How retirees who are yet to claim state pension could access ‘flexible tax opportunities’

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Being aware of tax rules will allow a person to take advantage of the opportunities and allowances that are available to them. It can also help minimize their tax throughout their life to ensure more after retirement.

Pensions are very tax advantaged in the UK so there is a lot of relief people can receive.

There are options available for people who retire before their state pension kicks in who can still benefit from tax free cash.

On The Retirement Café podcast, Justin King discussed some options when retiring before your pension may lead to a tax nirvana.

He said: ”Your tax nirvana would be to have fully utilised your pension contributions during your life.

“If you are a higher rate taxpayer you will be getting 40 percent tax relief possibly even more depending on whether personal allowances have been deducted.

“But contributing fully to pensions, contributing fully to ISAs.

“Then when you get to that point of financial independence, the point of opening those taps… if you’ve got a dual income coming in that would probably be most tax effective because you and your partner have both got your personal allowances.

“And then you both have a dividend allowance of £2000 and at the moment you can hit, it’s even over £50,000 before you hit higher rate allowances.”

When discussing other flexibilities that come with pensions, and how to minimize the tax paid, Mr King spoke about retiring before one’s pension comes.

He said: “Pension income doesn’t have National Insurance.

“So that could be from a defined benefit pension, a final salary pension or it could be a state pension or your personal pension arrangements – they wouldn’t suffer.

“So, if you retire or finish work prior to getting your state pension, there are a number of flexible tax opportunities there.

“You could be withdrawing from your pension and utilising all your personal allowance this year at £12,500.

“And possibly some extra tax-free cash you’re also eligible for from a pension scheme.

“So, you could have £16,500 worth of tax-free income before which would fall within your personal allowance.”

Britons may benefit from front-loading this before they get their state pension because their state pension then may take up most of their personal allowance.

“There are always opportunities,” he added.

When thinking about tax, Mr King mentioned the importance of looking at it throughout one’s life, rather than at a specific moment.

He said: “It’s not just your current position, but what are the future income streams, or capital gains that they might make. What inheritances might you have on the way.

“You need to build a cash flow forecast to know when income may come, and the most effective time to take them.”

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