At a glance
- Understanding and using your full range of tax breaks 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 now will help you achieve the lifestyle you want in retirement.
Planning a tax-smart retirement
Some days you can’t imagine ever retiring. Other days, you wish you were hanging up your boots tomorrow. But when the day comes, you want to start retirement with a sense of anticipation of all that lies ahead, safe in the knowledge that you’ve put enough money by for a comfortable retirement.
And 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 income means you have to. But the more you’ve saved, the more choices – and peace of mind – you’ll have in later life.
Buying yourself some choices
When you do come to retire, you’ll almost certainly be using your pension or ISA savings as one of your main sources of income. Both of these can help shelter your dividends, interest or other profit from both Income and Capital Gains Tax, which can make your money go much further.
The first step is to audit what you’ve got. Make sure each of your assets is working as tax-efficiently as possible, and what return you’re getting, in case you want to move some cash into an ISA or your pension ahead of tax year-end. Each one has a varying degree of risk, and tax-efficiency. 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.
ISAs and pensions – know your allowances
One of the best ways to boost your pension pot this tax year is to use your full pension annual allowance of £60,000 if you can. This figure includes contributions from yourself, your employer, and any third party as well as tax relief paid to the pension – and it resets every new tax year. Just to be clear, if you’re paying into more than one pension, you’ll still only have an annual allowance of £60,000 in total pension contributions – not £60,000 per pension.
However, you’ll only personally get tax relief on contributions up to 100% of your earnings, or £3,600 – whichever is lower – in each tax year. If you’re a higher earner – above £200,000 – your annual allowance may ‘taper off’.
If you haven’t maxed-out 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 Income tax.
What other allowances could I use to boost my retirement income?
The tax breaks don’t stop at pensions and ISAs – you have some other annual allowances too. 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. Do be aware that you may need to pay CGT on any gain above that amount. The Chancellor made significant changes to the rates of CGT in the Autumn Budget.
You can’t carry the CGT allowance over so it’s a ‘use-it-or-lose-it’ tax break. But you can offset losses you made selling other assets to bring any CGT gain down (you do need to declare both gains and losses on your self-assessment tax return).
If you’ve already used up your ISA allowance, there’s still the Personal Savings Allowance (PSA), which can save you tax too. You can earn up to £1,000 of interest before you start being taxed 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.
Finally, think about any dividends you earn. 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 sit outside those ‘wrappers’.
The Dividend Tax for basic-rate taxpayers in 2024/25 is 8.75% and 33.75% for higher-rate taxpayers. For additional-rate payers, the rate is 39.35%.
Taking financial advice for your retirement planning
Our 2024 consumer survey, The Real Life Advice Report carried out by Opinium on our behalf, revealed that 1 in 5 of us seek advice on retirement planning alone. Not surprisingly that rises to 1 in 3 of those over the age of 44.1 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 lift-off.
A financial adviser< is there to keep on top of tax regulation changes and give you a heads-up on all the tax allowances you may be entitled to. We want you to feel 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.
Sources
1The Real Life Advice Report was commissioned by St. James’s Place. Opinium surveyed 12,000 UK adults in two polls between May and August 2024. Quotas and post-weighting were applied to the sample to make the dataset representative of the UK adult population. Quantative data referenced is sourced from the first poll which had a total sample of 7,995 respondents. Survey included those aged 18-34 (1,940), aged 35-54 (2,654) & aged 55 and over (3,401).
SJP Approved 15/01/2025