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lumin news Issue 10 / Winter 2024

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<strong>lumin</strong> <strong>news</strong> <strong>10</strong> / winter <strong>2024</strong> Page 5<br />

How to generate retirement income with a<br />

minimal tax burden<br />

With the right planning, and careful use of allowances, a couple can significantly<br />

lighten their tax load in retirement.<br />

JOE FISHER<br />

Financial Planning Manager<br />

joe.fisher@<strong>lumin</strong>wealth.co.uk<br />

Phone 02039 887 788<br />

Most retirees are able to substantially<br />

reduce their income<br />

tax burden once they<br />

stop working. With careful<br />

management and disciplined<br />

use of allowances, a couple<br />

could be able to shield up to<br />

£44,000 from tax in the<br />

<strong>2024</strong>/25 tax year (see chart).<br />

A changing taxation<br />

picture in retirement<br />

During retirement the taxation<br />

picture undergoes a<br />

major shift for most people.<br />

Your income will drop significantly,<br />

so your tax bill will<br />

also fall. You can utilise several<br />

helpful allowances to<br />

stay within the basic rate tax<br />

band for income tax (20%),<br />

minimising your tax bill still<br />

further. In some cases, with<br />

careful planning, a retired<br />

couple could negate income<br />

tax entirely. It’s important to<br />

keep track of all forms of income.<br />

Pension withdrawals,<br />

rental income, State Pension<br />

payments and dividend income<br />

are all taxable.<br />

Making the most of<br />

tax allowances<br />

Pension withdrawals are subject<br />

to income tax at your<br />

A couple can have up to £44,000 income<br />

per year tax-free<br />

Max. tax-free income<br />

£45,000<br />

£40,000<br />

£35,000<br />

£30,000<br />

£25,000<br />

£20,000<br />

£15,000<br />

£<strong>10</strong>,000<br />

£5,000<br />

£0<br />

One person<br />

Personal allowance<br />

CGT allowance<br />

Starting rate for<br />

savings income<br />

marginal rate. But if a couple<br />

each apply their personal allowances<br />

of £12,570, over<br />

£25,000 can be taken taxfree<br />

each year. The capital<br />

gains tax annual allowance<br />

can be used to ‘harvest’ investment<br />

gains – or other<br />

taxable gains – in each tax<br />

year. This allowance is currently<br />

£6,000, but will be<br />

£3,000 per person for the<br />

<strong>2024</strong>/25 tax year.<br />

Individuals with less than<br />

£17,570 of non-savings income<br />

may be able to benefit<br />

from up to £5,000 of tax-free<br />

savings income. This allowance<br />

is known as the starting<br />

rate for savings. Every £1 of<br />

non-savings income above<br />

your personal allowance of<br />

£12,570 reduces your starting<br />

rate for savings by £1.<br />

Basic rate taxpayers who<br />

have income above £17,570<br />

can benefit from £1,000 taxfree<br />

savings interest per person<br />

each year, via the personal<br />

savings allowance.<br />

A couple<br />

Personal savings allowance<br />

Dividend allowance<br />

Cutting your dividends<br />

tax bill<br />

Investors who are earning<br />

income from dividends (on<br />

investments held outside of<br />

tax wrappers) can also take<br />

steps to reduce their tax bill.<br />

The dividend allowance of<br />

£1,000 will be cut to £500<br />

from 6 April, but a couple<br />

can still enjoy tax-free dividend<br />

income of £1,000 annually.<br />

Staying within the<br />

basic rate tax band also sees<br />

you pay tax on dividend income<br />

(above the dividend<br />

allowance) at a rate of just<br />

8.75%, rather than 33.75%<br />

and 39.35% for higher and<br />

additional rate taxpayers.<br />

ISAs and pensions<br />

ISAs and pensions form the<br />

bedrock of retirement income,<br />

but how and when<br />

should you draw on them?<br />

Many retirees make tax-free<br />

withdrawals from flexible<br />

ISAs first and save pensions<br />

for later in retirement (leaving<br />

them invested and with<br />

the opportunity for future<br />

growth), as pensions are typically<br />

exempt from forming<br />

part of the estate for inheritance<br />

tax purposes.<br />

Using ISA assets first enables<br />

you to continue Dividend making allowance<br />

pension contributions Personal of up savings allow<br />

to £60,000 in each Starting tax year. rate for savin<br />

This may be helpful if you<br />

CGT allowance<br />

are continuing to work parttime,<br />

as once you start Personal draw-allowancing<br />

from pensions you are<br />

limited to a maximum contribution<br />

of £<strong>10</strong>,000 in each<br />

tax year. You can take up to<br />

25% of your total pension<br />

pot as a tax-free cash lump<br />

sum when you start accessing<br />

pension benefits.<br />

Strategically spreading<br />

pension withdrawals (beyond<br />

the 25% tax-free lump<br />

sum) over a number of tax<br />

years can help ensure overall<br />

income stays within the basic<br />

rate tax band, rather than<br />

making a large one-off withdrawal<br />

in a given tax year,<br />

which would likely tip you<br />

into a higher tax bracket.<br />

A retired couple who<br />

are making full use of<br />

their annual allowances and<br />

exemptions can save thousands<br />

on tax each year. Learn<br />

more by calling one of the<br />

Lumin financial consultants<br />

on 03300 564 446.<br />

FACTSHEET<br />

Tax-saving tips<br />

for pensions<br />

Request this free factsheet<br />

via enclosed response card,<br />

info@<strong>lumin</strong>wealth.co.uk<br />

or call 03300 564 446

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