Retirement spending and saving – a snapshot

Building your savings

There are many different savings pots available, and the rules around them are constantly changing. By staying up to date with the changes it is possible to build a retirement plan with the flexibility to adapt to the future.

Pension contributions

Despite all of the recent rule changes, pensions continue to be one of the most tax-efficient means of saving – especially for higher-rate taxpayers, who can reclaim 40p in tax for every £1 saved. Any UK resident can potentially contribute up to £40,000 into a pension in 2017/18, although this allowance was cut for higher earners in April 2016. It is also possible to use allowances from prior years – this is a complicated area and advice is essential.

The rules change regularly, so our client strategies need regular reviews to ensure they remain effective.

ISAs

The allowance for 2017/18 has increased to £20,000 per individual, meaning that a couple can save £40,000 tax-free each year. This higher allowance means that people can boost the long-term value of their savings by paying less Income Tax and Capital Gains Tax on their investment returns.

Lifetime ISA

Launched in the 2017/18 tax year, this is the newest type of ISA account. It is only available to the under 40s, and enables individuals to claim a 25% bonus on their savings up to a limit of £4,000 (with a maximum bonus of £1,000). This account can be used either to help purchase a first home, or to support retirement income if drawn after age 60. There are penalties for withdrawals at other times.

Cash savings

Individuals in the UK are now entitled to tax-free interest savings of up to £1,000 (for basic-rate taxpayers) or £500 (for higher-rate taxpayers). While interest rates are at historic lows, this allowance still helps to boost the value of cash savings.

State Pension

The State Pension is accrued by paying National Insurance while working, or while claiming certain benefits. It is possible to check your current State Pension entitlement through the Government’s online service.

There are also other savings strategies that can be used for clients with more complex affairs. However, by getting the basics right it is possible to be more flexible when generating an income in retirement.

To find out more about tax-efficient investing, download our guide.

Spending your savings

Once the savings have been built up, the key question then becomes how best to take an income that meets lifestyle costs and also maximises tax-efficiency. There are a number of different approaches, all of which can provide an efficient income in retirement.

Clients are able to keep close control over the amount of tax they need to pay. In some cases, they have no further tax to pay at all.

Personal allowances

In 2017/18 the personal Income Tax allowance was increased to £11,500 and the Capital Gains Tax allowance increased to £11,300. There are also tax-free allowances for dividends and savings income.

Basic-rate band

The basic-rate (20%) band on Income Tax has been extended to £45,000 of gross income in 2017/18.

Pension commencement lump sum

Under current rules, up to 25% of a defined contribution pension can be taken as a tax-free lump sum. This can be as a single amount at the start of retirement, or phased over a number of years.

ISA/Lifetime ISA

Savings built up in these accounts can be accessed tax-free (from age 60 in the case of the Lifetime ISA).

Other savings pots

Some people will have built up savings in other investment structures (such as bonds and VCTs). While these structures are more complex, they can also provide a highly tax-efficient income when used correctly.

Keep control of your tax bill

Because of the various tax-efficient means of building savings and generating income, in our experience clients are able to keep close control over the amount of tax they need to pay. In some cases, they have no further tax to pay at all.

Professional financial advice is key to ensuring that savings and investments are efficiently structured and managed. The rules change regularly, both for those who are saving for retirement and those taking an income. This means that our client strategies need regular reviews to ensure they remain effective.

Speak to a financial planner about your retirement

Our financial planners spend their days helping people to save enough money for retirement and take an income in the most tax-efficient way. To find out how they could help you, speak to your usual Tilney contact or book a no-obligation consultation with a Tilney financial planner. Simply complete this short form or get in touch by calling 020 7189 2400 or emailing contact@tilney.co.uk.