No matter your situation, no matter how rich, we all need an income.

Food, clothing, transport, property costs, holidays, all need to be paid for. You could draw funds from a ‘pot’ of money, that creates an effective income stream, but it may be proven to be unsustainable, for the long term, particularly as inflation reduces the spending power of our money.

Financial overview

As part of our financial planning service, we look at the entire financial position, including income and expenditure. I’ve worked with numerous individuals and couples to work through their income and expenditure position today and looking ahead. For most people, their pensions will form a foundation for their retirement income, but many of our clients have additional assets that do or could generate an income in addition to their pensions.

There are a range of factors to consider, including age, tax position, level of expenditure, nature of expenditure and lifestyle changes that you might anticipate.

Age

Age is a significant factor with respect to pensions, as there is a minimum age at which you can access them, typically from age 55 (which is rising to 57 in 2028).

Tax position

Tax is a notable matter that can be overlooked, particularly for couples where I frequently see an imbalance of assets and income between two people. Why pay more tax than you have to? If you can use tax-efficient opportunities to achieve a given outcome, it makes sense to review them and utilise where appropriate.

I’ve outlined some thoughts and ideas below to potentially help get you thinking. These notes do not constitute financial advice nor investment recommendations.

Types of pensions

Pensions are something that almost everyone has or is saving into. The three main types are State Pension, defined contribution (DC) pensions (a ‘pot’ of money) and defined benefit pensions, that will pay you an income for life at some stage. State Pension age has been rising in recent years and rises again to 67 from 2028. The State Pension is a great underpin for retirement income but has little flexibility (it is possible to defer receiving it) and 67 is relatively old to start receiving an income.

It’s worth considering how you could bridge the gap between stopping/reducing work and state pension age. DB pensions often offer the ability to start receiving an income from age 55 onwards, but all schemes vary and it’s important to discuss this with the pension administrator to understand any penalties or implications of taking an income before the schemes ‘normal pension age’. DC pensions typically offer more flexibility, albeit with the minimum age criteria.

Modern DC pensions can facilitate the option of taking tax-free cash over a number of years for example plus the ability to draw an income for a period of time, whilst potentially stopping or changing the income values when you wish. Perhaps you take more income from a DC pension until you reach state pension age, and then reduce your DC pension income?

ISA’s

Anyone who has read my LinkedIn posts and previous blogs, will know that I’m a big advocate of ISAs, as they shelter your money from tax. What’s often overlooked, is the idea that ISAs can provide you with a tax-free income to support your lifestyle. I’ve recently worked with a couple where one person is a basic rate taxpayer and the other, a non-tax payer. We’re going to generate an income within their ISAs to provide them both with a tax-free income to support their family. Alongside this, for the non-taxpayer, we’re using a General Investment Account (GIA) to invest in income-generating investments, as income up to their personal allowance, is tax-free. For example, say they have £8,000 of dividends and interest within a GIA and £7,000 of income from an ISA, they would have an income  of £15,000, free from tax. The other partner has pension income from DB pensions and state pension. Their ISA income is tax free, hence this couple now have an income of approximately £38,000, with very little tax.

Rental properties

Many of our clients have buy-to-let properties, as they offer a tangible asset and property is something that people are familiar with. With a good tenant and strong demand, rental income can provide a reliable and potentially increasing income stream. However, there are downsides, including managing the property (costs & admin), tax (which is becoming less favourable) and the fact if you need access to capital, selling a property is expensive and can take many months. There is little flexibility with respect to rental income – if you need more, you can’t sell a brick….

However, if you have rental income, it can stand alongside other forms of income that are perhaps more flexible.

In summary, it is helpful in my view, to try and build a portfolio of assets that can provide an income in future, for example, pensions, ISAs, GIAs, cash and property – this is far from exhaustive, but are commonly seen across our client base.

If you’re looking ahead without a strategy and plan for your income in future, get in touch – we’d love to hear from you.

Thanks for reading and

Enjoy the journey!