The objective of retirement planning is not only to save enough to live off in retirement, but also to make sure you don’t pay more taxes than necessary. While tools like pension schemes or ISAs provide significant tax benefits, the rules, rates and amounts change very often and you need to constantly review the ways you save for retirement, in order to make sure they are still tax-efficient.
One example of such changes is the recently announced decrease in the Lifetime Allowance (LTA), which can affect millions of taxpayers saving through pension plans. You can find yourself paying as much as 55% in taxes if you exceed the LTA, which has been reduced from £1.25m to £1m, effective from 6 April 2016. Although £1m may look like a large amount, it corresponds to only £20,000-£30,000 per year when you save regularly over the course of your career.
If You Have Already Exceeded the LTA
Some people, especially those closer to retirement age, will find their pension savings already above the new LTA. You might be eligible for an increase in LTA via a protection mechanism that compensates savers for the LTA changes, subject to various criteria. In general, once applied and approved, you won’t be able to make additional contributions and might not be able to transfer your pension without losing the protection. You should always consult a pension adviser before taking any steps.
Alternative Ways to Save for Retirement
If you are concerned about exceeding the LTA in the future and want to save more, keep in mind that a pension scheme is just one of the many ways to save for retirement. For most people, especially higher rate taxpayers, pensions are among the first things to consider, because their generous tax advantages make their long-term after-tax performance hard to beat by the other options. But when you save more and are likely to exceed the LTA, allocating part of your retirement savings to other investments starts to make more sense.
The obvious choices for many taxpayers include ISAs (their annual allowances have been significantly increased and restrictions relaxed in the last years), buy-to-let property, or investing in stocks, bonds or funds outside your pension plan. Your particular circumstances will make some of these options more appropriate than others. In some cases there will be other tools to consider, such as offshore companies or trusts, especially when you want to plan beyond your retirement and make sure your family remains protected and is not liable to unnecessary taxes in case of your death.
Plan Your Finances as a Whole
It is essential to always consider your finances as a whole, rather than evaluate individual investments or tools in isolation. While taxes are an important factor, you must also pay attention to the kinds of assets your money is invested in (regardless of the channel), their risk and return characteristics and how they all work together in a portfolio. Furthermore, the costs of particular solutions must be taken into consideration, because like taxes they can add up quickly over the years.
An experienced retirement planner will be able to evaluate your objectives, risk attitude and individual circumstances, construct a comprehensive financial plan and recommend the most suitable and tax-efficient solutions. A professional adviser will also be in a good position to keep track of all the legislative changes, explain them to you and recommend appropriate adjustments to your financial arrangements.