We all need an income to sustain our lifestyles and whilst working, you have an ongoing source, which whilst potentially not in your control, at least you have visibility of. How about your future income, beyond work? Whether that’s retiring, changing careers or winding down, we still need an income.

Consider this scenario, where a couple are in their 40s, are employed and have a 5 year age gap. They want to step-off the corporate hamster wheel in their 50s. As a business, we don’t focus on ‘products’, but in this scenario, I think helpful to outline the ‘wrappers’ that this couple could employ to help them with their future objectives, which for simplicity and accessibility, I’ll keep to two – Pensions and ISAs.

Pensions

This is the first asset most people think of, for providing for their future income. However, what pensions have you got? Where are they? Are they defined contribution (DC – i.e. a pot of money) or defined benefit (DB – i.e. it will give you an income for life)? If you don’t know, the first step is to gather the paperwork and review them.

Pensions might well be the largest asset, beyond property, that you have or are building towards, but when it comes to accessing your savings, you might want to consider the order in which you access your assets. It will depend on your circumstances, but say you want to stop employed work at age 50. You can’t access pensions until you’re (currently) 55. What do you do the years prior to then? Equally, in this scenario, one partner is 5 years older than the other, so they can’t necessarily access their pensions at the same age.

ISAs

Those who know me and have read my blogs, will know that I’m a big advocate of ISAs. Fundamentally, ISAs help shelter money from tax – notably sheltered from income and capital gains taxes. Whilst there’s no immediate tax benefit, you are sheltering your money from future tax and also, it takes time to build your ISA savings, as there are annual contribution limits (£20,000 per tax year, per adult). Main types of ISA are cash, stocks & shares and lifetime ISAs.

Lifetime ISAs are a type of ISA, that’s a little more restrictive, but equally, potentially very useful. You have to open one before you are 40 years old and you can only contribute up to age 50. However, for each £1 you contribute, the government adds 25p. You can’t access it until you’re age 60, without it being for your first home, otherwise the withdrawal will be subject to a 25% penalty.

For this couple, we’re looking at the integration of these various wrappers, to create a sustainable, low tax income for their futures.

Pensions – This could have their pension savings within a flexible, personal pension (such as a Self Invested Personal Pension).

You could choose to take some tax free cash, if perhaps you want to buy that special something. You could take an income from your pension – don’t forget, you’ll have a personal allowance, which at present, means you can have an income of £12,570 (current standard level) without paying income tax. Why not draw an income of £12,570 and utilise that allowance and pay no tax?

Multiply that by two people and you’ve got just over £25,000 of tax free income.

ISAs – The value of ISAs as noted earlier, is the tax-free nature of the accounts. Unless you have a fixed-term ISA, you can ordinarily access an ISA when you wish, without paying tax.

You could have an ISA generating an income, which would be tax free. This couple have amassed  £100,000 in ISAs, generating an income of 5%, that’s £5,000 of tax free income. Again, multiplied by two people and you’ve got £10,000 of tax free income.

Lifetime ISAs

Assuming you retain your LISA for non-property needs, you’ll need to wait until your 60^th birthday to start accessing it, but once you have, you can access it as & when you like, without tax being payable. You could choose to make withdrawals each month, or in lumps, in order to suit your requirements and lifestyle.

Cash

We all need cash to pay for our day to day living. This couple have some cash, but they’ve saved the majority of their additional income into their pensions and ISAs.

State Pension – I’ve noted it separately, as we have little to no control over state pensions. It’s a taxable income, that you’ll receive at state pension age, assuming you’ve made National Insurance contribution throughout your working years. This is the key take-away here – check your NI contributions – it’s easy to do. You’ll need 35 years of national insurance credits to receive the new state pension in full.

Summary

This couple have sufficient assets in their SIPPs, to generate a sustainable income of £12,500 each, per annum and stocks & shares ISAs of £100,000 each. They have Lifetime ISAs of £30,000 each, alongside an anticipated full entitlement to the new state pension.

• Pensions are providing a combined £25,000 of income (but 5 years apart)
• ISAs – a combined £10,000 of income
• Lifetime ISAs – they choose to draw £10,000 combined, in lumps, each year until they are utilised

For the first five years, they have pension income of £12,500, ISA income of £10,000 and LISA withdrawals of £10,000. That’s £32,500 of tax-free income. When the second partner accesses their pension, this will be £45,000 tax free, noting that the LISA withdrawals are likely to reduce after year six. Alongside these, they choose to take advantage of their tax-free cash from their SIPPs, taking £5,000 of tax free cash each, for 5 years, boosting their tax free income to over £40,000 for many years.

Their state pension will kick-in in the years to come, when they could consider reducing the income from their SIPPs, to reduce their tax liabilities.

This is ignoring any cash they’ve built up, any potential for down-sizing of property or any inheritances. There are numerous alternative options besides pensions and ISAs, but hopefully this goes some way to demonstrate the power of tax efficient wrappers, of which pensions and ISAs are accessible for most people.

This blog does not constitute financial advice nor an investment recommendation and the items noted are for illustrative purposes only.

Thanks for reading and enjoy the journey!