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Pensions: Allocating your wealth

For many people, retirement can seem like an isolated incident that will happen in the distant future. However, it is important to set aside the time to look ahead and consider how you can finance your retirement as efficiently as possible.

By Simon Taylor, IFA and pensions specialist at Pearson Hinchliffe Solicitors & Financial Services LLP.

Financing your retirement

A pension is the number-one priority in retirement, and you need to know whether it is going to generate sufficient income for you. Fortunately, occupational and personal pensions are relatively tax-efficient. Employee contributions to company pension schemes are tax-free: contributions are deducted before tax is calculated. The maximum amount of relief to which any individual is entitled equals 100% of their earnings for that particular tax year. However, contributions to pension schemes are subject to an annual limit (£255,000 for the tax year 2010/11). Any contributions exceeding this limit incur 40% tax.

If you have had more than one employer during your working life, you should check your company pension schemes, track down any missing information and work out what you are entitled to.

Individual Savings Accounts (ISAs)

Other options include individual savings accounts (ISAs) which are tax-efficient 'wrappers': all income and capital gains on investments held inside them are paid free of tax. The amount of money that can be sheltered in an ISA is subject to an annual limit (currently £10,200 in the tax year 2010/2011), so it is worth getting into the ISA habit as early as possible, in order to take advantage of their tax efficiency for the long term.

Another thing to take into consideration is that your tax status might alter once you retire. You might change from being a higher-rate taxpayer to paying the basic rate, or you might become a non-taxpayer. In the UK, individuals receive the first £6,475 of annual income free of tax; however, for those aged between 65 and 74, this personal allowance is raised to £9,490. For those aged 75 and over, the exemption is slightly higher at £9,640. The age-related personal allowance is subject to an annual income limit of £22,900, after which it begins to diminish.

Therefore, it is worth investigating how to make the most of your allowances. If you are married, it might be prudent to switch some assets from one spouse to the other, or to change jointly held assets into one name in order to ensure maximum tax efficiency. You might also want to consider the possible cost of long-term care and inheritance tax. Talk to your financial adviser to work out the best strategy to ensure a stress-free retirement.

To speak to an independent financial adviser about pensions, or any matter concerning planning for your retirement, please contact us without obligation using the details below.

Pearson Hinchliffe Financial Services | Hollinwood Business Centre, Albert Street, Hollinwood, Gtr Manchester, OL8 3QL
Telephone: +44 (0)161 785 3500, Fax: +44 (0)161 624 2589, Email: enquiries@pearson-hinchliffe.co.uk