In Focus: Tax  

How pensioners can get £30k tax-free a year

How pensioners can get £30k tax-free a year
Photo by Andrea Piacquadio via Pexels

People entering their golden years could 'take home' at least £32,870 in tax-free income each year in retirement if they make the most of tax-efficient financial planning.

According to Rachael Griffin, tax and financial planning specialist from Quilter, by using a range of different investments, a well-advised client could have a total income that is outside of income tax.

Although tax allowances are set to become increasingly less favourable over time - especially considering the multi-billion Covid-19 black hole in the deficit the chancellor will have to fill somehow, Griffin said there are still ways to squeeze every last ounce out of those available to clients.

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"When it comes to retirement income, well planned use of allowances can allow you stretch your hard-earned savings that much further.

“If you have used a diverse set of investment products, you can now stand to tap into a minimum of £32,870 of your savings per year, using the available tax allowances for 2021-22.

“Each of the different products enable you to take home a rather small amount of tax free ‘income’ per annum, but add them all together and you find yourself with a substantial amount."

Where the tax allowances come from:

  • Pensions: Using the personal tax allowance will allow someone to draw up to £12,570 in tax free income from their pension savings in addition to any Pension Commencement Lump Sum taken.
  • Isas: Allow unlimited funds to be drawn upon without being taxed.
  • General investments: Using sales from collective investments realising gains of £12,300 or below provides tax free ‘income’ using the capital gains tax allowance.
  • You can get further £2,000 distributions from equity based collectives in tax free income using the tax free dividend allowance.
  • Cash interest: Interest from cash deposits allow someone to receive £1,000 of tax free income if they are a basic rate taxpayer while higher rate taxpayers will be able to receive up to £500.
  • Offshore Bonds: A withdrawal from an offshore bond (in addition to the 5 per cent allowance) of up to £5,000 to use the starting rate savings allowance.

This gives a total of £32,870 plus PCLS, Isa and capital withdrawn, assuming the starting rate limit for savings income is available for up to £5,000 for those with income under £17,570.

Griffin stated the tax treatment and efficiency of these options will depend on the individual circumstances of each customer, saying: "Retirees should plan carefully when thinking about how to access their funds during retirement.

"Being aware of and making full use of the allowances available can save a retiree a substantial amount of tax money over the long term."

That said, Griffin added: "Tax efficiency should not be the only driver when choosing what products to use. Each product offers different levels of flexibility and your particular financial circumstance will dictate what mix of investments is best."