Insights

Simple tax steps to help boost your pension pot

By
Adrian Howard
on
May 31, 2022

There comes a time in life when retirement looms increasingly large over the future. Whether you’re looking forward to it or never want it to happen, it’s something that needs to be planned for. These days, retirement is increasingly about giving yourself plenty of options, and that’s where it really pays to use your tax allowances and reliefs well.

  • As you move towards retirement, there will likely be options to consider and choices to make – and tax allowances are a big part of this.
  • Whatever your goal, planning ahead means assessing the assets you have in place and using them as tax efficiently as possible.
  • From ISAs and pensions to dividends and capital gains, the various allowances available can help you reach your retirement objectives and achieve peace of mind.

There comes a time in life when retirement looms increasingly large over the future. Whether you’re looking forward to it or never want it to happen, it’s something that needs to be planned for. These days, retirement is increasingly about giving yourself plenty of options, and that’s where it really pays to use your tax allowances and reliefs well.

“Saving enough in a tax-efficient way helps to buy you plenty of choices, whereas previous generations didn’t have to think about this,” says Tony Clark, Senior Propositions Manager at St. James's Place.

Paving the way

Those options and choices can vary. When do you want to retire? What kind of retirement do you want? Can/should you keep working in retirement? Where will you get your retirement income from?

Whatever your goal, planning ahead involves assessing the assets you have in place and using them as tax efficiently as possible.

ISAs and pensions will likely be the foundation of your retirement plans, whether you want to retire early, extend your working life or embark on new ventures once retired. With both providing different forms of shelter against tax on dividends, interest and profits, using them well can help your money go much further.

As you get closer to retirement, you may want to pay closer attention to using your full pension annual allowance, which remains frozen at 100% of your salary or £40,000 – whichever is lower. If you don’t use it all, you can still carry forward any unused allowance from the previous three years.

“Look at what assets you have in place and invest in a tax-efficient manner across a broader range of assets,” says Clark. “You want to look at pensions and ISAs, of course, as well as other products with varying degrees of risk and tax efficiencies.”

The full tax toolkit

For example, if you make profits from selling assets outside your ISA or pension, the annual Capital Gains Tax (CGT) exemption allows you to make tax-free gains of up to £12,300 in the current tax year. As with ISAs, you can’t carry unused allowances over to the following tax year, so it’s important to use the full allowance each year if you can.

There’s also the Personal Savings Allowance, which can help if you’ve used up your ISA allowance. You can earn interest of up to £1,000 this tax year if you pay Income Tax at the basic rate (reducing to £500 for higher-rate taxpayers, with no allowance for additional-rate taxpayers).

Think about any dividends you earn, too, as the tax rules here are changing. You don’t have to pay tax on dividend income that falls within your personal allowance, while dividends earned from investments held in ISAs and pensions are tax free. You can also earn up to £2,000 in dividends tax free outside those wrappers.

However, the Dividend Tax charged above that allowance will rise in April 2022. For basic-rate taxpayers, it will go up from 7.5% to 8.75%, and for higher-rate taxpayers, it will increase from 32.5% to 33.75%. For additional-rate payers, it will jump from 38.1% to 39.35%.

Seizing the opportunities

Keeping on top of changes such as those to Dividend Tax is just one example of how an adviser can make a real difference as you approach retirement.

The turbulence of the past couple of years has prompted many people to reassess their retirement plans, and now may be the time to make changes, according to Clark.

“There are lots of ways to achieve what you want, and an adviser will help you understand the most tax-efficient way of getting there, such as the actions you need to take, the allowances to make the most of and the best order in which to use them,” he says.

Don’t let your tax allowances go to waste. Get in touch today.

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.