If you’re thinking of retiring, knowing which month of the year it is best to retire in can actually save you a lot of money.
Not only that, it can ensure your retirement portfolio is well positioned to maximise your retirement income going forward.
5 reasons why it is best to retire before the 6th April
In case you are not aware, the tax year runs from the 6th April to the 5th April every year. So at the time of writing (November 2020), the current tax year will end on the 5th April 2021.
For some, retiring at the end of the calendar year (31st December) makes sense as it probably allows you to leave work slightly early and make the most of the Christmas holiday season. It also means new year, new start.
But if you do have the choice, you might want to consider retiring around the end of March. Here’s why:
- A lower rate of Income Tax. If you are a higher rate tax payer, then retiring part way through a tax year is likely to mean your pension income is taxed at 40% (because it’s added on top of your salary). By retiring and taking your pension income at the start of a new tax year will mean you have no salary to add on and therefore your pension income could be taxed at basic rate 20%.
- Full Personal Allowance. Better still, if you have other resources and only plan to make small withdrawals from your pension then you have the full Personal Allowance of £12,500 before you pay any tax on income. Retiring part way through the year will probably mean you have already used up your Personal Allowance.
- ISA allowance. If you receive a tax free lump sum from your pension then by retiring at the end of March you will be entitled to 2 x ISA allowances in quick succession. One for the end of the tax year and another right again at the start of the new tax year from 6th April. Currently, that means £40,000 could be invested into tax free ISAs in a matter of days. If you have a spouse, you can also use their ISAs allowances in the same way, meaning £80,000 could be invested.
- Capital Gains Tax (CGT) allowance. Similar to the ISA, if you are planning on cashing in investments for your retirement which have made gains, then by doing it at the end of the tax year means you can split your encashments and get a full CGT allowance for the current tax year and a few days later a full CGT allowance for the new tax year. Currently that’s 2 x £12,300 of gains you can release before paying any CGT. Again add in your spouse’s allowances and you can make it £49,200 (4 x £12,300).
- Gifting allowance. If you were planning to make gifts on your retirement, perhaps to your children or grandchildren from pension lump sums, then by waiting until the end of the tax year means you get 2 x gift allowances of £3,000 in quick succession. One for the end of the tax year you retire and one for the start of the new tax year. If you have not used your annual gift allowance from the previous year then you could gift a further £3,000 without any Inheritance Tax consequences. Again using your spouse’s allowance as well can mean a total of £18,000 (2 x £9,000) could be gifted in the space of a few days.
So as you can see there is a lot of Income Tax to be saved by choosing March as the month best to retire in.
As a bonus there is also another good reason to retire at the end of the tax year. You will be going into spring so the weather should be warmer and the nights longer with more you can do!
However, why it might not be best to retire at the end of the tax year
Whilst there are clearly lots of tax benefits of retiring at the end of the tax year you always need to look at your own personal situation and analyse it properly.
Check out things like:
- Bonuses/Healthcare/Car scheme. Do you need to be working for a full tax year to qualify for the latest work bonus, continued healthcare or to keep the company car?
- Defined benefit (also known as final salary) pension. For DB pensions each year of membership is usually calculated on each anniversary of the date you joined the scheme. Therefore it may make sense to retire just after this if you accrue a large additional payment or avoid early retirement penalties.
- Stress/Health. If you hate your job, are suffering from stress then there is never a good reason to delay your retirement if you can help it.
At the end of the day it can be very beneficial to pick the right month in which it is best to retire for you. However more important is your longer term financial plan.
By ensuring you have worked out your income requirements, structured your pensions and investments appropriately and stress tested your plan, you will ensure a comfortable retirement no matter which month you retire.
If you would like to understand your current pension and retirement position please secure a free 15-minute video call with us. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction. We have located many lost pension pots for our clients and helped hundreds to retire. Also we recently presented a webinar on retirement options, you can find a recording of the webinar below.
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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.