When you are considering what income you will have when you retire, don’t just think about your pension because there are many other investments that can provide an income and often on a more tax efficient basis.
Whilst it is usually possible to take up to 25% of your pension pot as a tax free lump sum, the balance is taxable. Whereas you can draw from an ISA tax free and there are other investment vehicles that allow you to take money out (limits apply) without creating tax liabilities.
Here is an example:
John is 76, a retired doctor, he is widowed and has two adult children. He owns his own home valued at £300,000, a Stockbroker portfolio of £600,000, an Investment Bond of £376,388 and a Self Invested Personal Pension (SIPP) valued at £225,000. His income is as follows:
This means that he is a higher rate tax payer and currently paying income tax of £7,154.
It makes sense to stop the taxable income being received from the Self Invested Personal Pension and rearrange the shares so that the yield is within the dividend allowance. Switching the ISA investments to higher yielding funds will provide a tax free income. John also has an Investment Bond from which he can draw money and this will not be counted as taxable income.
Following the reorganisation income was obtained as follows:
This means that he is now a basic rate tax payer and his income tax liability has reduced to £1,984.
The other advantage is that John’s SIPP can continue to grow and will not be included in his estate for IHT purposes.
So this strategy increases his income, reduces his tax and could increase the amount of money his children will receive on his eventual death.