3 practical reasons why it’s essential to work with an expert BEFORE you retire

Working with your Kellands financial planner before you retire can help you live the lifestyle you want in later life. Here are three powerful reasons why.

Many clients decide to seek financial advice after they have retired. There are lots of reasons for this, from the tax repercussions to simply ensuring that they will be able to maintain their lifestyle in this new phase of life.

However, if you wait until retirement to seek assistance, you may already have missed some vital financial planning opportunities you could take advantage of.

Here are three of the key benefits of working with your Kellands financial planner before and at retirement, rather than waiting until further down the line.

1. Pension tax charges are increasing

Pensions are one of the most tax-efficient ways to save for retirement, offering generous tax relief. However, there are strict rules governing the amount of tax-efficient pension contributions you can make annually and in your lifetime.

The Annual Allowance, standing at £40,000 as of the 2022/23 tax year, is the maximum that can be contributed to your pension each tax year from all sources combined (employer included) without incurring an additional tax charge.

The Lifetime Allowance is the amount under which you can contribute into your pension over the course of your lifetime while receiving tax relief. In 2022/23 this stands at £1,073,100 and, if you exceed this threshold, you could be subject to a 55% tax charge on any amount above this limit when you draw your pension.

Figures published by FTAdviser have revealed that the number of savers breaching the Annual and Lifetime Allowance limits reached new records in 2019/20.

42,350 individuals reported pension contributions exceeding the Annual Allowance in 2019/20 – a 24% increase. Meanwhile, 8,510 people faced a Lifetime Allowance tax charge – up by 19% on the previous 12 months.

The rules governing these allowances are complex, and so working with your Kellands planner in the run-up to retirement can help you avoid unwanted tax charges both on your contributions, and on any income or lump sums you later draw from your fund.

2. You need to ensure the income you draw is sustainable

In recent years, you now have more flexibility and choice than ever when it comes to drawing a pension income.

However, to misquote Spider-Man’s Uncle Ben, “with great flexibility comes great complexity”.

If you don’t take advice ahead of starting to draw an income, it is possible that you could deplete your pension fund too quickly and run out of money later in life.

Age UK research, reported by Unbiased, expresses concern that pensioners don’t fully understand the risks of drawdown, with thousands of retirees drawing too much from their fund.

The analysis estimated 90,000 retirees were taking an annual income of 8% or more from their funds. Making withdrawals at this level are only sustainable during periods of very strong growth – at a realistic growth rate of 4%, a fund would last only 17 years at this level of withdrawal. That could mean running out of money with years or even decades of life left.

Without the right advice, you could be at risk of drawing too much income from your fund, risking depleting your savings later on. Conversely, you might be drawing too little income, with over-prudence meaning you can’t live the lifestyle you desire in retirement.

Using cashflow modelling software, your Kellands planner can look at all your assets, income needs, and expenditure to determine what a sustainable level of pension withdrawals looks like for you. This can help you to ensure you don’t run out of money or, alternatively, pass away with a significant Inheritance Tax liability.

Additionally, your Kellands planner can take market volatility, high inflation, and other factors into account when it comes to drawing your retirement income and create a bespoke income strategy that works for you.

For example, it may be beneficial to draw an income from other assets in uncertain times, to protect the value of your pension fund for when markets recover.

3. It could reduce your tax liability

You can begin to draw money from your defined contribution pension when you reach the age of 55 (rising to 57 from 2028).

You can usually take up to 25% of your fund as a tax-free lump sum, with the remaining 75% subject to Income Tax at your marginal rate.

HMRC typically calculate your Income Tax by adding any pension withdrawal over the 25% tax-free lump sum to your other taxable income for that particular tax year.

So, if you decide to go it alone, and withdraw a significant sum, you could easily push your income into a higher Income Tax bracket, meaning you might lose 40% or 45% of your pension withdrawal to Income Tax.

Minimising the tax you pay on your retirement income can help your savings to go further, and to provide you with a better quality of life. So, creating a tax-efficient strategy before you retire can help sustain the value of your fund.

For example, a better strategy might be to make smaller, regular withdrawals spread over many years.

Or, your Kellands planner might advise you to draw pension income up to the next Income Tax threshold, and then top up your income from ISAs where withdrawals are free of Income and Capital Gains Tax.

Get in touch

To find out how we can help you to build a sustainable retirement strategy before you decide to stop working, please get in touch.

Email us at hale@kelland.co.uk or call 0161 929 8838.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

< back to News & Views

News & Views

May 23, 2024

How could stealth taxes affect your wealth in 2024?

In the past four years, many aspects of your financial life may have changed.
Read more