Retirement planning
Written by Ray Coman
With life expectancy longer and interest rates ultra-low, the wealth requirements for life after paid work are on the rise. Tax is likely the biggest single factor delaying or reducing the retirement fund. Keeping an up to date plan on tax mitigation to protect the retirement plan is a cornerstone of the Coman & Co service.
Savings and ISAs for retirement
The home as a tax haven
Probably the most generous tax relief in the system is the exemption of the home from capital gains tax. It is highly tax inefficient to be both landlord and tenant. A property which is not the home is exposed to capital gains tax. Rents received are liable to income tax, whereas rents paid do not obtain tax relief.
Investment property
Successive changes in tax regulation have made investment property less appealing. However, some types of property enjoy more favourable tax treatment including: commercial property, furnished holiday accommodation and homes in multiple occupation. Commercial property can be owned by a pension.
Pension planning
A pension is a highly tax efficient method of saving. There is tax relief on contributions, income and gains in the funds are tax free, the first 25% of a pension can be extracted as a tax free lump sum when the pension vests. Furthermore, it is likely that a person will be subject to tax a lower rate on retirement than during lifetime. The main drawback of a pension is the requirement to lock up cash for years often decades. It is less popular where there are more pressing cash flow priorities such as acquiring a home, and school fees. Especially in the final ten to fifteen years of a person's working life, the case for pension planning increases.
Recent regulations place restrictions on the amount that can be invested tax free. These are the annual exemption and lifetime allowance. The annual exemption is reduced once income exceeds a threshold. We can advise on the limits that apply to avoid unnecessary excess charges by HMRC. We also review contribution and income history to identify the optimal tax savings that can be achieved.
Savings and ISAs for retirement
The regulations about Individual Savings Accounts have relaxed in recent years.
A Junior ISA is often a more tax efficient method of saving for children than costly and complex Trust Funds.
Business ownership
A business can provide a great store of wealth. Some businesses will accumulate goodwill that has marketability. The value of the business on eventual sale will form an integral part of retirement strategy. From the perspective of fellow business owner, Coman & Co can provide advice which is both practical and effective. We can assist with:
- Tax efficient extraction of profits over the life of the business.
- Inclusion of family members so that household costs are paid via household members taxed at the lower marginal rate.
- Forecasts of tax liability to help with arranging affairs to reduce tax on disposal of the business.
- Succession planning, whether to family members, competitors, existing employees or partners. This could include the use of management buyouts.
- Consideration of inheritance tax, capital gains tax, stamp duty, VAT, income tax and national insurance implications of business decisions. Our aim is to ensure that each of our business owner clients retain the maximum amount of the fruits of their labour.
State pension
On preparation of a Tax Return we will identify if the employment, self-employment and benefits position of a client is likely to contribute towards a state pension.
Where a client has employment earnings or self-employment profits less than the small profits exception, or is supported by investment income, it is likely a year is not being towards the number required to secure a basic state pension. This can be addressed via additional voluntary (or class 3) contributions.
While we are not able to provide investment advice, a voluntary contribution which secures entitlement to the state pension is likely to be more efficient than the same amount invested via a private or workplace arrangement. We advise our clients to periodically check national insurance contributions record and address any shortfall that could reduce entitlement.
Our tax planning service
A retirement fund is precious. It brings freedom from work. It provides a valuable resource for accommodation and healthcare costs that are likely to increase. We aim to help secure that standard of living that a person has become used to during working life to provide for a comfortable and rewarding retirement.
