Pensions and tax: 3 tips for helping your clients remain tax-efficient

Retirement is one of life’s most treasured milestones – but sadly, it can also become a source of stress where finances are concerned.

Indeed, a study published by IFA Magazine found that nearly half of both retired and non-retired people are worried about outliving their savings.

Your clients’ pensions are likely to make up a large portion of their retirement income. If their pension pot is eroded significantly by tax, this could increase the risk of running out of money before they pass away.

Although you’re likely already clued in on the importance of tax planning for individuals drawing funds from their pension, your clients may not have the same understanding of this pressing issue.

For example, some pension holders are placed on an emergency tax code after their first withdrawal, leading to thousands being owed substantial rebates. PensionsAge says HMRC returned £57 million in overpaid Income Tax on pension withdrawals in the second quarter of 2024 alone.

Others may simply take their income inefficiently, meaning they lose more than necessary to HMRC without being due a rebate.

In any case, it’s important to know what you can do to support your clients when they begin drawing from their pension(s), so they can avoid these pitfalls and feel more financially secure.

Keep reading to learn three tips for helping your clients to draw a tax-efficient pension income.

1. Start the conversation before your clients retire

If your clients have already fallen into a pension tax trap, such as taking their entire pot as a cash lump sum and paying a large Income Tax bill as a result, it may be too late to reverse the damage.

That’s why it is so important to start the conversation well before your clients actually retire.

To begin with, it may be helpful to:

• Talk to your clients about their retirement goals around five years before they actually put them in motion
• Open up a dialogue that emphasises the importance of tax planning in retirement
• Answer their questions and connect them with someone who can give bespoke advice if needed (more on this later).

It’s never to early to initiate a dialogue about your clients’ pensions, tax liabilities, and overall retirement goals.

2. Stay abreast of the latest fiscal policy changes

Along with talking to clients about pensions and tax well in advance of their retirement, ensure you’re keeping up with your own knowledge too.

In the upcoming Autumn Budget, for instance, chancellor Rachel Reeves is expected to levy harsher taxes on high earners, perhaps affecting you and several of your clients. While nothing is set in stone yet, the Labour Party has hinted at changes to pension tax relief as well as potentially incorporating pensions within a person’s estate for Inheritance Tax (IHT) purposes.

What’s more, the State Pension is likely to rise again in April 2025, perhaps further increasing your clients’ Income Tax liabilities in retirement.

Plus, according to research published by FTAdviser, frozen Income Tax thresholds could “drag” 3.1 million more pensioners into the higher- or additional-rate tax brackets for the first time by 2028.

As of October 2024, the Personal Allowance of £12,570 has been frozen until 2028, and it is unlikely that the basic-, higher- and additional-rate Income Tax thresholds will rise in the near future, either.

With these freezes in mind, the study found that 2.7 million over-60s could become higher-rate taxpayers between the 2022/23 and 2026/28 tax years. A further 500,000 people could become additional-rate taxpayers within the same time frame.

These are only a few examples of the ongoing fiscal policy changes that could affect your clients’ retirement prospects, especially where tax is concerned. Educating yourself and forming strong relationships with other professionals, such as financial planners, could enable you to offer clear, informed guidance to clients.

3. Connect your clients with a financial planner

Amid rising costs, tax increases, and a recent change in government, your clients may be understandably worried about their retirement prospects.

What’s more, many retirees may be reluctant to take advice, even if it could add significant value to their lives. Research from Canada Life reveals that 79% of over-55s who have already retired did so without any professional advice. Sadly, 11% of these individuals wish they had planned properly after realising how much they would need to afford a comfortable retirement.

Bespoke advice could offer your clients:

• A trusted confidant who can answer their questions
• Goal-oriented planning designed precisely for them
• An annual review of their wealth circumstances
• Personalised support when unforeseen events alter the course of their financial plan.

We’re here to provide all this and more.

Email enquiries@prosserknowles.co.uk or call 01905 619 100.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Your pension income could also be affected by the interest rates at the time you take your benefits.