When you retire you have to pay income tax on your pension income at the same rates as if you were working. Income from the State Pension is also taxable. However, you do not need to pay National Insurance contributions after reaching State Pension age.
There are a few tax-traps to watch out for when it comes to taking an income at retirement, at Four Wealth Management we can help you to make sure you are taking your income in the most tax-efficient way.
Where is your income coming from when you retire?
Many people have build up a combination of assets by the time they reach retirement age. This may include a mix of cash, investments, property, pensions, stocks and shares ISAs and Cash ISAs. It is up to you to determine which assets to take income from and each is taxed differently.
At Four Wealth Management, we can work with you to determine how much income you need at retirement each month and the most tax-efficient way to achieve this income.
We will also help you to create a long-term plan for your wealth which includes passing on your wealth to your loved ones. We will help you to mitigate Inheritance Tax by taking income from sources that are inside of your estate first in order to reduce your Inheritance Tax liability over time. There are many other Inheritance Tax solutions that we can discuss with you.
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Taking retirement income from sources that are not your pension
Many people just assume that when they retire they should be using their pension to provide their full income. However, your pension is outside of your estate for Inheritance Tax purposes and therefore is a tax-efficient way for you to leave money to your loved ones free from 40% Inheritance Tax.
You can take up to 25% of your pension as a tax-free sum. It is important to note that you do not have to take the full 25% in one go as you would effectively be taking 25% of your pension from outside of your estate and putting it back into your estate. If you were to pass away unexpectedly then this would increase any Inheritance Tax liability.
If you have money saved in stocks and shares ISAs or Cash ISAs, then you should consider taking some of your income from these as any income from an ISA is free of income or capital gains tax.
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Can I reduce the amount of tax I pay when I retire?
Tax rules and allowances are constantly changing and you may benefit from speaking to a financial adviser who can guide you through the allowances that you are entitled to. At Four Wealth Management we also let our clients know when any changes in legislation will affect them personally and recommend any changes that are needed to their portfolio.
Paying tax on income after retirement is very different to paying tax when you are working as the tax charges are different for each type of account and investment.
Choosing how you take income at retirement is a big decision and it is important to take financial advice in order to make sure that you are making the right decisions for your own individual circumstances. A financial adviser can also help you to make sure that you will not run out of money in retirement.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
