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The Taxing Side of Planning Your Retirement

10 July 2015

The Taxing Side of Planning Your Retirement

Whatever you have planned for your retirement, there are many elements you need to put in place before you can enjoy your well deserved time off. Ensuring you have in place the most suitable pension scheme for you is just one of the necessary steps. With many options available, it’s crucial to understand the benefits of each, as well as your eligibility.

A welcome change for many pension holders came in the shape of the Pension Reform in April 2015, which increased flexibility and access to funds from the age of 55.

There is no limit on the amount permitted to be taken from pension pots once the policy-holder has reached this milestone age. However, only a quarter of these funds are tax-free so managing the other 75% needs serious consideration. Any amount removed from the pot beyond the first tax-free-quarter, will be added to other incomes and taxed at the relevant tax band rate – which could mean 45% for some professionals.

If the 25% tax-free lump sum is taken from the pot, there are several ways to make the most of the remaining 75%:

  • Purchasing an annuity – providing a guaranteed income for life.
  • Implement flexible retirement income/flexi-access drawdown – the 75% is invested in funds constituting a regular taxable income (as with an annuity). However, this option involves risk as income is relative to the performance of these investments and is therefore not guaranteed.
  • Take small cash sums – treating the pension pot like a savings account. However, there is little protection for yourself or dependants and three quarters of each sum is subject to a tax deduction and possible additional administration charges and limits.
  • Take the whole pot as cash –this option doesn’t offer the pension holder or any dependents a secure income for life, however, and there is also a risk of running out of money too quickly.
  • Mix all of the above options – the best combination can be determined by retirement age, income objectives, health, size of the pension pot and dependants.

It’s important to consider all options carefully – depending on your personal circumstances your priorities may vary from someone else’s. Best thing to do before you decide? Get professional advice on keeping investments high and deductions low.

Specialist medical and dental accountants Lansdell & Rose offer business advice alongside regular tax planning and financial accounting. Visit www.lansdellrose.co.uk or call 020 7376 9333.

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