Spending as you wish in Retirement

Be under no illusion, tax will continue to nibble away at your finances, even when you have made that final leap into full retirement. Analysis of the latest Office for National Statistics data has revealed that retired households are paying an average of £6,500 a year in direct and indirect taxes, which effectively equates to retirees giving 30% of their retirement income to the tax man. It’s important to remember that tax has many guises, and those planning for retirement will still need to consider the dent on retirement income through tax hits, when the time comes to reap the rewards of a lifetime of work. If a robust tax plan has not been put in place, retirement reality may not be quite as rosy as you had hoped.

The treasury estimated £320m in additional revenue would be generated during the tax year 2015-2016, following the implementation of the new rules which came into effect on April 6th, giving the over 55s freedom to access their pension pot as they wish. Much of this additional government revenue will be generated by cash taken out of a pension pot above the 25% tax free lump sum. This is treated as taxable income and will be added to the income for the year resulting in a higher rate tax bill of up to 45 per cent. Aside from the inevitable indecisions relating to the best options for individuals in respect to their pension pot access, there has been a shift in the balance of both direct and indirect taxation on retired households, resulting in a sizeable contribution going to the Exchequer each year. Indirect tax across goods and services will eat into £3,900 of your pension savings and direct tax on income and profit will take approximately £2,600.

When considering money that will have to be spent on unavoidable tax bills in retirement, be sure to prioritise an inheritance tax (IHT) plan. This means that you can be safe in the knowledge that when the time finally comes to pass on your wealth, you are not giving the tax man any more of your hard earned cash than necessary.

Thanks to the introduction of new benefit rules which came into play in April, pensions are emerging as an important IHT planning tool. The new rules allow the full value of a pension to be passed to a beneficiary tax-free, so long as the pension-holder dies before the age of 75. If the pension-holder dies after reaching 75, the pension can still be bequeathed tax-free but the beneficiary will be liable to tax on the income. There is no escaping the fact that not all income received in retirement will be yours to spend as you wish, but with the right advice and attitude to tax planning you can ensure a far brighter retirement outlook.