As you embark on retirement, ensuring that you make the most of your hard-earned savings becomes a crucial aspect of financial planning. 

Taxes can significantly impact your retirement income and overall financial well-being, so understanding how to navigate the complex world of tax management is essential. 

Retirement is a journey that typically spans several decades and is composed of distinct stages, each with its own unique set of financial considerations. 

In this article, we will delve into each of the four stages of retirement and explore the various tax implications associated with them. We will provide insights, tips, and strategies to help you effectively manage your taxes, minimise your tax liability, and maximise your financial resources during each stage. 

Stage one: The Pre-Retirement Phase 

This phase typically starts at age 50 and is all about setting yourself up right so that you can retire with confidence.  

It’s the phase where you still have time to maximise the ‘free money’ that can be earned through tax efficient saving and investing. So your retirement savings pot is as big as it can be.  

The big bit of planning here is pension contributions. You should be trying to get as much into pensions as possible.  

If you are a basic rate taxpayer, then each contribution will effectively get you a 25% return through tax relief. An £80 contribution becomes £100 inside your pension. 

For higher rate taxpayers the return will be 50% and for additional rate taxpayers it will be around 56%. 

You could even add more to your pensions by way of extra employer contributions and National Insurance relief if you contribute directly via your employer to the workplace pension scheme.  

Don’t forget to check your partner’s pension savings too as you may be able to top their pension up if you are at the limit for saving into yours. It will be handy having pensions in both names further into retirement. 

You can access your pension from age 55 (moving to 57) so perfect for early retirement planning. 

You should also be checking your government State Pension to ensure you have paid National Insurance for the full qualifying period. If you haven’t, you still have time to top up. 

If you have maximised your pension contributions, then ensure the rest of your savings and investments are also tax efficient by using your ISAs. These will come in really handy for when you eventually retire and need to take your income from different pots to manage tax. 

Stage two: Early retirement – the higher spending phase 

This phase typically runs from age 60 – 80 and is probably when you are going to need the most income from your retirement savings.  

It’s the stage of retirement where you will be your youngest, hopefully fittest and the point you will want to really start enjoying yourself after years of work.  

In terms of tax management, we could break this phase into two parts. The period before you receive your government State Pension and the period after.  

The reason why the retirement period before your State Pension is so important is because you may have a short window to make withdrawals from your personal and workplace pensions tax free.  

Let me explain.  

Everyone is entitled to a Personal Allowance (currently £12,570 tax year 2023/24) which is the amount you can earn before paying Income Tax.  

If you have retired and are no longer working, you are likely to have any taxable income. Usually, up to 25% of your personal or workplace pension is tax free, but the rest is taxable.  

Providing your pension provider offers flexible withdrawal features you could withdraw £16,760 per year tax free until your State Pension age. 25% (£4,190) of this amount will be your tax free cash lump sum and 75% (£12,570) will fall within your Personal Allowance.  

A couple could do this and generate £33,520 per year until State Pension age. 

If you phase your retirement and still have some form of earnings, then you will need to check if it makes sense to use your partner’s Personal Allowance instead.  

Once you start receiving your State Pension you may want to consider stopping your pension income withdrawals. In order to top up your income further you may want to consider using your ISAs or further withdrawals from the tax free cash element of your pension although you need to be mindful of Inheritance Tax planning. More on this later.  

If you have other savings and investments outside of an ISA like a general investment account, you may want to look at selling down these units and utilising your Capital Gains Tax Allowance. Even if you do end up paying some Capital Gains Tax the rate is usually cheaper than paying Income Tax on your pension income. 

Stage three: Mid-retirement – the settling down phase 

This phase typically runs from age 80-90 and is the point where spending settles down and becomes more routine.  

Spending is usually lower as you don’t spend as much on things like holidays and cars.  

From an investment point of view you may decide to take some risk off the table and look at things like annuities, especially purchased life annuities that can be bought from cash. These provide a guaranteed income for the rest of your life and are very tax efficient as only a small element of interest is taxable. 

You may find you have more income than you need and now is the time to start considering gifting to your loved ones.  

Inheritance Tax planning may now be on the agenda and so the focus turns from managing your own Income Tax to ensure as much of your wealth is passed to your loved ones and not lost in tax.  

You should consider your home (which is likely to be your biggest asset) and whether it makes sense to downsize as this can make it easier to give away the net proceeds from a sale. It can also ensure a top up to your income if you need it.  

Try leaving as much in your pension as possible as pensions are usually outside of your estate when it comes to calculating Inheritance Tax. So, spend down your ISAs and other savings and investments.  

State four: Late retirement – preparing for the end 

This stage typically starts after age 90 and is all about getting your affairs in order so everything passes to your loved ones as efficiently as possible on death.  

You may need long term care at this point so it’s important you have things in place like Lasting Powers of Attorney so you can ensure the correct person is managing your affairs and they understand your wishes. You should also ensure your Will is up to date and passing assets on tax efficiently.  

At this point you may wish to halt any sales of assets that are subject to a Capital Gains Tax as gains effectively die with you and the base price is reset once passed onto your loved ones. So they can then sell it straight away tax free. 

Providing you have the right pension in place, your pension beneficiaries will be able to keep your pension invested and growing tax free. They can then use it as their own pension in the future.  

Of course, the above is only relevant based on today’s rules. Over a 30+ year retirement the tax rules will change dramatically and it’s important you are able to call on the relevant expertise when needed.  

This is where a Financial Adviser can offer massive value and the tax savings alone far outweigh the fee for advice.  

Remember, you don’t know what you don’t know.  

Here’s to a prosperous and tax-efficient retirement journey! 

If you are not sure what to do with your personal and workplace pensions at retirement then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy retirements over the years. This could be you too. 

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.