When deciding how to receive income at retirement, it is important to consider your options carefully. It could be worth speaking to a financial adviser at Four Wealth Management to find out the most tax-efficient way for you to start receiving an income after you retire.
Many people do not know that taking income from a pension may trigger the Money Purchase Annual Allowance (MPAA). This reduces the amount that you can contribute to your pension each tax year. Income can be your 25% tax-free lump sum or it can be income withdrawn monthly.
What is the Money Purchase Annual Allowance (MPAA)?
Usually you can receive tax relief on pension contributions of up to £40,000 per year or 100% of your taxable salary if this is lower. However, once you begin to withdraw taxable income from your pension then you are likely to trigger the MPAA. This means that the maximum you can contribute per tax year is £4,000 instead of the usual allowance of £40,000.
The MPAA was introduced so that people do not retire at the age of 55, withdraw their pension pot and take the 25% tax-free lump sum and then put the assets into a new pension and receive tax relief again.
The MPAA is not normally triggered if you cash in pensions worth less than £10,000 but a financial adviser at Four Wealth Management can confirm this for you.
Please note the Money Purchase Annual Allowance does not affect defined benefit pensions, only defined contribution pensions.
Why should I take income from other sources?
If you are able to, once you retire you could consider utilising income from other sources before your pension. For example, your ISAs. This will enable you to continue to contribute to your pension and continue to benefit from tax relief on your contributions.
Reduce your Inheritance Tax (IHT) liability
Utilising your income from other assets will also reduce the value of your estate over time for the purposes of Inheritance Tax. This is because ISAs and other cash accounts sit within your estate, whereas pensions are usually outside of your estate.
Find out how to receive income tax-efficiently
To discuss other ways that you can receive income, book a no-obligation meeting with one of our financial advisers on 0117 973 0500 or fill out our online form.
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 bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.