Expert view: An efficient tool for boosting tax-free income

With the annual individual savings account (Isa) allowance rising next month to £10,680 per person, it is a more vital tax planning tool than ever. As well as providing immediate access, if needed, perhaps the greatest benefit of Isas is the ability to draw tax-free income in retirement.

This enables individuals to plan for retirement and greatly reduce their income tax bill. A 100,000 Isa fund producing 4 per cent income (4,000 a year) is the gross equivalent to a higher rate taxpayer of 6,666 a year in pension income.

In 2011-12, the income level where basic rate tax becomes payable for those over 65 is 9,940 a year. With the basic state pension providing 5,311.80 a year, it takes only 4,628.20 a year of taxable income from a private pension to use up an individual's tax-free allowances.

Any excess income above that level incurs 20 per cent tax and the age allowance trap can bite for those over 65 as they lose 1 of their additional tax-free allowance (2,465) for every 2 taxable income between 24,000 and 28,930 - effectively taxing them at 30 per cent on this income.

For the average or higher earner, it clearly makes sense to use the full Isa allowance to build up a tax-free portfolio to supplement the taxable income from a pension in retirement; this income can also help to offset losing the benefit of the additional age allowance available at 65 as it is non-tax assessable.

• Andy Cumming is managing director at Scott-Moncrieff Wealth Management