How to work with tax in retirement planning

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.

For those fortunate enough to have other savings and assets, retirement income is not just about pensions.

Equity release is an alternative, as the market has come on in leaps and bounds over the years, offering a range of options from a lump sum to ad-hoc withdrawals as and when required.

For individuals in later life, even with higher interest rates, this option can look very attractive. Particularly, again, if they have a potential IHT liability.

There is also of course the option – as the individual ages, and with interest rates having risen to a 15-year high – to look at using some of their pension fund to purchase an annuity if they need to secure additional income.

Hopefully, having protected much of the value of the pension fund in the early years of retirement, this allows for more flexibility later.

Why so much concern about IHT, given, on average, only 4 per cent of estates actually pay the tax, with this figure remaining fairly constant over recent years?

What does ring alarm bells is that IHT receipts have hit record levels, a trend that is set to continue.

This is being fuelled by rising property prices, inflation, and the long-standing freezing of the IHT nil-rate band of £325,000 and residence nil-rate band of £175,000, which is set to continue until at least April 2028.

This somewhat sobering thought underlines the need to ensure that the impact of all taxes must be taken into consideration. 

For wealthy individuals with money purchase arrangements, the new pension strategy of preserving as much of their pension fund as possible and considering all other savings and assets as a source of income in retirement, maximising the relevant tax reliefs and exemptions, could be considered a better option.  

Bear in mind that even if other savings are exhausted, or there is a need for ad hoc payments, there is always the safety net of dipping into their pension fund as and when required.

For some individuals, pensions freedoms have turned retirement income planning on its head.

For those fortunate enough to have other savings and assets, in addition to their pension, it is very much a case that retirement income is not just about pensions.