Planning ahead – how to ensure your finances are healthy in readiness for retirement

Thinking ahead when it comes to retirement planning is vital for anyone who wants to enjoy a financially comfortable life in their later years and pass on their legacy to the next generation in a tax-efficient and sensible way.

At a time when life expectancy is on the rise and healthcare is forever evolving, many Britons are living for 20 to 30 years after they retire, which is why making adequate preparations for retirement is now more important than ever before.

Since April 2014 only £40,000 can be paid into your pension each year before needing to pay tax on it and declare it on a self-assessment tax return. This £40,000 includes all money added – whether that is invested yourself or another party such as your employer.

It is, however, possible to carry over any unused allowance into the next tax year – so if you pay nothing into your pension one year, you’ll be able to pay £80,000 in tax-free the following year. This can roll over up to four times, to a total of £160,000.

This makes keeping an eye on how much you are paying into your pension each year very important, as you could potentially miss out on these tax-free deposits.

Although, there are criteria that prevent you from carrying allowances over. For example, if you have any unused money purchase annual allowance you cannot carry it over.

You are also unable to carry forward unused allowance from tax years in which you were not a member of a registered pension scheme.

There are a few ways in which you can work out how much annual allowance can carry over, such as:

  1. Working out your annual allowance yourself – If you ask your pension providers they should be able to give you all the information you require to calculate how much allowance you have remaining. It is important to note that the 2015/16 tax year’s allowance was £80,000 as the government slowly introduced the current £40,000 threshold.
  2. There are tools available from HRMC that allow you to calculate if you are close to the £40,000 threshold.
  3. Ask your accountant to calculate it for you – a trained financial professional is always the best port of call for any advice on matters such as this.

There are other ways that you can plan for your retirement. Here are a few things to consider:

Investing in property

Those who decide to invest in property need to factor in the costs of Stamp Duty Land Tax (SDLT) on additional property purchases, and the phasing out of mortgage interest tax relief if they intend to let out a property in order to supplement their retirement income.

Similarly, anyone who is investing in a property with a view to selling it on needs to plan ahead for the Capital Gains Tax (CGT) implications of this.

Keeping on top of your pensions

Pensions are one of the most important aspects of retirement planning. But equally important is structuring your investments in a tax-efficient way and ensuring that the contributions you pay towards your pensions benefit from tax relief where appropriate.

Life insurance and medical insurance

It is important to consider the benefits of life insurance, long-term care and medical insurance in order to safeguard yourself and ensure that you and your family are guaranteed a good quality of life.

Business succession and exit planning

If you are a business owner, you might wish to pass your business on to other members of your family when you retire or sell the business on. Whatever your wishes, you will need to seek specialist tax advice and plan ahead accordingly from an early stage to avoid facing unfavourable tax consequences.

Passing on your legacy in a tax-efficient way

Drafting a Will can help you to ensure that your estate is passed on in line with your wishes when you die. However, you will need to think about the Inheritance Tax (IHT) implications of passing on your legacy and plan ahead accordingly.

In England and Wales, each individual is entitled to a tax-free allowance of £325,000, above which estates will attract IHT at a rate of 40 per cent. Fortunately, there are various ways you can mitigate your IHT liability, such as by leaving money to a charity in your Will or passing property down to direct lineal descendants using the residence nil rate band (RNRB).

Good investment and future planning is hard work, which is why it is always best to seek specialist advice at the earliest possible opportunity. Get in touch with the team at Macalvins to find out how we can help.

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