Should your clients take their pension as soon as they retire?

As your clients approach retirement, they will be beginning to think about how they will draw their later-life income.

Importantly, many will assume that drawing their personal pension will be one of the first steps they take in retirement.

While this strategy may be beneficial for some, there are alternative options to simply taking their pension straight away which could provide often-overlooked advantages down the line. Your clients are likely to have other sources of income lined up for retirement, including:

• Investment income, including money drawn from Individual Savings Accounts (ISAs) and General Investment Accounts (GIAs)
• The State Pension
• Income from properties they own
• Income from business assets
• Inheritance, where applicable.

Drawing upon these as soon as they retire, and only taking their pension once these other resources have been depleted, could have some surprising upsides for your clients in future.

Read on to find out why leaving their pension “until last” in retirement could have significant benefits for your clients and their families.

The Lifetime Allowance tax charge was removed in April 2023, and is set to be completely abolished in future

Now that the Lifetime Allowance (LTA) tax charge has been removed, your clients can save a potentially unlimited amount into their personal pension pots without the threat of an additional tax bill hanging over their heads when they withdraw the funds.

Indeed, in the 2023 spring budget, chancellor Jeremy Hunt announced a total removal of the LTA tax charge starting in the 2023/24 tax year, and said the LTA would be completely abolished in a future finance bill.

In 2022/23, the LTA stood at £1,073,100. If your clients’ total pension wealth had surpassed this sum, they might have been hit by a 55% tax charge if they drew the funds as a lump sum, or 25% if drawn as income (on top of their marginal Income Tax rate).

Happily, now that it has been removed, your clients’ pensions can continue to accumulate value without the LTA tax charge being applied when they draw their funds.

Most importantly, this could mean that even if your clients’ pensions are already breaching the previous LTA limit, they can now stay invested for the coming years and potentially grow this wealth even further.

So, if they are on the cusp of retirement, your clients could opt to leave their personal pension pot untouched for the time being, and instead draw upon their other savings and investments first.

That way, your clients’ pension pots may continue to accrue value for the maximum amount of time, perhaps offering them further financial stability in their later years.

Your clients’ pensions are not usually subject to Inheritance Tax

Another essential factor your clients should understand about their personal pension is that it does not usually form part of their estate for Inheritance Tax (IHT) purposes.

This is especially pertinent in the 2023/24 tax year, because the IHT nil-rate bands have been frozen at their current rates until 2028. Their amounts exist as follows:

• The nil-rate band, applying to all taxable assets, stands at £325,000.
• The residence nil-rate band, applying to property passed to direct descendants, is £175,000.

Inevitably, IHT receipts have increased already due to these freezes. According to FTAdviser, IHT receipts increased by £1 billion year-on-year between April 2022 and April 2023 compared to the same period in the previous year. And, unless the freezes are lifted, it is presumable that these receipts will only continue to rise.

Fortunately, your clients’ pensions could present a golden estate planning opportunity in the face of rising IHT bills.

When the LTA tax charge was still in place, there was a limit as to how much your clients might have been able to pass down tax-efficiently to their loved ones when they die. However, now that the charge has been removed, your clients’ pensions could accumulate significant wealth, and potentially be passed down IHT-free.

Leaving their pensions invested for as long as possible while depleting other assets – most of which could incur an IHT bill if they passed away – may mean your clients’ beneficiaries keep more of their inheritance for themselves.

Whereas, if your clients use up their pension wealth first and draw upon other savings and investments later, the assets left to loved ones when they pass away could be eroded by an IHT bill.

Consulting with a financial planner could help your clients form a top-tier retirement income strategy

Working out which sources of income to draw from in retirement could be a daunting task for your clients to take on alone.

With so many factors at play, including tax, estate planning, inflation, interest rates, market volatility, and rising later-life care costs, the benefits of working with a financial planner in retirement are evident.

We can help your clients:

• Assess their future retirement income sources
• Work out the tax implications of each income they draw upon
• Place their pension in favourable conditions for long-term growth
• Create a sustainable retirement income plan that keeps the next generation in mind.

If your clients are in the decade leading up to retirement, now is the time for them to begin preparing their later-life financial plan. The removal of the LTA tax charge, along with the freezing of various tax allowances, presents unique challenges that a professional can help them capitalise upon.

Get in touch

If your clients are on the runway to retirement, put them in touch with us today. Email info@wkmwealth.co.uk or call 0116 403 0138.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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 results.

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.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

All contents are based on our understanding of HMRC legislation, which is subject to change.