Just because you are retired does not mean you are exempt from taxation. As with those still employed, income can be liable to taxation. No one wants to pay more tax than is needed, therefore understanding how tax works can help you take advantage of allowances.
One option is to take advantage of your tax-free cash entitlement. When you first retire you can take a lump sum of up to 25% of your pension free from tax. It is possible to claim this tax-free sum at 55 (57 after 2028) and then delay taking your pension income until a later date. This choice could help you reduce your working hours and transition into retirement on less hours. The tax-free sum could be a useful subsidy to match your day-to-day requirements.
However, beyond this tax-free sum, withdrawals from your pension are taxable. Depending on your income when you make this withdrawal, you could be taxed up to 45% taxation. (Hargreaves Lansdown, 2017) Therefore, it is important to understand the rules and to plan pension withdrawals strategically , this could save you a significant amount of money.
If you do have a lump sum, then an ISA is a tax efficient way to save. Interest on ordinary savings accounts is taxable because it is classified as income. If this income takes you over a tax threshold then it will be taxed. With an ISA you pay no tax – so it is a sound idea to put as much as possible into your ISA account as you can afford, taking into account ISA allowances. If you take a Cash ISA or a Stocks and Shares ISA, you can take tax-free withdrawals when the money is required.
Finally, you must also be smart about tax after death. Inheritance tax will include the value of your property, investments, savings and your possessions. The current threshold is £325,000. It may seem that this is an extortionate sum. However, if you take account of the value of your home and any insurance policies, you may be soon over this amount. It is important to talk to an independent financial advisor, who will take you through the different means of managing your estate. Alternatively, you can refer to the government website, which can take you through how much money you will have in retirement.
The content in this article was correct on 23rd September 2019. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on pensions for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.