3 February 2023
Pensions are complex, so when you have worked hard to save for your retirement the last thing you want is to get hit with a high tax bill. Follow wealth manager, RBC Brewin Dolphin’s tips for organising your retirement savings for maximum tax efficiency.
Amy Pethers, financial planner at wealth manager RBC Brewin Dolphin highlights the way to achieve a tax efficient retirement income.
- Maximise your annual pension allowance
The annual allowance allows you to contribute up to £40,000 a year to your pension and still benefit from full tax relief at your marginal rate of income tax. If you were a basic-rate taxpayer and were to contribute £100 (gross contribution) into your pension, it would actually cost you £80 (net contribution). Your pension provider will claim the difference as tax relief (20% basic rate tax relief) and add it to your pension pot. Higher rate tax relief (above 20%), can be claimed by completing the annual self-assessment form.
- Plan ahead for the year and avoid the emergency tax trap
When you reach retirement, it is very important to plan your income carefully. If you take several large sums from your pension over a few months, this may push you into a higher-rate tax bracket and you could temporarily be subject to emergency tax as HMRC may think you plan on doing this for the rest of the tax year. It often makes more sense to spread the cash that you take form your pension over the months and proceeding years so that you have clear plan in place cognisant of the tax that you will be paying.
- Withdraw what you need
Being realistic about what you need to live on is key, ensuring you have the right balance to enjoy your retirement but also be mindful to stay within the tax thresholds. For example, withdrawing less than £50,271 from your pension (and any other income sources) will ensure you only pay tax at a basic level of 20%. However, if you withdrew £50,271 or over you would move into the higher tax bracket. The benefit of pension drawdown enables you to vary your retirement income from year to year. Which allows you keep it within a certain threshold. You should also think about what other assets you have available, for example, if you have sufficient savings within your ISA you can withdraw this as tax-free income without impacting your tax bracket. This is one reason why ISAs alongside pensions can be very useful in retirement.
- Understand your pension and the 25% tax free cash
The headline rate of pension tax-free cash is 25%, but some pension savers with older style company pension schemes may find that they have a greater amount of protected cash available. Yet many people in these occupational schemes often forget that they are eligible for this. It is always worth enquiring about your pension’s benefits, rather than assuming they are the same as other schemes. An adviser can help to clarify your situation and ensure you don’t lose valuable benefits.
- Watch out for your pension lifetime allowance
The lifetime allowance, which currently amounts to £1,073,100 for the 2022/23 tax year, is not a maximum cap on pension savings. You can save more than this into a pension, but you may face a tax charge. The amount of tax you pay depends on how you draw the money and can amount to 55% on the excess if you take it as a lump sum or 25% plus your annual rate of income tax if drawn as an income. A good adviser will be able to work out a plan to create a tax-efficient drawdown strategy.
- Taking a company pension before 65
Benefits taken before age 65 may be subject to a penalty, but it might be worth it. If you take benefits early from a defined benefit (or ‘final salary’) scheme, there could be a reduction in available income. You would be getting a lower pension, but for a longer period. This could, for example, potentially put you in a lower rate tax bracket, or bring benefits below the lifetime allowance. However, you might want to consider what other savings you could access first, such as ISAs or other investments.
Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444).
PRESS INFORMATION
For further information, please contact:
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: +44 (0) 20 3201 3026
Chloe McFarlane: chloe.mcfarlane@brewin.co.uk / Tel: +44 020 3201 3490
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.7* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 30th June 2022.