INCOME DRAWDOWN

The flexibility to withdraw as much as you need and leave the rest of your pension savings invested is a helpful way to try and make sure your money keeps growing – and lasts as long as you need it to.

Much of the success of this will depend on how your investments perform. The skill of a professional adviser can prove particularly valuable, as they can work on preserving the value of your retirement pot.

It is particularly important to only take what you need from your pot to ensure your savings will last for the rest of your retirement.

Last year was difficult with global stock markets and the bond market suffering falls. This year could prove challenging again, so it’s crucial to have the right investments – and to set the right level of income. It can be adjusted so if you want to review and reduce – or increase – the amount you receive, it can be done.

STATE PENSION

The full amount of the new State Pension is currently set at £203.85 a week. This normally goes up every year. The amount you receive depends on how many years of National Insurance contributions you have made or been credited with.

Anyone who reached state pension age before April 2016 (and receiving the full basic state pension) will get an extra £14 a week3.

 INFLATION-LINKED ANNUITIES

When you buy an annuity, you use a lump sum from your pension pot to buy an income for the rest of your life.

After years of being unpopular because rates were so low, annuities are making a comeback. That won’t help anyone who already has an annuity but if you’re in the market for one, there’s a good opportunity to explore what perhaps some of your money could buy.

Those with an eye on inflation can opt for an index-linked annuity, where the income rises each year in line with inflation which helps with rising costs of living. The downside is that the payouts start at a lower rate. You might prefer to opt for a standard rate and receive more at the outset. It’s important to crunch the numbers first and see where the break even point lies.

Once you buy an annuity there’s no going back – you cannot get your lump sum back, so it’s important to get it right first time. Taking financial advice is crucial. An adviser can also shop around on your behalf to get the best rate available for you.

CASH SAVINGS

Savings held in cash will struggle to keep up with inflation. Even now that interest rates are looking far more attractive, the most generous accounts are still not paying enough to keep up with inflation.

One option might be to reduce income from drawdown and use cash reserves for a time to allow markets to recover.

An adviser will be an invaluable source of advice for how to steer through times of high inflation to ensure your pension lasts as long as you need it to.

This Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person.

Tavistock Partners Limited is authorised and regulated by the Financial Conduct Authority. Tavistock Partners (UK) Limited is authorised and regulated by the Financial Conduct Authority. Tavistock Private Client Limited is authorised and regulated by the Financial Conduct Authority. The Tavistock Partnership Limited is authorised and regulated by the Financial Conduct Authority. Abacus Associates Financial Services is a trading style of Tavistock Partners (UK) Limited which is authorised and regulated by the Financial Conduct Authority. Duchy Independent Financial Advisers is a trading style of Tavistock Partners Limited which is authorised and regulated by the Financial Conduct Authority, All subsidiaries are wholly owned by Tavistock Investments Plc.

WHere are five ways to ensure you can keep your wealth in the family:

1. Write a Will

A Will is an important way to protect your family and other loved ones. It ensures your assets and possessions are passed on to the people you choose. It is one of the most important documents to have when it comes to preserving the long-term financial security of your family.

Without one a rigid set of Intestacy rules will dictate what happens to your assets and your property. Writing a Will can save on IHT as well as spell out your wishes.

If you already have a Will, you still may need to review it. If your circumstances have changed, which they often do, it is important that you make a Will to ensure that your money and possessions are still distributed according to your wishes. For example, if you have divorced or suffered a bereavement, you may wish to review your beneficiaries.

When you marry, any existing Will that you had will automatically be revoked and is no longer valid. If you do not make a new one, then when you die the law of intestacy decides how your assets are divided.

2. Consider trusts

If you want to set aside money for your family further into the future, you could set up a trust to minimise IHT.

A bare trust is commonly used. This type of trust gives the named beneficiary or beneficiaries the immediate right to the trust fund, and any income received from it. Bare trusts are a useful legal vehicle for passing assets on to minors, for example, with trustees managing the trust until the beneficiary or beneficiaries are aged 18. Your initial gift into a bare trust is a potentially exempt transfer (unless covered by an exemption) and providing you survive seven years there is no IHT due.

Alternatively, discretionary trusts give greater power to trustees to decide how and when to give funds to beneficiaries. This can be useful for estate planning and save assets from being depleted unnecessarily.

Trusts are a complex area which typically need to be set up correctly by a professional who can help with making sure you have enough capital and income for your own lifetime, whilst making provision for children and grandchildren so that more assets can be passed on in the most tax efficient manner.

3. Look as property ownership

If you are joint tenants with your spouse, your share of the house will automatically pass to them, regardless of what your Will states. The common way to avoid this is to change how you own your property and become what’s known as ‘tenants in common’ so that your share of the property is recognised as separate to that of your spouse. You could then gift your share to your children or into trust.

4. Importance of gifting

One of the most straightforward ways to support family members – and reduce the value of your estate to minimise IHT – is to give away assets while you are still alive.

For example, using the various exemptions such as the ‘annual exemption’ allows individuals to give financial gifts, tax-free, to the value of £3,000.

You can also give £250 to any number of people every year, though you can’t combine it with your annual £3,000 gift.

There’s more to be given away tax efficiently using the “Potentially Exempt Transfer” which allows the giving away of all types of assets, including cash, property and shares tax-free, as long as you live for seven years after making the gift.

You can also make regular gifts from your income. These gifts are immediately IHT free (there’s no need to wait for seven years) and there’s no cap on how much you can give away, provided you can demonstrate your standard of living is not affected.

5. Pass on your pension

People are increasingly passing on their pension pot as part of their legacy, and using other assets for a retirement income.

Pension savings are not subject to inheritance tax when you die. If you die before the age of 75, the person(s) who inherit your pension pot can draw on the money as they wish, without paying any income tax either.

If you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Trust and Wills are not regulated by the Financial Conduct Authority.

This Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person.

Tavistock Partners Limited is authorised and regulated by the Financial Conduct Authority. Tavistock Partners (UK) Limited is authorised and regulated by the Financial Conduct Authority. Tavistock Private Client Limited is authorised and regulated by the Financial Conduct Authority. The Tavistock Partnership Limited is authorised and regulated by the Financial Conduct Authority. Abacus Associates Financial Services is a trading style of Tavistock Partners (UK) Limited which is authorised and regulated by the Financial Conduct Authority. Duchy Independent Financial Advisers is a trading style of Tavistock Partners Limited which is authorised and regulated by the Financial Conduct Authority, All subsidiaries are wholly owned by Tavistock Investments Plc.

PENSIONS

Paying into a pension is extremely tax efficient as you get tax relief on contributions. Taxpayers get 20% paid by HM Revenue & Customs to their pension and if you pay income tax at a higher or additional rate you can claim relief on your self-assessment tax return at either 40% or 45%.

Since money invested in your pension grows free of capital gains tax and income tax, your savings can grow much faster.

There’s an annual limit of £40,000 for all workers – though you can’t pay in more than you earn. Pensions offer the unique benefit of being able to backdate unused allowances up to three years.

If you’re self-employed, paying into a pension will also save on your self-assessment tax bill as a higher rate (or top rate) taxpayer.

SALARY SACRIFICE

Using a salary sacrifice arrangement is a very efficient way to contribute to your pension. You enter into an agreement with your employer where you exchange (or ‘sacrifice’) part of your salary and in return your employer makes a direct contribution into your pension.

The main benefit of salary sacrifice is that both you and your employer save on National Insurance.

ISA

You can shelter up to £20,000 in an ISA where it’s exempt from income tax and capital gains tax. This allowance is renewed every April. But if you don’t use it, you lose it. By taking full advantage you could potentially grow a savings pot worth hundreds of thousands of pounds over time.

LIFETIME ISA

Designed for savers building a deposit for a first home or for retirement, you can pay in up to £4,000 a year (which forms part of the £20,000 yearly allowance) and bank up to £1,000 in government top-ups. The money can be used to buy a first property worth up to £450,000.

Alternatively you can withdraw it from the age of 60 to boost your income in retirement. If you take the money for any other reason there’s a 25% exit penalty. You must be between 18 and 39 to open a Lifetime ISA which can be opened as a cash or stocks and shares account.

JUNIOR ISAS AND SIPPS

Consider a Junior ISA for tax-free investing for children and grandchildren, where you can shelter £9,000 each tax year until the child reaches 18. As with adult ISAs, there’s an investment and a cash version.

You could even start a pension for under-18s. Tax rules allow up to £3,600 to be saved in a Junior SIPP for under 18s each tax year. A Junior SIPP allowance comes in addition to a Junior ISA allowance.

CAPITAL GAINS TAX

You can receive up to £12,300 profit from the sale of an asset without paying any tax. This might include selling shares, a second property or perhaps valuable art or jewellery. If you do not use your capital gains tax (CGT) annual exemption, it is lost and cannot be carried forward. Where you own an asset with another person, such as in a marriage or civil partnership, you can both apply your allowances. This means where a gain is made on the sale of a second home for example, you can double the amount you make to £24,600 before CGT becomes applicable.

It’s worth factoring in that the allowance will be reduced from £12,300 to £6,000 from April 2023 and £3,000 from April 20241.

INHERITANCE TAX

The Inheritance Tax (IHT) nil-rate band has been frozen at £325,000 since 2009/10, which means that it has been increasing in real terms over time. It will be frozen at this level until 20282.

For those with children or direct descendants who can inherit the family home, this could increase by £175,000 per person following the introduction of the Residence Nil Rate Band (RNRB) in 2017.

That means that for a married couple or civil partners, the first £1 million of their estate could potentially be free of IHT.

However, for estates over £2 million, this additional RNRB is reduced by £1 for every £2. Should the total estate exceed £2.7 million, the additional RNRB is lost entirely.

To reduce the value of your estate – and the eventual IHT bill – use personal gift allowances. This includes the annual exemption which allows you to give away up to £3,000 each tax year and it’s exempt from inheritance tax. You can also give £250 to any number of people every year, but you cannot combine it with your annual £3,000 exemption. You can give away all types of assets, as well as cash, including property and shares tax-free, as long as you live for seven years after making the gift.

PENSION DRAWDOWN

You can draw up to 25% of your pension tax-free once you reach age 55 (57 from April 2028).

PERSONAL RELIEFS

Married couples and those in a civil partnerships should consider utilising each person’s personal reliefs, as well as their starting and basic rate tax bands.

It may be beneficial to consider gifts of income producing assets (which must be outright and unconditional) to distribute income more evenly between spouses. For example, inter-spouse transfers are free from CGT, so where one spouse/civil partner has not fully utilised their annual exemption, consider a gift followed by a sale in the hands of the recipient to maximise available reliefs.

GET ADVICE OR GO IT ALONE?

Taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions – before they end with this tax year. Many people end up paying more tax than they need to because they are unaware of all their allowances.

Getting professional help on all elements of tax planning can help ensure you don’t miss out – or end up triggering unknown tax bills.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. 

This Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person.

Tavistock Partners Limited is authorised and regulated by the Financial Conduct Authority. Tavistock Partners (UK) Limited is authorised and regulated by the Financial Conduct Authority. Tavistock Private Client Limited is authorised and regulated by the Financial Conduct Authority. The Tavistock Partnership Limited is authorised and regulated by the Financial Conduct Authority. Abacus Associates Financial Services is a trading style of Tavistock Partners (UK) Limited which is authorised and regulated by the Financial Conduct Authority. Duchy Independent Financial Advisers is a trading style of Tavistock Partners Limited which is authorised and regulated by the Financial Conduct Authority, All subsidiaries are wholly owned by Tavistock Investments Plc.