Retirement Tax Strategies – Finding One That Works for You
Many people assume that when they retire they will not have to pay tax. They feel that once they are past retirement age then they are exempt. However, this is not true. If your income goes over the tax limit, then you will still have to pay tax. It is worth considering this when you are planning your retirement.
ISA
An ISA is a way to save money without being taxed on the interest. It is therefore a way of generating a tax free income. There is a limit to how much money you can put in an ISA each year. Individuals have a personal ISA allowance and so if you are in a couple, you should both take full advantage of this. There are two types of ISA, a cash ISA and a stocks and share ISA. You can split your money between both, with the cash ISA’s being safe and normally attracting a lower interest rate than the riskier stocks and shares ISA which can pay more or less.
Premium Bonds
Premium bonds are a way of gambling, which is why they do not attract interest as gambling wins are exempt from tax. You can invest up to £30,000 each in premium bonds. There is no guarantee that you will get a prize, but you could win up to £1 million a month. Prizes start at £25, but it is a risk. As premium bonds are run by the government, they are a low risk investment, but the average interest rate, based on calculating the odds of winning a monthly prize are very low.
Friendly Society Bonds
If you have a bond with a friendly society then you can pay up to £300 in a year and not have to pay tax on the returns. This limit applies across all friendly societies – which means that you cannot invest £300 in each, without breaching the tax free allowance.
Spreading the Income
It is well worth making sure that you spread the income between two of you, if you are part of a couple. As tax allowances are on the individual, not the couple, then you should gain from this.
Deciding What to Choose
It is very important to make sure that you do not just choose a tax free investment/savings account and assume that you will gain more from it. There may be savings and investments that although they attract tax, will actually make you more money than the tax free ones. Calculate what the return after tax will be on these options and compare to the tax free ones and decide which you think will pay you the most. Of course, with variable rates or risky investments like premium bonds or shares, it is not easy to predict what the return might be. However, try to find a way to compare them and see which you think will be the best for you. You could always ask a financial advisor for tax mitigation.
About Cindy
Cindy is a financial consultant who works with at a tax consultancy company in London. She has gained a lot of experience over the years by offering professional advice on wealth protection post retirement. He vast experience in this field has inspired her to write this resourceful article.
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Category: Financial Planning, Retirement
