Rishi Sunak 'taking money out of our pensions' says economist
This would really help them cope beat the cost of living squeeze, and keep more of their hard-earned money to themselves. However, it does take careful planning.
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To earn more than £50,000 a year free of tax in retirement, you would have to maximise all of your various tax allowances.
While they won't apply to everyone, millions should be able to take advantage of at least one allowance.
These tax allowances are complicated and easy to overlook. Even by taking just one or two that you had not considered, you could slash your tax bill.
Shaun Moore, tax and financial planning expert at wealth managerQuilter, said someone entering into retirement with a mix of savings and investments must understand all of their tax planning options. “You could save a substantial amount of tax money,” he says.
Even if all of these don’t apply to you, mopping up just one or two of the following could make a big difference.
Pensioners could plan for a tax-free retirement (Image: Getty)
Personal allowance. Everybody can earn up to £12,570 a year before basic rate income tax kicks in at 20 percent. The new State Pension pays well below that at £9,627.80, even if you get the maximum amount, which is why nobody pays tax on it.
Starting rate for savings. On top of the personal allowance, savers may also draw up to £5,000 of interest from a deposit account without having to pay tax on it, but it does depend on their position, Moore said.
You are not eligible for this tax break if your total income from other sources, including your state pension, adds up to £17,570 or more.
Personal savings allowance. Under the PSA, those who pay basic rate tax or no tax at all can take £1,000 a year in savings interest free of tax. If used, that lifts the total tax-free income so far to £18,570.
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Dividend allowance. Investors who hold stocks and shares outside of a tax-free Isa can draw dividend income of up to £2,000 a year, before dividend tax kicks in. This would increase the annual tax-free total to £20,570.
Isa savings. All the income you take from the tax-free Isa is entirely free of income tax, so those who have large sums stashed away can draw limitless income without paying any of it to HMRC.
Moore's figure some assume the pensioner has £75,000 of Isa savings, and takes 4 percent as income each year, or £3,000. Now they are earning £23,570 a year, still without having to pay HMRC.
Two other options could generate even larger tax-free sums, although they will not be open to everyone, every year.
Capital gains tax. Britons can take £12,300 of capital gains each year, without having to pay CGT. This is handy for banking gains on shares held outside on Isa, or other assets, including Bitcoin. This lifts the total potential tax-free income to £35,870.
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Planning retirement income can really pay off (Image: Getty)
Pension tax-free lump sum. Pension savers can take 25 percent of their retirement savings free of tax, officially known as the pension commencement lump sum. This is a hugely valuable perk.
Moore’s example assumes somebody with pension of £62,797 takes the full tax-free lump sum of £15,699 in the tax year in question. Now they are earning £51,569 free of tax. Obviously, this is not something they can do every year.
There is one final option for those who want to save even more tax, Moore says. “You could invest in an onshore bond, which allows you to make withdrawals of 5 percent a year free of tax, as this is treated as a return of your capital.”
Pensioners with large sums of money could take a lot more than £50,000. However, don’t just buy investments because they are tax efficient, make sure they are good value and right for you.
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