To reflect the new tax year, this article has been updated
At a glance
- Using the full range of tax breaks available on ISAs, pensions, dividends and capital gains will help boost your pension pot, ready for your retirement.
- Both pension and ISA annual allowances offer real tax efficiencies.
- Managing your current assets tax-efficiently will help you achieve the lifestyle you’re looking forward to, as you get older.
Planning your tax-smart retirement
Some days you can’t imagine ever retiring. Other days, it can’t come soon enough. But there will be a day when you want to put work behind you. And a rewarding, comfortable retirement is something that takes careful financial planning.
These days, retirement planning is about making sure you’ve got plenty of options to live later-life the way you want to, not the way your retirement income means you have to.
That’s why it really pays to use your tax allowances and reliefs each year to boost your pension pot, as you get closer to that retirement party.
Buying yourself some choices
Retirement takes a lot of planning. And the more you can save, the more life choices you’ll have in later life. But nobody is unaffected by the continuing cost of living crisis, so whatever you can save, it makes sense to be as tax efficient as possible.
The first step is to take a good look at your current financial circumstances, and make sure your money and assets are working as tax-efficiently as possible. You should look at the range of different assets you could save into, including your pension or ISAs, or other products. Each one has a varying degree of risk, and tax-efficiency.
ISAs and pensions – your building blocks
You’ll almost certainly be using ISA savings and pensions as one of your main sources of income in retirement. Both of these can help shelter your dividends, interest or other profit from tax, and help make your money go much further.
One of the best ways to boost your pension pot this tax year is to use your full pension annual allowance if you can. This Includes contributions from yourself, your employer, and any third party as well as tax relief paid to the pension. The current annual allowance is £60,000.
However, you’ll only personally get tax relief on contributions up to 100% of your earnings, or £3,600 – whichever is higher – in each tax year.
If you have not fully used your allowance in the previous three tax years you can carry it forward. Any amount paid in excess of your available annual allowance, including any carried forward will be subject to an income tax charge.
Using other allowances to boost your retirement income
The tax breaks don’t stop at pensions and ISAs. If you make a profit from selling assets outside your ISA or pension, the annual Capital Gains Tax (CGT) exemption for 2024/25 is £3,000.
You can’t carry this allowance over so it’s another ‘use-it-or-lose-it’ tax break.
If you’ve already used up your ISA allowance, there’s still the Personal Savings Allowance (PSA), which can help save tax. You can earn up to £1,000 of interest tax free in this tax year if you’re a basic-rate taxpayer. This drops to £500 per year for higher-rate taxpayers, and additional-rate taxpayers can’t claim at all. Depending on your income position, you might also benefit from the 0% starting rate band of £5,000 that can apply to savings income in some circumstances.
Think about any dividends you earn, too. Dividends earned from shares held in ISAs or received by pensions are tax free. You can earn up to £500 before you pay tax if the dividends are outside those wrappers.
The Dividend Tax for basic-rate taxpayers in 2024/25 is 8.75% and for higher-rate taxpayers, it’s 33.75%. For additional-rate payers, the rate is 39.35%.
Taking financial advice for your retirement planning
The turbulence of the past couple of years has made many people rethink their long-term life plans. In particular when they retire, and how they want to spend their retirement. If retirement is on your mind, make a time to talk your plans through with a financial adviser to discuss how you can give your pension pot that final boost before launch.
A financial adviser is there to keep on top of changes and give you a heads-up on the tax allowances. We want you to feel financially confident that your retirement will be every bit as good as you imagine.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
SJP Approved 02/04/2024