With inflation running amok, the need for quality financial advice has never been greater.
Many clients in retirement will, of course, be concerned that they might not be able to maintain their standard of living in the long term as they see their hard-earned savings dwindle.
Any steps to help protect their retirement nest egg, and there are many, should be considered, and good tax planning is one such option.
The tax-planning mantra ’consider all taxes’ must never be overlooked.
When we think of retirement income, a consideration is the significant impact income tax has on eroding the value of a drawdown pension fund.
To put this in perspective, the cost of every £1 of net income from the pension fund is:
- £1.25 for basic rate taxpayer
- £1.67 for higher rate taxpayer
- £1.82 for additional rate taxpayer
- £2.50 on income between £100,000 and £125,140
Careful planning is required to ensure, at the very least, that tax is not paid at the higher rate, or above, because of the corrosive impact this can have on the pension fund value.
In scenarios where wealthy individuals have other assets that can be used for income, the traditional approach of relying on the bulk of their retirement income coming from their drawdown pension may no longer be appropriate from a tax-efficient viewpoint.
Considering alternative sources of income, appreciating the true cost of pension income, and maintaining income and wealth, while passing on more assets to future generations in the most effective manner, is a significant reason for seeking quality advice.
It is worth reemphasising just how beneficial pensions are as a means of saving for most people.
Provided tax relief is available at an individual’s highest marginal rate of tax, on a comparative basis a pension will give a better return than the same net amount invested in an Isa or even a Lisa.
Taking a simple example, over forty years a higher rate taxpayer saving a £300 net a month, and based on a growth rate of 5 per cent gross a year, would have accrued just under £725,000 in their pension, compared with just under a £435,000 in an Isa.
Now that both allow full access, accepting that for a pension you generally need to be 55 years of age or over, currently the differing values come down to taxation.
Withdrawals from an Isa are tax free, though potentially subject to inheritance tax on death, but with a pension, an effective rate of tax from zero to 60 per cent can apply.
The trick is, as mentioned previously, to maintain an income as tax efficiently as possible, while also preserving as much of the pension fund as possible.
Taking the above example with £435,000 in their Isa and £725,000 in their pension, and an estate liable to IHT, then after the 40 per cent IHT charge there would be net Isa assets of £261,000 to pass on to beneficiaries.