Retired clients could be reducing how much wealth could be left to their loved ones on death as well as wasting valuable tax free allowances each year by taking their retirement income solely from their pension.
The challenge is to undo a lifetimes worth of retirement savings habits. Demonstrating that an alternative retirement income strategy using a range of tax wrappers can provide a sustainable source of income while securing the best possible legacy on death from unused funds, is key.
It is now time to start thinking of savings collectively rather than separate individual pots. Clients with savings across a variety of wrappers need to consider the best way to access these to meet their income needs in retirement.
Tax Efficient Income
It pays to make use of the available tax allowances when structuring retirement income. Up to 26,700 of income and capital gains can be taken tax free this year (thats 53,400 a year for a retired couple without a penny in tax).
The personal income tax allowance increased to 10,600 from April. In addition, it is now possible to take a further 5,000 savings income tax free and not forgetting theres the annual CGT exemption which stands at 11,100.
The one thing to be aware of though, is the order in which funds are withdrawn in retirement, as this can have significant impact on the tax allowances available and ultimately how much tax is payable. For example, the 5,000 tax-free savings rate is lost if income from pensions exceed 15,600.
Providing Legacy
Securing the greatest inheritable legacy for future generations should be reviewed on a regular basis. It may be a choice between withdrawing funds from an investment which is outside the IHT net and one on which would potentially attract a 40% tax charge on death. And an income solution which limits both the tax paid on the withdrawal and preserves the greatest inheritance will be the clear favourite.
Offshore Bonds
- Gains from offshore bonds are treated as savings income. For an individual who has earned income (including pension income) gains of up to 15,600 can be withdrawn without incurring an income tax charge. So it makes sense to strip out offshore bond gains before starting to take pension income especially if the gains can be kept within the new tax free starting rate band. In addition offshore bonds will typically form part of the estate on death. Using these funds for income in retirement could reduce the potential IHT for those clients with estates in excess of their available nil rate band.
Unit Trusts/OEICs
- Using withdrawals from a unit trust or OEIC will result in a capital gain rather than an income tax liability. If the gain can be managed within the 11,100 annual CGT allowance then withdrawals will be tax free. Furthermore, Unit Trusts and OEICs form part of the estate, so by withdrawing funds from these could potentially reduce how much IHT is due upon the estate.
NISAs
- Typically it will be worth withdrawing other taxed funds up to the available allowances before touching the NISA. However, those concerned about leaving a legacy for their loved ones will need to remember that the NISA will form part of their estate for IHT.
Pensions
- The new pension freedoms have turned conventional retirement income planning on its head. No longer should pension savings be the first thing clients turn to provide their income in retirement. The funds within a pension enjoy the same tax free gross roll up as the NISA. However, unlike other investment, pension savings are generally free of IHT. The new death benefit rules also provide greater choice on who and how pension wealth can be inherited.
Summary
Having a range of different investment wrappers will increase the scope to utilise the tax free allowances. Paying little or no tax on savings is appealing, however a pension contribution with tax relief and 25% tax free cash could provide more in clients `pockets even after paying some tax on the income.
Pensions now enjoy such a privileged tax status that they should now be considered as the first choice for life savings and the thing to keep hold of the longest in retirement. The advantage they now hold over other investments means that it is worth considering wherever possible moving a clients other savings into their pension in the run up to retirement.
Robertson Baxter is a full service whole of market Independent Financial Advice firm. We offer a Family Office approach to clients of high and ultra high net worth together with Trustees and Charities. Our holistic advice covers all areas of Pension, Investment, Protection and Estate Planning, serving clients across Yorkshire.
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