The value of investments and any income from them can fall and you may get back less than you invested.

Case Study: Supplementing your retirement savings

Case Study: Supplementing your retirement savings

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This case study shows how ISAs can act as a valuable savings vehicle to improve your chances of a comfortable retirement – and help you to pass on a legacy tax-efficiently.

Richard is 50, earns £150,000 per annum and wants to start planning practically for retirement. He lives with his wife Melanie, who runs her own business, and their two daughters, Phoebe, 18, and Matilda, 16.

Richard has prudently saved around £700,000 in his pension and has £200,000 in an ISA. He would like to retire in ten years’ time at 60 and in the meantime is keen to maximise his savings for retirement.

The plan

  • Pensions are usually the most tax-efficient way of saving for retirement because of the income tax relief on contributions.
  • However, Richard is already maxing out his pension annual allowance. He can’t put any more money into his pension without incurring an annual allowance charge. 
  • Richard hasn’t used any of his £20,000 ISA allowance this tax year, so his priority is to direct any spare funds, first, into an ISA.
  • Any additional savings could then be invested in a portfolio of funds within a general investment account (GIA). Funds in a GIA would be subject to tax but prudent use of the capital gains tax annual exempt amount could help minimise the tax incurred.
  • Assuming that Richard makes full use of the ISA allowance each year (investing £1,666.66 a month), that the annual ISA allowance remains at £20,000 and that Richard’s ISA delivers an average annual return of 4% after charges, his ISA will be worth £543,000 by the time he hits 60.
  • When Richard retires it could be beneficial for him to draw down retirement savings from his ISA first, before he touches his pension.
  • His pension can be passed on to his wife and children free from inheritance tax, so it often makes sense to leave your pension untouched, if you can, so that future generations receive as much of your estate as possible. 
  • Also, retirement income taken from a pension is taxable, while income taken from ISAs is tax free.
  • Richard feels much more comfortable now he has clarity about his financial position and understands the options he will have at retirement.

 

 

 [1] Source: Brewin Dolphin.


The value of investments and any income from them can fall and you may get back less than you invested.

Past performance is not a guide to future performance.

No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.

Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.

Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority. 

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