Thinking ahead to life after work, which may be close, may be a long way off, but wherever you are in life, it makes sense, when you can, to think about your income streams.
For many people, retirement = pension. Yes, pensions are likely to form an integral part of your retirement, but it’s far from the only vehicle for your future income generation. Other pots to consider, including the following:
• Individual Savings Accounts – ISAs don’t offer the same immediate tax relief as a pension, but you’ll thank yourself that you’ve made the most of them, as the income and gains are completely free of tax!
• General Investments (GIA) – a GIA doesn’t offer specific tax benefits, but there are currently tax free allowances in respect of capital gains and dividends, at £12,300 and £2,000, per person, per tax year.
o That’s £14,300 of combined gains and dividends that would be free from tax.
• Company? Depending on the company setup, if you have a limited company, you might consider investing some of the cash. Essentially, a company investment is broadly the same as a GIA, but there are no annual tax allowances, all gains & income will be subject to corporation tax.
The state pension can provide a base income, but for most people, it will be insufficient to afford anything more than a base existence. If you can top this up, with income from other pots, you could have a variety of income streams, such as
• State Pension – uses ¾ of your personal allowance
• Pension tax free cash – tax free
• Pension income – use the rest of your personal allowance
• ISA income – tax free
• GIA dividend income – tax free, within your dividend allowance
The good thing is that if you’re a couple, you have double the allowances – if you can create an income from each of the above, the effective tax rate you’ll be paying, could be extremely low. If you have the cash and investments managed appropriately, there’s every chance they can pay you that income over a long period of time.
So, retirement does not equal a pension, alone. Consider what other savings pots you have and what your cash is doing. On the subject of cash, a recent piece of research by the FCA, found that 8.6 million people in the UK held cash in excess of £10k – meaning there will be some, with very significant amounts of cash.
Whilst you might like holding cash, it is not without risk. Inflation, in August 2021 was 3.2%. Your cash will not be earning a return anywhere near that – your cash is therefore losing it’s value. If you hold your cash with one financial institution, there is a risk of their demise, albeit that the Financial Services Compensation Scheme covers up to £85,000 per individual banking licence. If you’re holding £300,000 in cash, with one bank, that’s probably not ideal, but equally, dividing that cash up across multiple banks is additional administration few people need.
Remember, investing involves risk and your investments can fall as well as rise, plus your capital is at risk.
So what to do? Why not book a free, no obligation with us, using this link and we can have a chat through your position and offer some thoughts and options.
Thanks for reading and