Approaching Retirement Issue 3 – How much do you like paying the taxman?
I'm pleased to bring you the third in a series of articles by UK
Financial Adviser, Helen Kanolik, about the financial issues facing
retirees. If you require any further information, Helen's contact
details are included at the end of the article.
When you are
thinking about retirement, and how to set up your finances, minimising tax
should be a key strategy. It could
enable you to keep an extra 20% of the money being paid to you, or even more.
One of the
other issues that I often refer to is the need to ‘Keep it Simple’. This is because many of my clients have told
me how irritating, frustrating and time-consuming it can be to deal with lots
of paperwork, money coming from various directions, and complicated tax returns
each year. Tax reduction strategies can
help with this as well.
STATE PENSIONS
Your State
pension will probably be paid without any tax being deducted (unless you have
been a very high earner), because it will be set against your personal Income
Tax Allowance. In this tax year
(2007/8), the allowance for someone age 65-74 is £7,550.
AGE ALLOWANCE
I
mentioned in my first article that
taxable income of more than £20,900 reduces the age allowance – the extra personal
allowance for people aged 65 and over. For example, instead of an allowance of £7,550, a 70 year old with
taxable income of £25,550 will only have an allowance of £5,225. This could cost £930 a year in extra tax,
which could be saved if the taxable income were reduced to £20,900.
Company and
personal pensions will be taxable. With
a company pension, there probably isn’t much choice of how you take the
benefits, but personal pensions can be more flexible. It is usually a good idea to take the tax
free cash of 25% of the pension fund, unless there is a good Guaranteed Annuity
Rate in the pension contract.
Income
drawdown can give you flexibility to take more money out in years when you are
earning less, so that your tax bill will be lower. In the meantime, your earnings or other
savings can provide the income you need.
If you are
buying an annuity, choosing a good spouse’s pension will reduce the amount you
receive (and pay tax on), while helping to safeguard their future. With this in mind, you might be able to spend
more of your capital than you otherwise would.
INVESTMENT AND
OTHER INCOME
All your other
income will be taxable, unless it uses other allowances and exemptions.
If you take
income from Personal Equity Plans (PEPs) and Individual Savings Accounts
(ISAs), it does not have to be declared on a tax return, and is tax-free. So maximise investment in these, if you can.
If you have
investment in unit trusts, Open Ended Investment Companies (OEICs), and company
shares, any dividends are taxable. However, you can use your annual Capital Gains Tax (CGT) allowance –
currently £9,200. Don’t forget that this
means you can cash in enough investment to realise a gain of £9,200, so the
actual amount you can cash in without tax could be much higher.
If you suffer
a loss, you can carry it forward against future capital gains, to reduce the
tax even more. So if you need to spend a
large lump sum, this could be a good way to get the money. Don’t forget that giving away assets is also
a ‘disposal’ for CGT, unless you give them to your spouse or civil partner.
In my first article, I also mentioned
Investment Bonds, where you can withdraw 5% each year of the amount you
invested, and there is no tax to pay or requirement to declare it as
income. You can do this for 20 years.
Rental income is fully taxable, but some
expenses can be set off against tax. This includes the cost of improving a property, but not ordinary
maintenance. CGT is levied when a
property is sold, but the number of years (above 2) that you have owned it are
taken into account. After 10 years, 60%
of the gain is taxable (25% if it is a business asset). Holiday homes can be run as a business, very
tax-efficiently.
So you could have thousands of pounds of
extra income each year, just by using all your allowances and denying the
taxman a share – you know it makes sense!
I’d be happy to answer emailed questions: helenkanolik@heliting.com
_________________________________________________________________________________________
Heliting
Financial Services Limited
Beacon
House
15
Christchurch Road
Bournemouth
Dorset
BH1 3LB
Tel:
01202 551664
Fax:
01202 405485
Heliting
Financial Services Limited is authorised and regulated by the Financial
Services Authority - ref no. 191598.
Company
registered in England no. 3850106.
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