Adjusting to retirement is a big change. Not having a job to go to every day after doing so for many years requires a complete lifestyle change, which you may or may not be prepared for, both mentally and emotionally.
The financial implications can be also seem daunting however with good planning, your sunset years can be comfortable and enjoyable.
By following the right preparation and advice you can make saving for your retirement easier. Here’s five areas you should consider to help you make the right plans in regard to saving for life after your working years.
1) Understand the new pension rules
If you have invested in a pension scheme, you have the freedom to decide how to take your pension. However, there are tax implications which many people do not understand. Typically, up to 25% of personal pension can be taken out without paying any taxes for those aged 55 years and above. The rest of it is taxable. Because pension income is put together with other income in the tax year the income is received and the total is taxed accordingly. This means that taking out a large sum could come with an equally large tax bill.
If your income is above a given bracket this could also cause personal allowance to be lost. To counter this you may benefit from spreading withdrawals over more than one tax year to benefit from tax allowances.
2) Pass on your tax benefits efficiently
The law enables you to pass on your pension upon your passing. This used to be subject to taxes of up to 55% if you had started withdrawing and the balance had been paid out as a lump sum. The rules changed and made it possible to pass on more of your pension upon your passing and in some cases, tax free.
For those who pass away before the age of 75, no income tax is paid when beneficiaries make withdrawals. After this age, withdrawals are taxed as income. Typically, pensions are exempt from inheritance tax. However, the rules vary depending on personal circumstances.
3) Two is better than one when it comes to tax allowances
Spouses as well as registered civil partners can transfer assets to each other without paying taxes. If one of you pays more taxes, it makes financial sense to spread or even them as a couple by transferring investments to save taxes on the one who pays less taxes. Also, a new Marriage Allowance has been introduced where it is possible to transfer 10% of personal allowance between partners to bring down the joint tax bill.
4) Taking all the shelter you can will also make a difference
There are a number of tax shelters available. The best known is the Individual Savings Account (ISA) that does not attract Capital Gains Tax or any other tax on income. Income from ISAs does not need to be declared making them ideal for generating additional, tax-free income for retirement. It is important to understand that an ISA is not in itself an investment but a way to shelter your savings and investments from tax.
You can withdraw from you ISA when you need to and they have no upper age limit. Individuals can put a maximum of £15,240 in an ISA for the current tax year (2015/16) and allowances can now be divided between different ISAs such as Stock and Shares ISAs and Cash ISAs as per an investor’s choosing.
5) Maximize on tax allowances
There are other changes that have been made that will be implemented this year where there will be added tax-free allowances for cash interest and income from shares or dividends. Some retirees may be paying thousands of pounds in taxes that they perhaps shouldn’t be. The changes have been confusing for some and unfortunately this has led to some not being able to take advantage of all the tax-free allowances they can get.
Speak to a Financial Adviser About Your Retirement Today
Sitting down with a professional financial adviser could have a major impact on your tax bill and improve the quality of your life in retirement. A pension adviser will be able to look at every aspect of your pension and help you understand how to make the most of these changes.
Maxim Wealth Management offers independent financial advice on pensions, retirement, equity release and other aspects of personal finance management. Contact us today to discuss your pension and let us help create the best possible retirement plan.