Planning for Retirement?: Engage Guide To Wealth Management

Part 3: Tax Planning & Risk Management

Tax planning is an essential aspect of retirement planning.

By understanding how your income will be taxed in retirement, you can make informed decisions about how to structure your savings and withdrawals.

Taxation of Pension Income

In the UK, pension income is generally taxable. However, there are ways to reduce the tax you pay:

• Personal Allowance: The first £12,570 of your income is tax-free (for the 2024/25 tax year), thanks to the Personal Allowance. This includes income from pensions, savings, and investments.

• Tax-Free Lump Sum: You can typically take up to 25% of your pension pot as a tax-free lump sum when you start drawing from it, dependent on the size of your pension and historic protections. The remaining 75% will be subject to income tax.

• Drawdown Strategies: If you’re using pension drawdown, you can control how much you withdraw each year, potentially keeping your income below or within a desired tax band.

Tax-Efficient Savings and Investments

Maximising tax efficiency is crucial for preserving your wealth in retirement. Consider the following:

Individual Savings Accounts (ISAs): Income and capital gains within an ISA are tax-free. Investing in ISAs during your working years can provide a tax efficient income stream in retirement.

• Pension Contributions: Contributions to pensions can be paid before income tax (some workplace schemes) or basic rate tax relief is claimed by the pension provider and further tax relief might be due via a tax return, for contributions made to a personal pension. You can make gross pension contributions up to the value of your pensionable income, up to the annual allowance (£60,000 for the 2024/25 tax year). The allowance is reduced for those with income of more than £260,000.

• Investment Bonds: Both onshore and offshore bonds can provide known income streams and deferred tax on growth.

• Trusts: If you have excess savings for your retirement you might want to consider using trusts to retain some control and access to your assets, whilst passing future growth outside of your estate for inheritance tax.

National Insurance Contributions

If you decide to work part-time in retirement, be aware that you may still need to pay National Insurance contributions if you’re under State Pension age and earning above the threshold. However, once you reach State Pension age, you no longer pay National Insurance, regardless of your earnings.

Retirement comes with several risks that can impact your financial security. Managing these risks is crucial to ensuring a stable and comfortable retirement.

Inflation Risk

Inflation risk is the possibility that rising prices will erode the purchasing power of your retirement income. To mitigate this risk:

• Invest in investments that have the potential to rise more than inflation: Consider investing in long term growth assets, like equities, as part of your overall strategy.

• Cost-of-Living Adjustments: If you purchase an annuity, consider one with a cost-of-living adjustment that increases your income in line with inflation.

Regulatory Risk

Regulatory risk refers to the possibility that changes in government policy or tax laws could impact your retirement income. While you can’t control government decisions, you can stay informed and plan accordingly:

• Stay Informed: Keep up to date with changes in pension regulations, tax laws, and benefits that could affect your retirement.

• Diversify your savings pots: By having different savings and tax wrappers, like pensions, ISAs, General Investment Accounts and other savings vehicles, you create options for where to draw from more tax efficiently, as and when legislation changes.

Health Risk

Health risk refers to the possibility that you may face significant healthcare costs in retirement, especially if you require long-term care. To manage health risk:

• NHS and Private Healthcare: Understand what is covered by the NHS and consider private healthcare or health insurance for additional coverage.

• Savings for Health Expenses: Set aside a portion of your savings specifically for healthcare and long-term care expenses.

Market Risk

Market risk refers to the possibility that your investments will lose value due to market fluctuations. This risk is particularly concerning during the decumulation phase when you’re relying on your investments for income. Strategies to manage market risk include:

• Asset Allocation: Adjust your asset allocation as you approach and enter retirement, reducing your exposure to more volatile assets and increasing your exposure to more stable assets.

• Diversification: Diversifying your investments across asset classes, sectors, and geographies can reduce the impact of any single market downturn.

• Maintaining a Cash Buffer: Keeping a portion of your portfolio in cash or cash equivalents can provide a buffer during market downturns, allowing you to avoid selling investments during periods of low or negative returns.