28 April 2025
general
Hiking up a mountain is no mean feat but it’s just as important to plan for the journey back down – and for many, this can be even trickier than the ascent.
The same goes for planning your retirement. This is a time that many of us look forward to; you’ve worked hard, and now it’s time to reap the rewards of your labour.
However, the financial side of retirement isn’t always straightforward. As time goes on, you might realise that decumulation – the process of “descending from the mountain” – is not as easy as you had hoped.
In fact, Sky News highlights that people over the age of 70 are now more likely to pay Income Tax than those under 30. It states that in the 2022/23 tax year, over-70s paid £19.1 billion in Income Tax, with under-30s paying £18.3 billion – a difference of £800 million.
The Institute for Fiscal Studies notes that this trend has been on the rise for years, with occurrences in both the 2010s and the 2020s.
It’s clear that the financial picture for retirees is changing, which is why it’s important to stay on top of your finances and seek advice even after retiring. Here’s what you need to know to do just that.
A frozen Personal Allowance and higher life expectancies could result in a higher tax burden
For many retirees, a rising tax burden is the most pressing concern. Let’s take a look at why this might be happening and how it could affect you.
A frozen Personal Allowance may lead to retirees paying extra Income Tax
The Personal Allowance, which is the amount you can earn before paying Income Tax, has been stuck at £12,570 since 2021. This is unlikely to increase until at least 2028.
Meanwhile, the State Pension is still rising as a result of the triple lock. This is a policy guaranteeing that the State Pension goes up by whichever is higher:
This means that retirees who can claim the State Pension have seen significant income rises over the years. While a positive, it does mean that more are being pulled over the Income Tax threshold.
Experts cited in Money Marketing note that, by 2027, the full new State Pension will exceed the Personal Allowance, which means it will become taxable for the first time.
You may have structured your retirement plans under the assumption that your State Pension would be tax-free, or at least beneath the tax threshold. This may not be the case for much longer and, of course, there’s your private pensions and other forms of income to consider too.
While decades of pension contributions and investments might mean greater yields for you, when combined with your State Pension, your retirement income might now incur a higher tax bill than you had planned for.
Life expectancies at birth have been slowly increasing over the years
Life expectancy has increased dramatically over the years.
In fact, the University of Cambridge (UoC) indicates that:
This means that if you have not planned for additional years in your retirement, you may find yourself short on funds.
Indeed, the Office for National Statistics (ONS) states that life expectancy at birth was 79 years for men and 83 years for women between 2021 and 2023.
Whether you’re approaching retirement or are already enjoying it, speaking with your financial adviser to adapt your plan as needed is vital.
Income Tax and Capital Gains Tax could erode your retirement pot
As it stands, Income Tax thresholds are frozen until 2028. For those taking the same income each year, their tax liability is unlikely to change. However, if you were to take more, your bill could rise. . In fact, IFA Magazine states that by 2028, 1 in 5 pensioners will be paying higher- or additional-rate tax. More than a third of them are 70 or over.
Moreover, if you’re selling non-property assets as a way to fund your retirement, you will need to account for higher rates of Capital Gains Tax (CGT). Currently, the main rates of CGT are 18% and 24%, but until October 2024, they were 10% and 20% respectively.
Adopting proactive strategies could help minimise your tax liabilities in retirement
Navigating the complicated tax environment in retirement often requires a proactive and adaptable financial plan. Fortunately, there are several strategies you can employ to potentially mitigate your tax burdens and gain financial freedom.
Strategic pension drawdowns
Carefully planning the amount you withdraw from your pension, and when, is crucial. A phased withdrawal, where you take your pension funds gradually, can help you manage your Income Tax liability. This technique requires careful consideration and the support of a financial adviser, as it’s easy to make mistakes and find yourself in a higher tax bracket than expected.
Maximise your ISA contributions
Individual Savings Accounts (ISAs) can be a valuable and tax-efficient shelter for your funds. Contributions to your ISA grow free of Income Tax and Capital Gains Tax (CGT) and you can draw the money tax-free too.
Read our simple guide to ISAs to learn more about saving and investing tax-efficiently.
Seek out professional advice when selling assets
If you need to liquidate assets that may be liable for CGT, such as business shares and property, it may be worthwhile speaking to a financial adviser. They can help navigate the intricacies of policies such as Business Asset Disposal Relief and Investors’ Relief, as well as offer informed advice about mitigating your tax liabilities where possible.
Use your Pension Commencement Lump Sum
You can take a portion of your pension as a lump sum or as a series of payments, otherwise known as your Pension Commencement Lump Sum (PCLS). All of these will be tax-free up to 25% or £268,275, which is your Lump Sum Allowance. Using your PCLS strategically can help you reduce your overall tax liability on your retirement income.
Regularly review tax codes and allowances
Ensuring you are being taxed at the correct codes is important, as is ensuring that you have taken full advantage of any eligible tax allowances. Both can make a tangible difference to the amount of tax you pay.
Developing a robust and ongoing financial plan could help you thrive in retirement
In the changing world of pensions and retirement planning, it’s important not to underestimate the benefits of long-term financial advice.
A financial adviser can help you stay on top of tax laws and regulations, ensuring your financial plan remains as tax-efficient as possible. Remember, the more you plan for what you need, the more likely you are to enjoy a financially secure retirement.
In other words, you won’t need to worry about running out of provisions halfway down the mountainside.
We can help with that.
Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about how we can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, or tax planning.
The Enterprise Initiative Scheme (EIS) and Venture Capital Trusts (VCTs) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.
Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.
Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.
