Spring is the ideal time to begin retirement not only because we’re heading towards better weather but because you can wind up all your financial affairs neatly in line with the end of the tax year.
Remember – a prosperous retirement relies on intimate knowledge of UK tax rules. Get to know them better than you know yourself.
For PAYE employees, the end of March marks the 12th month of the financial year. For those retiring at this time of year, your final pay packet is potentially the last time you’ll pay National Insurance, Income Tax or private pension contributions. I say potentially because you may have left work but income tax is still going to dog your footsteps like a demented stalker for the rest of your days.
First on the Tax To Do list is to inform the Revenue that you are no longer in employment. This can be done easily via the Government Gateway website or App. Log onto your account, go to the page that forecasts your income for the new tax year then zero any salary estimates shown against your past employer.
If you are getting income from any other sources such as a private pension, doing this should trigger HMRC into sending out a revised tax coding notice to your remaining income providers which in theory means that your full personal allowance should transfer across in its entirety if you have only 1 sole pension income provider.
Should you be drawing down from multiple private pension schemes at the same time then the situation is a bit more complex as HMRC will need to split your personal allowance across all your income providers so you could see lots of different tax codes suddenly appearing.
Apparently, it is down to an individual to take responsibility for correct tax coding and NOT the Revenue. This makes it even more important to keep on top of this stuff because HMRC can’t always be relied upon to get things right. If your tax codes don’t look right then challenge them asap. Don’t leave it as tax matters are always harder to unravel with the passing of time.
Secondly, if you have not already used up the annual ISA allowance then max out your ISAs. Stash as much cash as you can into any ISA accounts you have prior to the end of the tax year because ANY future retirement income drawn from an ISA account is completely untaxed.
If you are cashing in any private pensions fully to fund early retirement then an ISA is where you should be depositing funds to avoid paying any future savers tax.
Thanks to auto-enrolment I have a small private pension from my ex-employer that I will be cashing in as soon as we roll into the new tax year. Rather than keep the funds invested in a pension pot, I have decided to do this because:
1) Too much volatility in the stock market at present
2) Mansion House accord forcing pension providers to move money into UK equities
3) Possible reduction or removal of the 25% tax free pension lump sum by the Government
4) Possible increase in income tax rates in the next Budget
5) Tax wrapper benefits from cash ISA account
We’re all encouraged to pop our hard-earned cash into pensions BUT what is not always clearly pointed out at the onset are the tax liabilities you incur later on when you come to withdraw funds. Let me give you an example to explain what I mean.
Say I have a small private pension pot valued at £4,000 which I wish to cash in fully. I get to keep the first 25% or £1,000 free of tax. The remaining £3,000 is taxed at 20% so you pay away £600 income tax leaving you only £2,400 towards retirement.
Suppose, I change my mind and decide to leave the pension pot fully invested and draw down regular monthly income from it instead. The same applies. After the tax-free allowance of 25% is used up, you will pay income tax on whatever you draw out every month plus you will also be liable for annual Fund Management fees on the remainder.
Once you understand the above examples then points 3 and 4 made previously become much more important. Should the Chancellor decide to scrap or lower the 25% tax free lump sum allowance for pension withdrawals or put up the rate of income tax in November, your retirement finances will be impacted.
My gut’s telling me that there’s a pretty good chance that in November, income tax rates will need to go up. Not just as a result of the current Gulf war but to make up for loss of revenue from green levies being moved out of energy bills and into general taxation, pay for cost-of-living increases doled out to politicians/benefit claimants, the scrapping of the two-child benefit cap and to fund increases in the Defence budget.
I’d rather take a small tax hit now than a much larger one if the above comes to pass. Once my private pension cash is then stashed away in its ISA tax wrapper, income can grow without future tax penalties being applied. Naturally, the Government will try to stymie this by reducing the annual ISA allowances further because the ravenous revenue hyena is not going to pass up the chance of eating more of your pie.
It’s a given that a cash ISA isn’t going to potentially generate as much income as perhaps a stock market investment will but then again, it’s a small price to pay for security of your capital and NO taxes.
Whoops I’ve rambled on. That’s what happens when there’s no word limits imposed on blog posts. Was there a point to this post? Yes. Choose your retirement date wisely. Whatever you do to fund your retirement always spread things out across multiple tax years to reduce tax liabilities and make full use of tax wrappers. Hence why I will be waiting until at least May before cashing in my small private pension.
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