Pension UK: Retirees ‘haven’t a clue’ about tax-efficient retirement – best options shared | Personal Finance | Finance


Pension savings and income can be impacted by tax concerns which could prove to be costly for savers. There are many tools available for effectively managing these concerns but new research from Hargreaves Lansdown (HL) showed many people simply don’t know where to start.

Sarah Coles, a personal finance analyst at HL, broke down these findings further.

She said: “We haven’t a clue about the most tax-efficient home for our retirement savings. As a rough rule of thumb, for a basic rate taxpayer you get the biggest tax boost in a LISA and for a higher rate or additional rate taxpayer it’s a pension. But when asked to pick the most tax-efficient for them, half of people didn’t even want to hazard a guess, while among those who took a stab at an answer, only five percent of basic rate taxpayers picked the LISA.

“It’s hardly surprising there’s so much confusion, because when you’re weighing up the tax benefits of each, they aren’t even explained in the same language. With a pension, people talk about tax relief, whereas with a LISA they talk about the taxman topping up your contribution. It doesn’t help either that the rules differ when you withdraw money too.

“To make matters more complicated, the rough rules of thumb don’t work for everyone. If you’re over the age of 39, for example, then you can’t get a LISA, so you need to check the details of your chosen scheme.

“Even when you’ve got to grips with the tax arrangements, bear in mind that tax isn’t the only consideration. It also depends enormously on who else is paying into your retirement savings. It means that for most basic rate taxpayers (or at least the ones with a LISA), the best option for the first chunk of your money is your workplace pension, then for the next chunk it’s the LISA, and then once you’ve used that allowance, it’s back to the pension. It’s hardly surprising that so many people are unsure of the best approach.”

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Sarah went on to explain how tax concerns should be factored in for both contributions and payments.

Tax on contributions

Different levels of taxpayers will see their options vary, as Sarah explained: “For a basic rate taxpayer, at the point of contributions, the top up on the LISA and tax relief on a pension amount to the same thing.

“If you put £4,000 in, the taxman will add another £1,000.

“For a higher rate or additional rate taxpayer, you get a bigger tax boost through a pension then a LISA. If you contributed £4,000 to a LISA it would be worth £5,000 after the top up, but if you contributed £4,000 to your pension (which would actually involve contributing £4,946 and then claiming £946 back through your tax return) it would add a total of £6,183 to your pension.”

Tax on pension payments

Of course, tax concerns will also affect savers when they eventually withdraw from their pensions.

As Sarah continued: “For a basic rate taxpayer, at the point of contributions, the top up on the LISA and tax relief on a pension amount to the same thing. If you put £4,000 in, the taxman will add another £1,000.

“For a higher rate or additional rate taxpayer, you get a bigger tax boost through a pension then a LISA.

“If you contributed £4,000 to a LISA it would be worth £5,000 after the top up, but if you contributed £4,000 to your pension (which would actually involve contributing £4,946 and then claiming £946 back through your tax return) it would add a total of £6,183 to your pension.”

Sarah concluded by urging savers to remember it’s “not all about tax”

Pension commitments can be wide ranging and Sarah highlighted what other areas should also be focused on: “If you’re employed and qualify for auto-enrolment into a workplace pension, then as well as you and the taxman, your employer has to pay in, which means this tends to be the best option for the first chunk of retirement savings.

“If your employer matches additional contributions, then it’s the best home for the next chunk too – until you’ve squeezed as much free money from your employer as you can.

“Only then should you think about alternatives like personal pensions and LISAs.”



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