In Focus: Tax planning  

How to work with tax in retirement planning

  • Identify tax benefits and pitfalls in retirement planning.
  • Explain how retirement income can be structured tax efficiently.
  • Communicate the benefits of advice in retirement planning.

As regards the pension fund, if the member dies before age 75 there is the potential option for beneficiaries to take a lump sum death benefit or beneficiary drawdown, or a combination of both.

There would be no IHT and no income tax payable on the latter, if beneficiaries notified the scheme within the two-year window.

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Where the member dies after attaining 75, taking the uncrystallised fund as a lump sum, the beneficiary pays tax at their marginal rate, potentially a combination of rates at 20 per cent, 40 per cent and 45 per cent, with different rates applying in Scotland.  

If a beneficiary was taxed on the full amount at 45 per cent, this still leaves net funds of £398,750.

That equates to 53 per cent more wealth passing on, compared with the same net amount having been invested in an Isa, but could be as high as 178 per cent if the member died before attaining 75.  

In the post 75 scenario, if the beneficiary opted for drawdown instead and restricted their income to the basic-rate band, then 122 per cent more wealth would be passed on.  

Other ways to take income efficiently

Blending retirement income from other sources, like an Isa, rather than just relying on income from a personal pension seems a no brainer, but apart from the Isa what are some other options for taking an income efficiently?

Even with the capital gains tax annual exemption reducing to £6,000 in 2023-24 from £12,300, then to £3,000 in 2024-25, the lower rates of tax at 10 per cent for basic-rate taxpayers and 20 per cent for any gains falling into the higher-rate thresholds is attractive.

Based on a comparison of the tax treatment of a £1,000 income or gain, and ignoring any exemption or allowances, the table below shows the tax advantage capital gains can have.


Basic rate

Higher rate

Additional rate













In order to be able to maximise the use of crystallising gains to provide a regular source of income you do need a sizeable investment portfolio.

Someone with a portfolio of collectives valued at £300,000 producing 5 per cent capital growth a year and looking for £15,000 gross income would have to liquidate the full portfolio, which is obviously impractical.

However, eating into the capital of the portfolio over time may still be more appetising than taking income from their pension if they have an IHT liability. 

Another possible income option is releasing equity from the individual’s home, which for many is their most valuable asset. The simplest way is to downsize.

As there is no CGT on the disposal of an individual’s principal residence, and there is an element of protection with regards to the residence nil-rate band in respect of IHT, it is a prime candidate.

From experience, however, there is often reluctance to sell the family home.