to the beneficiaries.”
Adviser view
Matthew Harris, a director at Dalbeath Financial Planning in Cowdenbeath, Scotland, said: “It is important that clients generate an income in retirement but they also need some diversity in terms of where this comes from.
“Quite a lot of clients do not want to take an income in the early years, so some take their tax-free cash to carry out spending plans and some may even still be working.”
