One of the key elements of saving for retirement intelligently is organising your money for maximum tax efficiency.
There are many tax allowances designed to promote a culture of saving so that you can retire with enough money put aside to provide for a comfortable later life.
Both pensions and ISAs are tax efficient vehicles and it’s important to understand what best suits your needs.
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.
Don’t forget ISAs
ISAs are another good option for retirement saving.
In the 2019/20 tax year You can contribute up to £20,000 into your ISA, with all growth and income free from tax.
While you do not get the generous tax relief on your contributions, all withdrawals are tax-free.
You might decide to draw your income from your ISAs instead of your pension pot for the first few years, for example, giving your pensions pot longer to grow.
Watch out for your pension lifetime allowance
This is the upper limit on the amount that you can build up in your pension fund over your lifetime while still enjoying the full tax benefits.
The lifetime allowance is set by the government and it is currently £1,055,000 for the 2019/20 tax year.
That may sound a lot, but if you start saving early and your investments do well, it could easily be reached.
If you go over your lifetime allowance, you will generally pay a tax charge on the excess when you take a lump sum or income from your pension pot or reach age 75 with unused pension benefits.
Any excess may be subject to tax charges of 55% of any lump sum or 25% income.
Even if you are a long way from retirement, it is vital to establish whether you could breach the allowance in the future, which is why professional advice is essential.
A financial planner can help you decide whether early action is necessary to avoid any unnecessary tax penalties.
The value of investments can fall and you may get back less than you invested.
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.
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.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.