Retirement used to be black and white, one day you were at work and the next you were a pensioner.
Today “retirement” is more of a phase, particularly since 2015 when pension freedom was launched. Pension funds can now be accessed from age 55, allowing a gradual retirement before fully giving up work.
While you may have thought about taking money out of your pension fund flexibly, what about continuing to put money into your pension after drawing money out? Why would you possibly want to do such a thing?
Even if you don’t pay income tax, you can still contribute up to £3,600 to your pension each year (up to age 75). The tax relief available means that you actually pay £2,880 and the Government tops this up to £3,600 with £720 of tax relief.
When you come to take the money out, 25% is free of tax and the rest is added to your income. If you stay within the personal allowance then no tax would be payable, even after receiving the relief in the first place. This might be a good way of rebalancing the income a couple receive in retirement and allow better use of the combined personal allowances.
Pension funds are also protected from inheritance tax (often abbreviated to IHT). The fund isn’t included as part of your estate so no IHT would apply if death is before age 75. After age 75 then the beneficiaries pay their own marginal rate of tax on the fund they receive and this could be lower than the IHT.
This information is based on our understanding of current pension rules. The rules on pensions change regularly and a tax liability could impact your overall financial planning goals. If you’d like to discuss your retirement plan, we’d recommend contacting your independent financial adviser.