Pension income can be hit by certain taxes throughout a person’s retirement and these costs are usually factored into later life planning. Fortunately, as tax allowances changed Quilter worked out how much a person can draw from various assets before any tax charges are levied.
Retirees should note the following when planning out their income needs:
- Pensions: Utilising the personal tax allowance will allow someone to draw up to £12,570 in tax free income from their pension savings in addition to any Pension Commencement Lump Sum (PCLS) taken.
- ISAs: Allow unlimited funds to be drawn upon without being taxed.
- General Investments: Using sales from collective investments realising gains of £12,300 or below provides tax free “income” using the capital gains tax allowance. Retirees can get further £2,000 distributions from equity based collectives in tax free income using the tax free dividend allowance.
- Cash Interest: Interest from cash deposits allow someone to receive £1,000 of tax free income if they are a basic rate taxpayer while higher rate taxpayers will be able to receive up to £500.
- Offshore Bond: A withdrawal from an offshore bond (in addition to the five percent allowance) of up to £5,000 to use the starting rate savings allowance.
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If all of these elements are utilised, it could give a total income of £32,870 plus PCLS, ISA and capital withdrawn.
Rachael Griffin, a tax and financial planning expert at Quilter, commented on these findings: “While tax allowances are set to become increasingly less favourable over time, there are still ways to squeeze every last ounce out of those available to you.
“When it comes to retirement income, well planned use of allowances can allow you stretch your hard-earned savings that much further.
“If you have used a diverse set of investment products, you can now stand to tap into a minimum of £32,870 of your savings per year utilising the available tax allowances for 2021/22.
Rishi Sunak revealed many tax changes in his recent Budget, as the Chancellor detailed personal tax allowances will remain unchanged until 2026.
Additionally, inheritance tax thresholds, pension lifetime allowances and the annual exempt amount in capital gains tax will also remain at current levels until 2026.
VAT and corporation taxes were also altered.
Rishi Sunak acknowledged some individuals and companies may face higher charges over the coming years but the Chancellor argued they were necessary to cover the state’s public debt levels.