Take advantage of tax relief in retirement plans

LAST year, this column raised the issue of how pension developments were changing the landscape of retirement planning. The overlap of Pensions, Savings and Investment creates the ‘big picture’ to be considered when making decisions on retirement, bringing together three vital questions. When can I retire? How much risk should I take with my money to get there? And ultimately, how much will I get when I do retire?

“There are certain relevant advantages to earners who are presently higher rate taxpayers and who will be basic rate taxpayers in retirement,” says Dave King of A.S.K. Independent Consultants. “One is to make use of the 40 per cent tax relief on the way in to a retirement plan and effectively pay only 15 per cent when taking the money out. This benefit is amplified by the new rules effective from April 2015.

“If paying a contribution of £10,000 into a plan costs only £6,000 after 40 per cent tax relief, then in retirement as a basic rate taxpayer, the same £10,000 can be accessed in one swoop – realising 25 per cent as tax free cash of £2,500 and paying 20 per cent tax on the remaining £7,500 giving a net amount of £8,500.

“This is a great increase of 25 per cent on your contribution, irrespective of any risk associated with the underlying investment. To emphasise that point – pay in a net amount of £6,000 and get back a net amount of £8,500.

“We are now seeing how the use of pension in its traditional sense as an annuity has begun to disappear in the new regime. The universal use of ISAs, Bonds, Unit Trusts and Cash are grouped together with retirement pots to provide the overall funds from which tax efficient income or lump sums can now be taken.

“In practical terms, the issue of retirement income and investment is now an area of constant surveillance, no matter what age and stage clients are at, since the accessing of money is easier and planning needs to be done at least annually. This is to ensure that long term income needs are met, whilst allowing for shorter term withdrawals.

“Modern plans and fund alignments also mean that the actual investments can now all be part of a similar fund strategy, rather than in the past with its bewildering and inefficient array of products, funds and managers.”

Contact Dave King of A.S.K. Independent Consultants, 0141 571 0160.