Retire Smart – 7 simple ways to reduce your tax

Paying a penny more in tax than you need to is always something to avoid, but in retirement it can be particularly painful.

Your resources and the income they can generate are finite, and letting the taxman take too large a share can affect every aspect of your life. 

Inflation means that many more of us are finding our retirement incomes are large enough to attract the taxman’s attention, and the problem may get worse.

Analysis of Office for Budget Responsibility (OBR) forecasts reveal that under the triple lock promise the new state pension is expected to rise from just over £11,500 next year to around £12,800 in 2028 – meaning it crosses the personal allowance tax threshold, which is set to remain at £12,570 until 2028.

That means it doesn’t take much of a private pension to get a tax bill in retirement. Almost all of us will be paying tax on our pensions.

At Continuum we’re looking at ways to reduce the share of your retirement wealth the taxman can take. 

1. Watch your tax bracket

All pension income, including the state pension, is taxable. It’s therefore important to consider all forms of income you receive – including state pension payments, rental and dividend income – in case it pushes you into a higher tax bracket. 

Remember, pension income is taxable under the current income tax rules although annual income up to £12,570 is tax-free for tax year 2023/2024.

Basic rate                    £12,571 to £50,270 you pay tax at 20%

Higher rate                  £50,271 to £125,140  you pay tax at 40%

Additional rate            over £125,140 you pay tax at 45%

If you use drawdown and only take out as much money as you need to fund the lifestyle you want, you may be able to keep within – or even under – the tax thresholds.

2. Remember your personal tax allowances

If your income is less than the personal tax allowance (£12,570) you won’t pay any income tax.  £12,570 is not a great deal of money these days, especially as the full state pension already takes you to £10,600.20 a year. 

If you have a spouse or civil partner you can share the tax burden. If they have no income, or are in a lower bracket, you may be able to cut your household’s overall income tax bill.

3. Don’t rush into withdrawing your money

Pensions pots will continue to grow when you’ve reached retirement. So if you don’t need to dip into yours for a few months or years, you could be better off.

Delaying taking your pension income will help it to last longer and allow you to continue making higher tax-free contributions if you are still working.

Not only do you enjoy the potential for continued growth, you avoid a tax penalty. 

Taking income through drawdown while you’re still working and saving into the pension will limit the amount you can continue to save tax efficiently. Currently, most people can pay in up to £60,000 into pensions each tax year and enjoy tax relief. But once you withdraw you trigger the Money Purchase Annual Allowance or MPAA. Once this is imposed, you are limited to contributions of just £10,000 a year.

4. Use your ISA savings first

ISA investment can be used to provide a retirement income. It won’t affect your tax-free contributions if you’re continuing to save into your pension.

If you can draw a regular income from ISA savings, it can top up your income when moving from full-time work to reduced hours before full retirement. 

ISA withdrawals are tax-free, but there may be penalties with fixed-term ISAs. With Lifetime Isas, you’ll need to be over 60 to enjoy penalty-free withdrawals. If you are taking early retirement under this this, you’ll lose 25% of what you withdraw.  

5. Take your pension tax-free cash sum 

From the age of 55 you can usually take up to 25% of your pension fund tax-free. This is limited to a maximum of 25% of your available Lifetime allowance which is currently £1,073,100. 

6. Cash in small pension pots 

You may have several small pension pots, often from pension schemes of employers you only worked with for a short while. You may be able to cash in up to three small pension pots – that is, those containing savings of less than £10,000.

7. Get some expert help

The tax rules and regulations are complex, and it may be easy to fall into a trap that leaves you liable to pay tax that you could have avoided.

Fortunately, it is also easy to get the expert help you need to steer around those tax traps.

Simply call us at Continuum.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.

Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.

By incurring a Lifetime ISA Government withdrawal charge you may get back less than you paid in.

By saving in a Lifetime ISA instead of qualifying pension scheme you could lose contributions by your employer, if any.

Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits. 

A pension is a long-term investment, the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken.

Accessing pension benefits early is not suitable for everyone. You should seek advice to understand your options at retirement.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.

The Financial Conduct Authority does not regulate taxation advice.

Why it no longer pays to save for your own retirement (

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