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3 practical ways you could reduce your tax bill in retirement

The number of retirees who could face an Income Tax bill is expected to rise. If your total income could exceed tax thresholds, there might be some steps you can take to reduce your tax bill.

The Personal Allowance is the amount of income you can receive before you usually need to pay Income Tax on the portion that exceeds the threshold. For 2024/25, the Personal Allowance is £12,570.

Crucially, the allowance hasn’t increased since the 2022/23 tax year and it’s currently frozen until April 2028. In contrast, your outgoings and income are likely to rise in line with inflation. So, even though your income might not increase in real terms, you could find a greater proportion of it is liable for Income Tax.

For example, the State Pension has benefited from large increases in the last two tax years under the triple lock. In April 2023, it increased by 10.1%, and then by a further 8.5% in April 2024.

As a result, those who are eligible for the full new State Pension receive £11,502 in 2024/25. So, you only need to receive a small income from other sources before you might need to start considering Income Tax in retirement.

Luckily, there could be steps you can take to reduce your tax bill, including these three.

1. Access the tax-free portion of your pension in instalments

You might know that you can access up to 25% (up to a maximum of £268,275) of your pension as a tax-free lump sum. But did you know you can also spread out this tax-free portion of your pension?

If you choose this option, each time you withdraw money from your pension, 25% of it will usually be tax-free. You can take different amounts each time to suit your needs if you’d like.

As well as potentially making your income more tax-efficient, this method could allow your pension to grow further. The money that remains in your pension will typically be invested, so it has an opportunity to deliver returns.

Of course, investment returns cannot be guaranteed and it’s important that your investments match your circumstances. When you retire, your risk profile may change, so reviewing how your pension is invested could be useful. If you have any questions about investing in retirement, please contact us.

2. Know which allowances could reduce your tax bill

There are tax-free allowances you may be able to use to reduce your Income Tax bill.

The interest earned on savings held outside of a tax-efficient wrapper may be added to your total income and could become liable for Income Tax as a result. However, many people benefit from a Personal Savings Allowance (PSA). So, the interest your savings earn might be a practical way to boost your regular income.

Your PSA depends on the rate of Income Tax you pay. In 2024/25:

• Basic-rate taxpayers have a PSA of £1,000
• Higher-rate taxpayers have a PSA of £500
• Additional-rate taxpayers have a PSA of £0.

In addition, if you’re married or in a civil partnership, you may also be able to use the Marriage Allowance to increase your Personal Allowance.

If your partner doesn’t use their full Personal Allowance and you pay Income Tax at the basic rate, they may be able to transfer £1,260 of their Personal Allowance to you. It could reduce your overall tax bill by £252 in 2024/25.

We could help you understand which allowances might be right for you.

3. Supplement your pension by making withdrawals from your ISA

While a pension is often the main source of your income in retirement, you can supplement it with other assets.

During your working life, you might have built up savings or investments in an ISA. Now, you could use it to supplement your pension income. As an ISA is a tax-efficient way to save or invest, it could prove a useful way to boost your income without increasing your tax bill.

There might be other assets you can use to support you in retirement too, such as investments held outside of an ISA or property. However, you should be aware they might increase your tax liability. For instance, if you sold investments that weren’t held in an ISA, you might have to pay Capital Gains Tax (CGT) on the profits if you exceed certain thresholds.

We can help you understand how you might use other assets to fund your retirement goals.

Contact us to talk about your tax bill in retirement

Depending on your circumstances there could be other ways to reduce your Income Tax bill and you might be liable for other types of tax in retirement too, such as CGT. As part of creating a retirement plan, we can work with you to understand how to mitigate or reduce your tax liability. Please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Making your present part of your financial plan could enhance your life

As financial planners, we often talk about the importance of working towards long-term goals and security. As part of your financial plan, you might be putting money into a pension for retirement or building an emergency fund to safeguard your finances if you experience a shock.

Considering your long-term ambitions is often important for turning them into a reality. Yet, enjoying the present is just as essential. While it can be difficult to balance your lifestyle needs now with those of your future, it may help you get more out of life.

Overlooking the present could mean you miss out on experiences

Planning for the future is important, but you don’t know what’s around the corner. If you take today for granted or put off experiences until later in life you could end up missing out.

You might cut back now and pool all your money into a pension with the plan to travel extensively once you give up work. But if you suffered from ill health before you reached that point, you might not have the opportunity to visit bucket-list destinations or have experiences you’ve been looking forward to for years.

The Great British Retirement Survey 2023 revealed that almost a fifth of people aged between 56 and 65 have faced a major life event that has changed their retirement plans. The most common reason was ill health.

Similarly, a higher-paying job might offer the chance to save more for retirement. But if you’re family-oriented and want to strike a better work-life balance, a promotion that will lead to longer working hours or more responsibility might not be right for you when you weigh up the effect it could have on your family life.

For many people, balancing short- and long-term financial needs is important for living a fulfilling life.

Doing things now and so giving yourself fond memories to look back on could improve your sense of wellbeing. This could be something small like enjoying a nice meal out with friends, or a grander expense, such as planning a trip to hike Machu Picchu in Peru if you love to travel.

Not only could embracing today in your financial plan make you happier now, but it could motivate you to stay on track when you’re working towards long-term goals. Perhaps a holiday that allows you to relax and focus on the things you love will mean you’re more inclined to top up your pension so you can retire and enjoy a slower pace of life sooner.

An effective financial plan can help you balance the present and future

It can be difficult to balance your short- and long-term needs. One of the key challenges is understanding how much you need for your future, as well as considering the effect unexpected events might have. That’s why working with a financial planner could prove invaluable.

Cashflow forecasting is one tool we could use to help you assess how to strike the right balance. It offers a way to visualise how your wealth might change based on the decisions you make.

Let’s say you want to increase your disposable income, so you have the freedom to spend money on days out doing things you enjoy, such as going to the theatre, eating out, or visiting historical locations. To do this, you may need to reduce the amount you are allocating elsewhere, such as your monthly savings or investments. Cashflow forecasting could let you see the impact this decision would have on your future finances.

Armed with this information, you can start to understand how to balance your expenses now with your future goals. You might find your long-term finances would still provide the security you need even if you spent more now, so you feel comfortable adjusting your expenses. On the other hand, you may find a compromise if it could affect your long-term goals.

Having a clear financial plan could mean you’re able to enjoy the present more too.

Financial concerns can take the joy out of experiences you might otherwise have been looking forward to. So, knowing that you’ve taken steps to create long-term financial security may help you live in the moment and take in what life has to offer.

Get in touch to talk about a financial plan that balances your short- and long-term needs

If you’d like to create a financial plan that balances your lifestyle needs now with long-term goals, please get in touch. We’ll work with you to understand what’s important to you and how you might use your assets to create financial security that lets you enjoy your life now and in the future.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate cashflow planning.

The value of financial planning: The intangible benefits that could boost your wellbeing

Consider the benefits of financial planning. If the first advantage that comes to mind is the opportunity to grow your wealth, you might be overlooking some of the intangible benefits that could improve your wellbeing.

Last month, you read about the potential financial benefits of working with a financial planner and how it could help you reach your goals.

Now, read on to learn more about some of the wellbeing benefits. While intangible benefits can be harder to quantify, they are just as important and might be something you value as much as growing your wealth.

1. Working with a professional could offer you peace of mind

A report in Professional Adviser suggests that one of the key reasons many people use a financial planner is the peace of mind it offers. In fact, in a survey of people with more than £300,000 of investable assets, more than half said this was important to them.

Worrying about your finances may affect your mental health. A survey from Standard Life found that 47% of women and 33% of men feel worried, anxious, stressed, or overwhelmed due to economic uncertainty.

A financial plan can help you focus on what you want to achieve in the future and the steps you might take to provide security, even if the unexpected happens. As a result, it could support your overall mental wellbeing.

2. A financial plan could improve your knowledge and confidence

Having someone you trust to turn to when you have financial questions could take a weight off your mind, and it could boost your finances too.

According to research from Moneybox, two-thirds of UK adults are, on average, £65,000 worse off because of low levels of financial confidence and knowledge.

The study found that less than a third of people claim they are very confident when managing finances. What’s more, 64% said they have missed out on financial opportunities in life – 35% blamed a lack of financial knowledge and 29% cited low financial confidence.

When asked why they struggled to manage their finances, the participants said they didn’t know where to start, found the topic overwhelming or struggled because of jargon. Yet, just 14% had spoken to a financial planner.

Working with a financial planner could mean you feel more confident about the steps you’re taking.

3. A financial planner could give you more time to focus on what’s important

Ensuring your financial plan remains on track and continues to reflect your circumstances can be time-consuming.

As well as keeping on top of your finances, factors outside of your control could also affect your financial plan. For example, if the government made changes to tax allowances, it could potentially lead to a higher tax bill or an opportunity to improve tax efficiency.

When you’re working with a financial planner, you can rest assured that your finances are in safe hands and focus on what’s most important to you.

4. You’re more likely to reach your goals with a clear plan

Only 17% of people in the UK have a plan to achieve their long-term money goals, according to data from the Aegon Wellbeing Index. In addition, only a quarter of people surveyed said they have a concrete vision of the things and experiences their future self might want.

If you don’t clearly outline your goals and how you’ll achieve them, it can be difficult to measure your success and stay on track. Understanding what you want to achieve now and in the future is an integral part of financial planning.

While you might link effective financial planning to growing your wealth, that’s not always the case. Indeed, in some circumstances, your plan might involve depleting your assets to allow you to reach your goals. For instance, when you retire, you’re likely to switch from accumulating wealth to turning your assets into an income stream.

A financial planner can help you assess how to manage your finances with your goals in mind.

Contact us to talk about your financial plan

If you’d like to discuss how a financial plan could support your wellbeing and help you create a path to reaching your goals, please contact us to arrange a meeting.

Next month, read our blog to discover how financial planning could lead to you making decisions that align with your aspirations and deliver even greater value.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Why “safety in numbers” might not apply to investing

Being part of a group can make you feel like you’re less likely to fall victim to a mishap or other negative event. While the hypothesis might be true in some circumstances, the opposite may be said when you’re investing. Read on to find out why failing to follow the crowd could be a good thing.

The inclination to be part of a large group and adopt the behaviours of people around you is sometimes referred to as “herd mentality”. Following the same route as other people can give you a sense of security and help you feel as though you’re making the right decisions. After all, you might think: they can’t all be wrong, can they?

Yet, financial decisions should often be based on your circumstances. So, a safety-in-numbers approach could have the opposite effect and harm your long-term finances.

A fear of missing out could lead to you following the crowd

There are lots of ways that a herd mentality might affect your investment decisions, including a fear of missing out.

You could hear a group of friends or colleagues discussing an investment opportunity. They may be excitedly talking about the returns they expect to make and how it’ll help them reach their goals, from retiring early to paying for private school for their children. With everyone else seemingly poised to secure huge returns, you might be worried about missing out, and so follow the crowd too.

Similarly, reading news articles might lead to you seeking safety in even larger numbers.

Earlier this year, you might have read about the soaring value of US-based technology stocks dubbed the “Magnificent Seven”. With headlines like ‘The Magnificent Seven stocks are now roughly equal to the combined value of the UK, Japan, and Canada’s stock markets’, you might feel like you’d be missing a huge opportunity by not investing in these companies like other investors.

Even the moniker collectively given to these technology firms makes it seem like you’d be a fool not to invest some of your money in them.

Yet, delve a little deeper, and you could find that investing in the same companies as everyone else isn’t right for you.

Take Tesla, for example. While it is one of the companies that make up the Magnificent Seven, according to Bloomberg, between January and March 2024, it was the worst performer on the S&P 500 stock index. So, if you had invested, it might not have delivered the returns you expected if you simply read the headlines. What’s more, the company might not suit your risk profile or investment strategy.

Despite this, the view that there is safety in numbers still leads to people making investment decisions that aren’t right for them. Indeed, history is littered with examples of investors who followed the crowd and faced the financial consequences.

Investment bubbles: From technology to tulips

Investors believing there is safety in numbers may cause “bubbles” – where the market or a particular asset’s value rapidly escalates before quickly falling in value when it “crashes” – as demand rises as more people seek to get on the bandwagon.

Some investors might remember the dot-com bubble in the late 1990s. The widespread adoption of the internet led to the rapid growth of valuation in so-called “dot-com startups”.

Eager to capitalise on the rocketing growth of companies operating in this exciting technology space, investors started to pool their money in online shopping companies, communication firms, and more. Indeed, between 1995 and 2000, tech-focused US stock index Nasdaq rose by around 800%.

When the bubble burst in 2000, some companies failed, many without ever making a profit, and others lost a large portion of their market capitalisation.

Herd mentality harming investors isn’t a new phenomenon either.

In the 1630s, the price of fashionable tulips soared when they became seen as a status symbol across Europe. At the height of “tulipmania”, the rarest tulip bulbs traded for as much as six times the average person’s annual salary. To some, it seemed like everyone was making money simply by purchasing and trading bulbs.

A fear of missing out led to people purchasing bulbs on credit – and when prices started to fall, some victims of herd mentality were forced to declare bankruptcy as a result.

A tailored investment strategy could help you make decisions without following the crowd

So, if there isn’t safety in numbers, what approach should you take to investing? Creating a tailored investment strategy that focuses on long-term returns could help you reach your goals.

A “good” investment isn’t right for everyone. A friend may tell you about an excellent investment opportunity that sounds tempting. However, if they are investing for retirement in 20 years and you’re investing for a goal that is just five years away, your approach to assessing if an opportunity is “good” could be very different. For example, with a longer time frame, your friend’s risk appetite may be much higher than yours.

Rather than following the crowd, reviewing investments with your strategy in mind could help you select investments that align with your aspirations.

Contact us to talk about your investment strategy

We can work with you to assess which investments suit your needs. We’ll consider a wide range of factors, from your risk profile to your other assets. Please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Investment market update: May 2024

On the back of data showing some countries have exited recessions at the end of the first quarter of 2024 and inflation falling, several market indexes reached record highs in May. Read on to find out what else may have affected the markets and your investment portfolio.

UK

Dominating headlines towards the end of May was prime minister Rishi Sunak calling a general election. Sunak made the seemingly snap decision following positive inflation news despite polls suggesting the Conservative government is trailing the Labour Party.

The general election will take place on Thursday 4 July. The uncertainty over the next few weeks could lead to markets being bumpy as they react to the latest information and assumptions. Remember, ups and downs are a part of investing and it’s important to focus on your long-term goals during periods of volatility.

The latest figures from the Office for National Statistics (ONS) show the UK is nearing the Bank of England’s (BoE) 2% inflation target. In the 12 months to April 2024, inflation was 2.3%.

Sunak said the data was proof the Conservative’s plan was working and “brighter days are ahead”. In response, the Labour Party accused the government of celebrating a “tone-deaf victory lap”.

The BoE voted to hold its base interest rate at 5.25%. Borrowers keen for rates to start falling could receive some good news this year though. BoE governor Andrew Bailey said a cut will likely come in the coming quarters if inflation continues to fall, and he hinted the Bank could make cuts faster than the market expects.

Data on the economy was positive too. After the UK fell into a technical recession – defined as two consecutive quarters of negative growth – at the end of 2023, ONS figures confirm the UK economy grew in the first quarter of 2024. GDP increased by 0.4% in March 2024, following growth of 0.3% and 0.2% in January and February respectively.

Yet, the Organisation for Economic Co-operation and Development warned the UK would have the weakest growth across G7 countries in 2025. The organisation predicts GDP will rise by just 1% next year.

The latest readings from the S&P Global’s Purchasing Managers’ Index (PMI) support the ONS GDP data. PMI data provides an indicator of business conditions, such as output and new orders.

In April 2024, the service sector posted its fastest business activity growth in almost a year. The sector makes up around three-quarters of the UK economy, so strong growth will have helped pull the UK out of the recession quickly.

There was good news in the construction sector as well, with the PMI information showing growth reached a 14-month high. However, the data indicates the manufacturing sector contracted in April. One of the challenges facing manufacturing firms was purchasing costs rising for four consecutive months.

May was an excellent month for the FTSE 100 – an index of the 100 largest companies on the London Stock Exchange. It reached record highs several times throughout the month as markets reacted to speculation that interest rates would fall.

On 15 May, the index jumped by around 0.5% to reach 8,474 points. The top riser was credit data firm Experian after it reported growth at the top end of their expectations for the last financial year, which led to shares rising by more than 8%.

Europe

The wider continent fared similarly to the UK.

Eurostat confirmed that the eurozone is out of a recession. The economy shrank by 0.1% in the last two quarters of 2023 but posted growth of 0.3% in the first quarter of 2024. Major economies, including Germany, France, Spain, and Italy, grew in the first three months of the year.

However, the European Commission warned external factors could place economic growth at risk. These risks include ongoing Ukraine-Russia and Israel-Gaza conflicts.

In the eurozone, inflation was stable at 2.4% in the year to April 2024. While the European Central Bank has also yet to cut interest rates, it’s expected that it may do so as early as June if inflation falls.

European markets were also influenced by expectations that an interest rate cut could be imminent. Sliding oil prices led to modest gains on 8 May when France’s CAC was up 0.6% and Germany’s DAX increased by 0.1%.

US

Figures from the US show inflation fell to 3.4% in the year to April 2024. It led to Wall Street reaching a record high on 15 May as both the S&P 500 and the tech-focused Nasdaq index rose.

Data could suggest that US business confidence is falling after fewer jobs were added to the US economy than expected in April. Businesses added around 175,000 jobs compared to the 243,000 economists had predicted. Unemployment also increased slightly from 3.8% to 3.9%, which had a knock-on effect on the power of the dollar.

The Dow Jones index, which contains 30 major US companies, hit a milestone this month. The index reached 40,000 points for the first time on 16 May. The biggest riser was retailer Walmart, which was up 6%.

Entertainment giant Disney also hit a landmark in May – its streaming platform Disney+ turned a profit for the first time since it launched four years ago. Despite the news, Disney’s shares dropped by more than 5% in pre-market trading on 7 May as results have still fallen short of expectations.

Asia

On 9 May, encouraging trade data from China, which showed both exports and imports have returned to growth, boosted markets around the world.

However, China could face headwinds. After speculation over the last few months that the US would introduce trade tariffs, US president Joe Biden announced new tariffs would come into force on 1 August 2024.

There will be a 100% tariff on Chinese-made electric vehicles. Tariffs will also increase for other items, including lithium batteries, critical minerals, solar cells, and semiconductors.

The US said the tariff would help stop subsidised Chinese goods in the US market from stifling the growth of the American green technology sector. China responded by saying the move undermined fair trade and it’s US consumers who would bear the brunt of the additional costs.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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