After almost two decades at the top, it looks like Andy Murray will soon be calling time on what has been an absolutely glorious tennis career.
So, how do you smash retirement and create a deuce-y pot of cash to enjoy the lifestyle you want when you call time on yours?
Planning your retirement income can seem daunting, especially if you’ve managed to save or invest in a range of different assets over the decades.
For most of us though, the first thing to consider – your baseline – will be your pension.
The good news is that generally the first 25% that you draw from a Defined Contribution pension is tax-free.
But after that you’ll be taxed at your marginal rate of income tax. So, what other options do you have to fund the retirement you’ve been planning?
If you have money saved in ISAs, you won’t pay income tax or capital gains tax on any amount you withdraw. So, you could use those savings and drain that pot first. If you’ll be eligible for a State Pension too, you might not even need to touch your workplace or private pensions.
Those tax advantages are a very good reason to spread your assets. You could diversify into ISAs, cash holdings or even property, while you’re still working. Lots of people rely heavily on a pension income and get hit with a tax bill just because they didn’t know they had other options or income streams.
When you do start drawing your pension, your tax situation alters significantly. While you’ll find plenty of opportunity to be tax-efficient, there are also a few pitfalls that you need to know.
Will I pay tax on my pensions?
The short answer is yes, you will pay tax on your pensions – State, Defined Contribution or Defined Benefit – if they add up to more than your Personal allowance of £12,570 for the 2024/25 tax year.
If you have a Defined Benefit pension (DB), income tax will be deducted at source by your pension provider. If you have a Defined Contribution pension, you can take money out from age 55 (this will rise to 57 in 2028).
The first 25% is generally tax free. After that, withdrawals will be taxed at your marginal rate. Your tax rate will increase if your total income goes over the income tax thresholds of £50,270 (higher rate) or £125,140 (additional rate.). You will also lose your personal allowance on a tapered basis if your income exceeds £100,000, reducing it to zero at £125,140.
If you withdraw a larger sum (beyond your 25% tax free cash) from your pension one year, you could take a big tax hit.
Will I pay tax on any other retirement income?
By the time we retire, lots of us have a mix of savings, investments, and assets. You could well have pension, Cash ISAs, Stocks and Shares ISAs, property, even part-time earnings. It’s up to you to choose how and when you draw money from these – you’re in control and can work this to your advantage. But some of those income sources are treated and taxed differently.
If you have income from more than one source, you’ll need to declare this clearly on your tax return – so you pay the right amount of tax against each income.
Your Personal Allowance will normally be applied to your pension or job if you’re still working. But your savings will be counted against your Savings Allowance. That’s £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and no allowance at all for additional rate taxpayers.
There are some no-catch tax breaks when you stop working though. You won’t have to pay National Insurance contributions after hitting State Pension age.
A financial adviser can help you make a tax-efficient plan for retirement income. They’re across any changes to the regulations, and they’ll help you plan. Then, you can get on with enjoying the retirement you’ve imagined – and worked for.
If you need some help with creating a tax-efficient plan for your retirement? We can help.
Click here to arrange a no-obligation chat with Gary Walker Wealth Management.
Gary Walker is the founder of Gary Walker Wealth Management in Aberdeen, a principal partner practice of St James’s Place.
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