When I plan out a person’s retirement strategy, some people have commented that it’s not just about pensions, and to me that is correct. Retirement planning should be about pensions and ISAs; both are important.
Putting money into a pension is logical, as you get tax relief on this, and at 40% this is quite an advantage. Please bear in mind though that when you take the money out at some time in the future, it is then taxable. ISAs on the other hand, don’t attract tax relief, but there is no tax when you take the money back out in the future. All well and good you might say, but so what!
What I try and do is to obtain a good mix between the two. Always try and ensure you have a sufficiently good pension fund where you can take out £11,800 a year (the basic tax allowances), so this means £11,800 a year with no tax. As I invariably always use SIPPs for pensions, I like to recommend where possible, that a person takes out their 25% tax-free cash, and either puts this into ISAs or general investments, to build up the non-taxable side of things.
If, for example, someone is looking for £25,000 a year in retirement income, I would look to take withdrawals of £13,200 a year from an ISA or general investment – and so, when added to the £11,800, that person has £25,000 a year income in retirement. Now what could be financially better than that?
This is what planning is all about, to make the best of things for clients.
The Financial Conduct Authority does not regulate tax advice.
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