At Finance with Flow, we believe that financial success is built on strong partnerships. That’s why we collaborate with trusted experts like Wattam Kirby Mee (WKM), to ensure our clients receive comprehensive financial support. As an outsourced finance department, we focus on streamlining accounting and financial operations, while WKM provides expert wealth management and financial planning. Together, we create a seamless experience that helps businesses and individuals achieve their financial goals with confidence.
We are thrilled that Neil, Director at WKM agreed to be a guest writer to share insights and opportunities of how to create a low tax retirement income. We hope this piece gives you some ideas on how to plan now, for your future.
Opportunities to create a low tax income
We all need an income to sustain our lifestyles and whilst working, you have an ongoing source, which whilst potentially not in your control, at least you have visibility of.
How about your future income, beyond work? Whether that’s retiring, changing careers or winding down, we still need an income.
Consider a couple in their 50s, employed and have a 5 year age gap. They want to step away from corporate life in the next few years. As a business, we don’t focus on ‘products’, but in this scenario, I think helpful to outline some example ‘wrappers’ this couple could employ to help them with their future objectives.
Pensions
This is the first asset many people think of, for providing for a future income. However, what pensions have you got? Where are they? Are they defined contribution (DC – i.e. a pot of money) or defined benefit (DB – i.e. it will give you an income for life)? If you don’t know, the first step is to gather the paperwork and review them.
Pensions might well be the largest asset, beyond property, that you have or are building towards, but when it comes to accessing your savings, you might want to consider the order in which you access your assets. It will depend on your circumstances, but say you want to stop employed work at age 50. You can’t access pensions until you’re (currently) 55. What do you do the years prior to then? Equally, in this scenario, one partner is 5 years older than the other, so they can’t necessarily access their pensions at the same age.
ISAs
I’m a big advocate of ISAs (Individual Savings Accounts). Fundamentally, ISAs help shelter money from tax – notably from income and capital gains taxes. Whilst there’s no immediate tax benefit, you are sheltering your money from future tax and also, it takes time to build your ISA savings, as there are annual contribution limits (£20,000 per tax year, per adult).
VCTs
VCTs (Venture Capital Trusts) are investments that may well be less familiar to many. They are also higher risk than many conventional investments but equally offer something a little different. The investor receives 30% income tax relief on the investment upfront and any future dividends are tax free. There are various risk considerations alongside, but could help towards generating income without additional tax.
For this couple, we’re looking at the integration of these various wrappers, to create a sustainable, low tax income for their futures.
Pensions – assuming they have their pension savings within a flexible, personal pension (such as a Self-Invested Personal Pension).
You could choose to take some tax free cash, if perhaps you want to buy that special something. You could take an income from your pension – don’t forget, you’ll have a personal allowance, which at present, means you can have an income of £12,570 without paying income tax. Why not draw an income of £12,570 and utilise that allowance and pay no tax?
Multiply that by two people and you’ve got just over £25,000 of tax-free income.
ISAs
The value of ISAs as noted earlier, is the tax-free nature of the accounts. Unless you have a fixed-term ISA, you can access an ISA when you wish, without paying tax.
You could have an ISA generating an income, which would be tax free. This couple have amassed £100,000 in ISAs each, generating an income of 5%, that’s £5,000 of tax-free income. Again, multiplied by two people and you’ve got £10,000 of tax-free income.
VCTs
Assume they contributed £40,000, they will have received £12,000 of initial income tax relief and potentially looking at £2,000 of tax-free income.
Cash
We all need cash to pay for our day to day living. This couple have some cash, but they’ve saved the majority of their additional income into their pensions and ISAs.
State Pension – I’ve noted it separately, as we have little to no control over state pensions. It’s a taxable income, that you’ll receive at state pension age, assuming you’ve made National Insurance contributions throughout your working years. This is the key take-away here – check your NI contributions – it’s easy to do. You’ll need 35 years of national insurance credits to receive the new state pension in full.
Summary
This couple have sufficient assets in their SIPPs, to generate a sustainable income of £12,500 each, per annum and stocks & shares ISAs of £100,000 each. They have VCTs of £20,000 each, alongside an anticipated full entitlement to the new state pension.
- Pensions are providing a combined £25,000 income (but 5 years apart)
- ISAs – a combined £10,000 income
- VCTs – £2,000 income
For the first five years, they have pension income of £12,500, ISA income of £10,000 and VCTs income of £2,000. That’s £24,500 of tax-free income. When the second partner accesses their pension, this will be £37,000 tax free. Alongside these, they choose to take advantage of their tax-free cash from their SIPPs, taking £5,000 of tax-free cash each, for 5 years, boosting their tax free income to over £47,000 for many years.
Their state pension will kick-in in future, when they could consider reducing the income from their SIPPs, to reduce their tax liabilities.
This is ignoring any cash they’ve built up, potential for down-sizing of property or any inheritances. There are alternative options besides pensions, ISAs & VCTs, but hopefully this goes some way to demonstrate the power of tax efficient wrappers, of which pensions and ISAs are accessible for most people.
This blog does not constitute financial advice, nor an investment recommendation and the items noted are for illustrative purposes only.
Looking for financial planning and investment advice?
Wattam Kirby Mee, have a personable approach, creating a tailored financial plan and investment strategy for each client focusing on their priorities and lifetime goals.
If you want to look into way of managing your wealth contact WKM today on 0116 403 0138 / info@wkmwealth.co.uk and mention ‘Finance with Flow’.
