Show me the money?

Where will the money come from? This is a question often asked by our clients as they think about working less or stopping work (you will note from previous blogs that I do not like the term retirement!).

It is certainly an understandable concern as most of us are used to getting a monthly salary or drawings, so it is vital to know what happens when that stops.
This is where the financial planning process comes in, especially if the hard task of saving and investing has been done along the way and we can prove using our financial modelling that you have enough!

If properly planned during the saving and investment period, it is probable that we as financial planners will have suggested you invest across a broad range of tax efficient investments to help achieve a tax efficient and sustainable income stream. These investments are likely to include ISA’s, Pensions, General Investment accounts, Life Assurance Bonds and sometimes a buy to let investment or two.

The tax allowances available are likely to include: –

  • Income tax personal allowance
  • Dividend Allowance
  • Savings allowance
  • Capital Gains Tax allowance

When working with a couple, then we have two lots of tax efficient investments and exemptions available. It is best to illustrate what can be done by way of an example; let me introduce you to Harry and Rachel.

Harry has just sold his publishing business and Rachel recently retired from her own separate business earlier this year. The children have all left home. Over the years we have helped them build a pot large enough to let them stop working for money and follow their dreams of travelling combined with their interest in art.

When they both worked they paid a lot of tax at higher rates however post retirement we can structure their income and their savings and investment to get them to a position where they have all the income they need whilst paying minimal tax, which is a massive boost as it ensures their pot can last for longer and they feel great about paying minimal tax after all those years.

Their income and tax position looks something like this:

Income Source Harry Rachel
Pension £30,000 £0
Interest £1,500 £1,500
Dividend Income £3,000 £3,000
Rental Income £0 £26000
Total Taxable Income £34,500 £30,500
ISA Dividends £5,000 £5,000
Pension Tax free cash £10,000 £0
Capital withdrawal within

CGT allowance

£5,000 £5,000
Total Tax-free Income £20,000 £10,000
Total Income £54,500 £40,500
Tax paid (£4,700) (£3,000)
Net Spendable income £49,800 £37,500
Overall tax rate 8.62% 7.41%

The above figures are based on 2017/18 tax allowances and exemptions which are subject to change, but as the financial plan should be reviewed annually, then we can adjust where funds come from to minimise tax and meet requirements from year to year.

So, the answer to the question is that the money post work is likely to come from a multiple of sources. This can take a bit of getting used to when you are used to one monthly salary payment but that is where working with a Financial Planner really helps in creating the income you need, saving tax and taking care of the administration surrounding your plan. This then allows you to get along with having the life you want, happy in the knowledge that your finances are in good hands.

 

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