IF YOU are watching your state pension age slip further away and are a bit concerned about those universal benefits disappearing before you even get to retirement, then make the most of the time you have to re-assess your planning.
While there is much chat about taxation and legal avoidance, this should always be a secondary consideration to investments and your appetite for risk.
In terms of pension planning, we have already seen several changes with much more to come in the shape of the new National Employment Savings Trust workplace pension scheme. Over time, we will all see an ever-increasing state retirement age, with the likelihood that the extra funding period as a consequence of working longer should provide a higher level of retirement income.
It should take no one by surprise that the smart money is on ISAs as the cornerstone of wealth creation plans for the future. With maximum annual subscription limits of £11,520, of which £5,760 can be held in cash, the funding limits are more generous than ever.
Pensions, on the other hand, have mostly had a negative press, be it for overcharging, perceived poor returns and the endless debate on tax relief, tax-free cash and gold-plated public sector schemes. The evidence would seem to point to ISAs as the answer, however there is a strong case for both ISAs and pensions. For example, if you were retiring tomorrow with savings of £200,000 from which you wish to draw down retirement income, the ISA would provide this income entirely free of personal tax. The same value held in a pension fund, leaving aside tax-free cash, would provide £10,000 per annum gross, assuming the same 5 per cent yield. The difference of course is that pension income is taxable. For basic rate taxpayers, this means £8,000 of spendable income rather than the more generous ISA income.
On the face of it, ISAs look like a much better deal. However, what is often missed is the significant tax relief on contributions to pensions. Where else will you receive a minimum of a 20 per cent uplift on contributions simply due to tax relief at source, in addition to having access to 25 per cent of the value of the fund tax-free when you retire – this takes some beating. That is until you realise that you benefit only once from tax relief on contributions, the income you eventually secure from your pension pot will be taxed each and every year in retirement once you use up your personal allowance.
The key to proper forward planning, if you wish to maximise tax-efficient retirement income, is to consider your personal tax-free allowance. This is particularly true for married couples.
An adequate level of income in retirement to allow you to enjoy such a lifestyle change should not be viewed simply in pension terms. For most, retirement income arises from a number of sources, it seems to make sense therefore to shelter more income from tax when the time comes, which can be achieved with a little bit of forward planning, the old adage it’s the sum of parts has never been more relevant.
• Alex MacLean is managing director of Aspire Wealth Management