One of the key issues for retirees, and one that will affect the actions they take in the run up to retirement, is from where to take their income. While everyone’s circumstances are different and should be viewed on an individual basis, in the years up to retirement, there are five points that should be on your checklist. These are:
If you are able to do so, now is a good time to start topping up your pension. The maximum you can pay into your pension per annum is a sum equal to your annual salary with a cap of £40,000. The benefit of this is to gain from any investment uplift but more importantly to benefit from the tax relief. Basic rate tax payers will receive 20% tax relief on what they pay in added to their pension, higher rate tax payers 40% and additional rate tax payers 45%, i.e. equivalent to the tax they normally pay on their income.
The pension freedoms have allowed your pension to be thought of as a tax-exempt investment vehicle, meaning it can be a source of income as well as a means of passing on any surplus wealth to family members and other beneficiaries. It is estimated that the average person will have accrued 11 separate pensions over their lifetime, so for cost efficiency and simple ease of use it may be worthwhile consolidating your pensions into one pension.
Although any money you put into an ISA will be net of the tax you have already paid on it, ISAs allow any income and capital gains to be accrued free of tax and withdrawals from an ISA are free of tax. Given the new death benefits introduced by the pension freedoms, allowing wealth to be passed on to beneficiaries with tax advantages, investing in a pension may be more appropriate than an ISA for those in their 50s and 60s. For others, and where an individual may have paid into their pension the maximum amount allowed in a tax year, it is viable to put as much non-pension cash as possible into an ISA.
An important factor to consider here is where to invest. Interest rates on cash savings accounts remain low and are well below inflation, which means savings in Cash ISAs, at the moment, are losing money. To make a return, in excess of inflation, to keep your money growing, typically requires investment (e.g. into a stocks and shares ISA). Bear in mind that wealth held in ISAs fall within a person’s estate for inheritance tax, so in retirement, it may be better to spend money in your ISAs before touching your pension(s).
Tax planning is crucial at this point in life; a wrong step, such as putting money into direct investments over tax efficient ones or into a pension, could leave you and loved ones considerably less well off.
Inheritance Tax (IHT) is payable at a rate of 40% of assets over £325,000, which is a figure frozen until at least April 2020. Many homeowners will realise that their homes alone are worth this much. Wealth passed directly to a spouse can benefit from the joint IHT exemption and an additional IHT allowance is now available for homeowners (£125,000 from April 2018) but it is worth remembering that rules and calculations around this are not as simple as were initially presented.
Making a Will and Lasting Power of Attorney
Not having made a Will or set up a Lasting Power of Attorney can have hugely negative consequences for those we leave behind or deal with our affairs if we are in ill-health. A Will, signed and witnessed, can make clear your wishes in respect of your wealth. Putting in place a Lasting Power of Attorney, either for your finances, or health and medical affairs, or both, will ensure also that should you become incapacitated or otherwise unable to manage your own affairs, a trusted representative can take on this role without the cost and inconvenience of applying to the Court of Protection.
Long term care
While often the elephant in the room, factoring in the necessity for long term care planning in advance makes sense and is best done sooner rather than later. It is not always our own care that we will deal with at this stage in our lives, it can be that of elderly parents. Being aware of the rules around long term care and acting to address this potential need, again, can save loved ones’ anguish at what can be a very emotional time.
It is critical to start planning around your finances in anticipation of retirement so that you stay in control of your wealth. As Independent Financial Advisers we specialise in helping people to plan for the future, as well as to find the right solution for their future needs. To arrange a free initial consultation with a Lowes Consultant contact our office on 0191 281 8811.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.