When looking at retirement, our attention is naturally drawn towards pensions, which, for many people, will be their largest source of income in later years. However, there are other ways to save for retirement in a cost-effective and tax-efficient manner. As with any savings/investment plan, the sooner you start, the greater the potential returns.
ISA plans
You have no doubt heard of ISAs in relation to long-term investment and retirement planning. Many people consider these to be among the most tax-efficient investment vehicles available today.
There are several benefits to consider, such as:-
- Investments within the plan are exempt from income and capital gains tax
- Maximum ISA contributions in the 2024/25 tax year are £20,000 per person
- Withdrawals are also free of income and capital gains tax
The government is currently consulting with the financial services industry regarding an additional £5000 ISA allowance to be invested wholly in UK shares. This is one of several moves by the government and regulators to increase interest in UK-based companies. While feedback has been generally positive, there are concerns about the possible “British ISA” structure, although we should have an update fairly soon.
Property investment
Even though many of those taking out mortgages today extend beyond the traditional 25-to-30-year term, the so-called “baby boomers” have enjoyed significant returns from property. Defined as those born between 1946 and 1964, many have invested in buy-to-let properties to provide extra income in their retirement. Long-term property investment may also yield a significant capital gain, which could also be helpful in later years.
While recent regulatory changes have diluted some of the benefits of a buy-to-let investment strategy, structured correctly, it may still be something to consider if you have additional capital. However, if you go down this route, it is important to seek financial advice at the earliest opportunity to utilise the correct structure and be aware of potential tax implications.
Savings accounts
Now that interest rates are back towards more traditional levels, as opposed to the near-zero levels during the pandemic, savings accounts are becoming more attractive. While there may be a temptation to hold a significant element of your liquid assets in a savings account, it’s essential to be aware of the potential consequences.
For example, if you are receiving 3% interest on your savings and inflation is running at 5%, then in real terms, your funds are depreciating by 2% per annum. It makes perfect sense to hold an element of your assets on deposit while appreciating the potential benefits of long-term investment. It’s also important to remember that the personal savings allowance, introduced in 2016, allows a basic rate taxpayer to receive up to £1000 interest per annum tax-free.
Tax changes
In recent years, we have seen several changes to the taxation system that have impacted the spending power of many households. The freezing of income tax bands will increase income tax payments for millions of people. In addition, there have been several changes to personal allowance since the 2022/23 tax year, including:-
- A reduction in the annual capital gains tax allowance – falling from £12,300 per person to just £3000.
- A similar percentage fall in the annual dividend allowance – cut from £2000 to just £500.
This is just the tip of the iceberg regarding tax changes in recent years, and it is important to seek advice as you plan for the future.
Summary
While pensions are obviously central to retirement plans, there are other tax-efficient ways of saving for the future. Diversification is important, as is advice regarding recent tax changes that could impact your long-term income. Therefore, it’s important to review your investments and finances regularly to ensure that you maximise the use of allowances and minimise potential tax liabilities in the future.
This is an area in which we can help, looking at your situation today, plans for the future, options and how these may be carried out in a tax-efficient manner. Please call us, and we can arrange a mutually convenient time to discuss your finances.