Make it easier to ease down

A case study

Bookkeeper Caroline Brewer wanted to go freelance in the run-up to retirement. When she asked her financial adviser how best to achieve this, the focus was on tax efficiency.

Caroline has worked with her financial adviser for ten years, but last September, when she reached 60, she set her adviser a challenge. “I’d always wanted to go freelance,” explains Caroline, a bookkeeper. “I felt this was the moment to make the move, partly so I could begin winding down in the run-up to retirement. So I asked my adviser how I could make it work financially.”

Caroline’s adviser recommended that she chould devise a plan for her that focused on tax efficiency. Her freelance earnings were expected to be around the threshold at which higher rate income tax becomes payable – that would have increased her marginal rate of tax from 20 per cent to 40 per cent. To mitigate this danger, it was suggested that she could increase her pension contributions through a salary sacrifice arrangement, which reduced her income tax and national insurance liability.

The adviser also pointed out that Caroline could maintain her standard of living while paying more into her pension by making withdrawals from savings currently held in ISAs, as any income taken from an ISA is entirely tax-free. An additional benefit from this arrangement is that by remaining a basic rate taxpayer, Caroline qualifies for the full £1,000 annual personal savings allowance. This is the amount of interest people can earn on savings with no liability to tax: for higher rate taxpayers, it reduces to £500.

The exercise was also an opportunity to consider other issues. Caroline was thinking of buying a property with her new partner but didn’t want her son from her previous marriage to be disadvantaged. Her financial adviser recommended she could update her will to protect her son. They also discussed the potential inheritance tax liabilities her son could face. Making withdrawals from ISAs while maximising contributions to pension savings, which are generally free from inheritance tax when bequeathed, was a good way to plan for this.

“The process has given me the confidence and freedom to make the changes in my life that I wanted,” Caroline reflects. “I’ve changed the way I work without having to compromise on my income, and addressed the impacts on my son of making financial arrangements with my new partner.” The financial adviser adds: “It’s all about helping Caroline get control. My role is to help clients get a clear view of where they could be headed and what their finances might look like later in life, so they can achieve their goals.”

How we can help

As people approach their retirement years it’s entirely understandable that they might want to formulate a plan which enables them to start to gradually wind down and enjoy some flexibility in their working hours without simply stopping full time work and retiring overnight. It’s a great time in life to gradually start to think a little less about work and more about taking on new hobbies, maybe longer holidays, finding time to meet up with family and old friends and perhaps start to work through that bucket list. The big question however is how far reduced working hours can still deliver a good income and without necessarily impacting on lifestyle standards. Our case study shows that well ahead of qualifying for state pension, this can be achievable by fully understanding the options which are available to maximise tax efficiency and this is where getting professional help is crucial. Here at Logic Wealth Planning we can help clients to create a plan which will indeed enable them to start to slow down without sacrificing their lifestyle. In fact by understanding our clients circumstances, goals and considering the options open to them, we have even helped those clients who have wanted to retire fully, well ahead of their retirement years. So we’re here to offer that friendly professional help as and when you need it. Call us now on 0808 1234 321 to start the conversation.

Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire, and the surrounding area, but not limited to the region.