Eight ways to make your pension last longer and pay less tax

I have a combination of savings, including Isas and pensions. I want to make sure they last as long as possible by paying as little tax as I can. Is there a particular order in which I should draw from them in retirement?

– Anon, via email

Kate says:

The order in which you take your pension and other savings is key to reducing your tax bill in retirement: deciding which savings to use first can be almost as important as saving itself. Here are eight ways to protect your retirement savings by paying less tax.

1DON’T RUSH INTO TAKING MONEY OUT – WAIT UNTIL YOU ACTUALLY NEED IT Pensions and Isas will continue to grow tax- free. Don’t take out any money, particularly from a pension, just to put it into a bank account or cash Isa.

2

USE YOUR ISA SAVINGS FIRST FOR RETIREMENT INCOME

Income from your Isa does not attract tax and can help you top up your income when you move from fulltime work to reduced hours and then to full retirement. Also, Isas form part of your estate and attracts inheritance tax – although spouses and civil partners can effectively inherit a partner’s Isa.

3

CONSIDER TAKING YOUR TAX-FREE CASH SUM This is normally up to 25pc of your pension fund. You can do this from age 55 and as the amount is tax-free it won’t affect the amount of tax you pay. You have to buy an annuity or go into “drawdown” – the type of plan that gives you flexible access to the rest of your pension – at the same time as taking your tax-free cash sum.

4 USE YOUR PERSONAL TAX ALLOWANCE

If your income is less than your personal tax allowance you won’t pay any income tax. If you are no longer saving into a pension, think about taking some income, up to your personal allowance, from the pension. But if you are still saving into a pension, or may do so again in future, any withdrawals beyond the tax-free lump sum trigger a reduction in the annual contribution allowance to £4,000.

5

TAKE SMALL PENSION POTS WORTH LESS THAN £10,000

You can cash in up to three small personal pensions without triggering that cut in the annual allowance to £4,000. Small pension pots don’t count towards the lifetime allowance of £1,073,100.

6

ACCESS YOUR PENSION INCOME LAST

You should generally access your pension last after accessing your Isa and pension tax-free cash, because any pension income will be taxable.

7

NEVER PUSH YOURSELF INTO A HIGHER TAX BRACKET

Pension income, including the state pension, is taxable. Be careful not to take out so much pension income in any tax year that it pushes you into a higher tax bracket. Only take out as much money as you need.

8

PENSION SAVINGS CAN BE PASSED ON TAX-FREE TO YOUR FAMILY Pensions, unlike Isas, generally don’t form part of your estate, so inheritance tax isn’t normally payable. If you die before your 75th birthday your unused pension funds can be paid tax-free to your heirs either as a lump sum or as income if paid within two years.

If you die after age 75, any unused money in your pension is taxed at the income tax rate of the person who inherits it.