Of the deaths that happened on Mount Everest between 1921 and 2006, most fatalities happened on the way down – only 15% occurred during the ascent or after leaving final camp.
Reaching retirement is a bit like reaching a summit, and, while not as deadly as Everest, the decumulation phase of your financial life can present dangers.
Most people seek financial help when they are accumulating assets: earning money, investing surplus income, and making moves to remain tax-efficient.
In many ways, when you retire and start spending your life's savings, financial advice is even more crucial to ensure that you plan your income to last a lifetime.
Make sure your savings last a lifetime
To ensure a sustainable income, you need to know how much you’ll need to live on. It’s worth remembering that each life stage will require a different amount of money.
During the early stages of retirement, you may spend more money as you’re likely to be fit and active. Ready to make the most of your freedom from the routine of work, you may find that you spend more on travel, hobbies, dining out with friends, or doing home improvements.
After several years of activity, you’ll likely find that you begin to slow down. While you’re probably going to remain busy with hobbies, you may be less inclined to travel long distances or remain away from home for long periods at a time.
As you age and enter later life, your mobility may be more limited, and you may require care, which can be costly.
Structure a sustainable and tax-efficient stream
While tax-efficient accumulation helps enhance your wealth for the retirement you desire, tax-efficient decumulation helps preserve your capital and increases the chance of having money to leave to your loved ones.
The most efficient retirement income strategy should be planned well in advance.
Planning should ensure that you take full advantage of tax allowances and exemptions. And, if you are married or in a civil partnership, make sure you plan together so that you can allocate your income and assets to maximise tax efficiency.
When looking at your combined wealth, consider the order you should begin decumulating.
Ideally you should use cash first, followed by taxable investments, ISAs, and finally pensions.
Spend excess cash first
It’s always a good idea to hold an emergency fund in an easy access savings account. Ideally, you should have enough cash to cover around three- to six-months of expenditure.
If you have more cash available, consider using this ahead of withdrawing funds from your pensions or investments.
When markets are volatile, selling investments at the wrong time could leave you with less to spend than you had hoped. Using excess cash allows you to leave funds invested, which may provide enough time for funds to recover any lost value.
Stop and think before drawing on your pension
According to research from HSBC, pension savers are losing almost £2 billion a year during their transition into and in retirement. In particular, workplace pension scheme members are losing significant sums because of the way they are accessing their money.
This is just one eye-opening reason to ensure you take advice before you begin drawing money from your pension.
While you may consider your pension as the foundation of your retirement plan, if you have other income that uses your tax allowances, it may be wiser to spend this money and delay drawing on your pension.
Read more: Stop and think before you increase pension withdrawals
Because pension funds benefit from tax-free growth, interest, and dividends, leaving your pension invested is especially helpful when it comes to maintaining capital value.
Plus, pension funds are usually not subject to Inheritance Tax (IHT). So, leaving your pension fund intact while you draw on other investments could be an effective way to reduce your IHT liability.
Enjoy flexibility from ISA savings and general investment accounts
Considerably more flexible than pensions, ISAs provide growth, interest, and dividends all free of tax. And you can withdraw money tax-free without restriction.
Because ISAs can be passed between spouses on death this can help preserve the tax-efficient treatment when it comes to IHT, too.
Useful in reducing tax in retirement, you can use your ISA to:
- Fund large, one-off purchases
- Top up your income – especially useful if your pension exceeds your tax-free allowance
- Make your portfolio more efficient overtime, by gradually moving taxable funds into an ISA wrapper.
Meanwhile, investment accounts provide a basic and flexible wrapper, in which you can hold funds, shares, and investment trusts.
Interest and dividends are taxable at your marginal rate and selling assets can incur Capital Gains Tax (CGT) if your profit exceeds your annual exemption (£12,300for 2021/2022, reducing to £6,000 in April 2023).
Plan ahead to reduce your tax liability
Following the autumn statement, and with upcoming reductions to CGT and Dividend Tax in the UK in April 2023, it’s wise to create a strategy to reduce your tax bill.
To achieve this, you could:
- Phase your taxable investment accounts into ISAs
- Use your annual CGT exemption to avoid large gains rolling up
- Structure your investments depending on the type of income they generate.
Remember, planning as a couple can be hugely effective. This is because you can divide investments to use both Personal Allowances and CGT exemptions more efficiently; transfers between spouses are ignored for CGT purposes and there is no minimum holding period.
Get in touch
Whether you’ve reached the summit and are ready to retire now or you've still some distance to go, it’s never too soon to put a plan in place. If you’d like help to create a financial plan to structure a tax-efficient income in retirement, please get in touch.
Email enquiries@alexanderpeter.com or call us on +44 1689 493455.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not are liable indicator of future performance.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
